A Golden Era for Retail?

Amazon (AMZN) is set to report earnings after the close today and it seems the only question is just how much they will be crushing their brick and mortar competitors. Actually, the way some frame the retail landscape the word “competitor” should be replaced with “victim” as AMZN just keeps grabbing market share and pushing into new categories, threatening the very existence of many businesses.

Indeed the bodies are piling up, with original targets such as books and electronics resulting in bankruptcies of national chains such as Borders and Circuit City and the retrenchment of Barnes & Noble (BKS) and Best Buy (BBY) (to say nothing of numerous independents). More recently in areas such as athletics, Sport Authority and GolfSmith have shuttered, as well as pressuring supermarkets and department stores into consolidation.

But two prevalent themes calling for the death of retail might not only be greatly overstated, but simply wrong in principle.

  • The notion physical stores and malls are dead may be greatly overstated.
  • The belief that the next generation, AKA millennials, are only interested in spending money on ‘experiences’ rather than ‘things’ is misinformed.

In fact according to long time retail analyst expert Jeff Macke, who does a nice job dispelling these notions, retail actually is entering a golden era of opportunity.

Macke breakdowns the forces at work and how and who the winners might be in this article:

Let’s start at the conclusion: Millennials are about to blow the world’s mind in the best possible way. The idea of a shut-in nation spending the prime of their personal and professional lives playing video games in mom’s basement is lunacy. Millennials aren’t space aliens. They are the spiritual grandchildren of Baby Boomers with longer life spans and better toys.

Here’s a rough timeline of American life. The sequence is unchanged since about industrial revolution:

millenial-timeline-10-27-16

The age ranges have drifted later along with life expectancy but the signposts are the same. No one has ever liked their first job. You’re not supposed to. That’s what makes a person upwardly mobile. I wouldn’t want to meet, let alone hire, a 25 year old who didn’t feel underemployed. This isn’t new. In 1985 Minneapolis business icon Harvey Mackay pulled me aside and told me to “Learn in your 20s, earn in your 30s”. The same advice works today, especially if you extend the learning period to your mid-30s.

There’s no magic here. Just demographics and census data.In 1970 the average first time mother was 21 years old. Today she’s 26. The father (co-mother) is generally a couple years older, both in 1970 and today. Kids change everything yet seem to be ignored when it comes to getting our arms around Americans under 35. Whenever you read something like “Young Men Spend 73% of their free time playing video games” ask yourself if this is more likely to be a shocking trend or simply a description of being young and unmarried.

More young people are entering the workforce than anytime since 1982. As old folks will tell you, 1982 was a pretty good time to be buying stocks despite a bitter recession and looking 1987 Crash.

Spending all day at home streaming and gaming only sounds relaxing if you don’t have children. Throw a couple 6 year olds in the mix and staying home all day sounds more lie incarceration than a staycation. Malls are cheap ways to kill a day. Movies are great way to experience art with your kids for not much money. There’s a reason malls have existed in some form for thousands of years. They aren’t going anywhere.

Millennials aren’t into consumerism because they don’t have good jobs yet. The lofty aspirations are just cover for bad pay and enviable freedom. The Baby Boomers went from unwashed hippies to yuppy scum ( http://www.bloomberg.com/graphics/2015-drexel-burnham-oral-history/ ) in about 20 years. The Millennials should be able to cut that time in half, once they get started.

Millennials: Let’s talk about your social awareness in 20 years…

Spending Shift

More people under 35 are entering the job market than any time since 1982. With or without a recession and despite student loans about $1 trillion US consumer spending is going to shift from brick and mortar to ecommerce in the next 10–15yrs. Every smartphone is a potential store that’s fully in stock and never closed. Retailers who consider that to be a bad thing are insane.

This year Amazon will do about $80 billion in online sales; roughly 120% more than the next 10 biggest players combined.

Online is still only 10% of US retail sales. There hasn’t been a bigger opportunity for merchants since suburbs were invented. Other companies are going to figure out how to sell to Millennials. It’s not about competing on price alone. It’s about meeting expectations then giving a little more. Do that consistently and you gain customer loyalty, online or off. This has been true since the invention of commerce.

Smart phones in the hands of Millennials who know how to use them disrupt retail in the best possible way. Good merchants can grow right here in the US by taking share. Prices drop but margins stabilize, as happens in all new mediums. Amazon will keep their lead but not their current 30% share of the US e-commerce market. In 10 years Walmart (I’m long) will be doing more than 2% of their US sales online. Amazon will have stores (they might be called distribution centers but in an obvious sense all stores are just locations from which to distribute goods). Stores aren’t disappearing. They are becoming ubiquitous.

Walmart has thousands of stores. They were all built as cheaply as possible in locations near metropolitan areas. Take out the shelving and displays and an underperforming big box store can become a distribution center able to process 10x more product (and without all the shoplifting and other headaches of running a store). Those who don’t see this installed base as an

Walmart has thousands of stores. They were all built as cheaply as possible in locations near metropolitan areas. Take out the shelving and displays and an underperforming big box store can become a distribution center able to process 10x more product (and without all the shoplifting and other headaches of running a store). Those who don’t see this installed base as an opportunity just don’t get it.

ECommerce isn’t a problem for US retailers. It’s the greatest opportunity for domestic growth in decades. It’s a land grab for market share. Winners will make billions. Losers will die hideous deaths. It’s all going to be wonderful theater and at least potentially very profitable for investors.

This isn’t a theory. It’s already happen. DPZ crushed estimates yesterday, driven largely by apps accounting for almost 1/3 of orders. That wasn’t an accident. It was an investment. Here’s a chart of some companies’ capex/ revenue over the last 10 years. It’s a crude measure of how much of their cash they plowed back into their businesses.

retail-capec-spending-10-27-16

Wall Street is telling retailers it values growth over earnings. That’s not mania. It’s early recognition of the size of the opportunity. It’s never been less important for a retailer to hit a quarterly EPS estimate. Ecommerce is akin to the opening of the Oklahoma Territory. Would you have wanted to invest in the pioneers with the fastest horses who were going to stake out the best land or the family concerned about not taking too many chances on their way into the new world?

I’m looking for the old school merchants with the smartest digital strategy and liquidity to put initiatives in place. The Millennials are coming 75 million strong and about to start breeding like rabbits. Merchants tapping that market with a holistic approach to customer satisfaction are going to win huge over the next decade. This shouldn’t be a shock. It’s just history repeating. The fact so few people see it coming is exactly what makes it a great investment opportunity.

— Steve Smith

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About the Author: Steve Smith