Scraping the Bottom
for Another Share

You are about to open the door into the “house of horrors.” If you’re already in a bad mood, you might want to skip over this blog.  But if you want the real unvarnished truth about how dismal the marketplace is today and how it’s trending into the foreseeable future (likely into a greater horror show), then take some deep breaths and read on.

Oh, and by the way, I could not even bring myself to offer up the same old bromides about how you might succeed in this mess. You’ve heard them a million times and you talk about them ad nauseam with your teams, hoping you can find an escape hatch.  So I won’t insult your intelligence with retreads.  However, having said that, you must excel in implementing each and every one of those bromides just to stay afloat.  Still with me?

Because this is such an unprecedented horror show, The Robin Report research department dug up the numbers and create some real-easy-to-understand charts so you can get a vivid snapshot of each of the horrors. They are sad, but true.

Okay, and away we go.

MACRO

Worldwide Woes

• Globally, geo-political chaos, war, unprecedented refugee crisis.
• Global economic malaise, including deflation in Japan and recession in Russia and Brazil; EU on the edge.
• Inscrutable China, severe overcapacity, financial manipulation and unknown threat to the global economy.
• Consumer spending way down in EU due to terrorism.
• Diminished global tourism affecting luxury sales, exacerbated in US by strong dollar.
• Currency volatility, oil and commodities glut, all driving deflation.
• U.S. economic uncertainty, on the potential edge of another recession; no true catalysts in the economy; GDP growth slogging along at around 2 percent.
• Profits on the decline.
• Trillions of potential investment capital for growth sidelined, due to lack of demand.

MICRO

The U.S. Consumer

• Stagnant wage growth.
• Boomers down-scaling into retirement, spending less on stuff, more on travel, leisure, entertainment, health and welfare.
• Millennials replacing boomers, larger in numbers but with smaller pocketbooks. They are more interested in style of life than stuff of life. Less is more; they’d rather rent than own; brands garner less interest and no loyalty; malls are dwindling as the hang-out place; and this gen has instantaneous and unlimited access to the lowest prices.
• Consumers saving more, spending less – particularly on apparel and footwear – and the so-called oil bonus is bogus.

After declining sharply between December 2012 and mid-2014, apparel and footwear personal spending growth bottomed out and began to improve in the second half of 2014, but then began to steadily decline for virtually all of 2015, as shown in the following chart.

Apparel has become a less important expenditure category for consumers. Over the past three decades, the portion of total US personal consumption spending that is represented by apparel and footwear has been steadily declining, as the following chart shows.

Consumers have become less interested in apparel relative to other categories, such as personal electronics, eating out and other experiential leisure expenditures.

MORE MICRO

U.S. Retail

• Over-stored, over-stuffed, over-websited.
• Little to no organic growth, “share wars.”

Several high-profile international retailers, such as Uniqlo, H&M, Zara, and others, have entered the US market in the past several years. The result has been a sharp increase in retail selling space and an oversupply of apparel and other soft goods. According to the International Council of Shopping Centers (ICSC), the US has 23 square feet per capita of retail selling space, more than 7 times that of the second most-stored country, the UK. The hyper-competitive situation in the US apparel industry presents major challenges for those who try to launch businesses here.

Because of this dramatic oversupply of retail selling space and the gains made by fast fashion houses and off-price retailers at the expense of traditional department and specialty stores, there has been an almost unprecedented level of price promoting, couponing, and weekly, if not daily sales.

The result has been steady downward price pressure on apparel prices, as shown in the following chart.

So, Where Is The Growth?

Slowing sales growth at apparel-oriented retailers is illustrated by the next three charts. Total sales at department, chain and discount stores, which include Macy’s, Kohl’s, JCPenney, Walmart, TJX and others, and which together sell more than half of the apparel in the US, have declined in ten of the past twelve months on a 12-month smoothed basis (US Dept of Commerce), as shown in the chart below. Part of this is due to the fact that department stores are expanding their off-price and outlet businesses faster than their full-price divisions.

Sales in apparel specialty stores, by contrast, which include the fast fashion players H&M, Forever 21, Uniqlo and Zara as well as the more traditional mall-based mono-brands like Gap, Limited, Ann Taylor and Lane Bryant, increased in ten of the past twelve months on a smoothed basis. Apparel specialty stores are taking share from the big stores. Within the specialty sector, it’s generally accepted that the fast fashion players are rapidly gaining share from the traditional chains, particularly in the teen space.

The gains by specialty stores have more than offset the big store losses, with the combined sectors showing slightly more increases than decreases over the past twelve months. However, as the chart below attests, US apparel is a slow-growth industry, increasing by only around 2 percent last year.

Another trend in US retail is declining store traffic. According to Big Data firm RetailNext, physical store foot traffic in the US has declined in at least each of the past 17 months, with six of those months showing double-digit declines, a byproduct of migration to e-commerce and m-commerce. Although some months have produced increases in sales per shopper, presumably because shoppers are more purposeful when they do finally come to a store, the overall takeaway from this trend is not good for physical stores. As a result, many retailers are closing underperforming stores and trying to make their remaining fleet more inviting and engaging.

On a Final Note…

• Amazon rolls out seven  private brands (to steal white space niches underserved by brands and retailers selling on its site).
• Cowen & Company says Amazon’s total apparel business is expected to grow from five percent of the total U.S. apparel market in 2015 to 14 percent by 2020.  Amazon would then replace Macy’s as the largest domestic apparel retailer. The estimate has Amazon’s apparel sales growing from $16 billion in 2015 to $52 billion in 2020. According to Cowen, Amazon already has 34 percent more apparel buyers than Target and two percent more than Walmart.
• Amazon still does not have to make a nickel. But you do.
• And 18 cents of every dollar of sales across all retail sectors is spent to fulfill online orders – free shipping and returns are now baked into the cake.
• Omnichannel and technology costs are skyrocketing while prices continue to deflate.
• The bottom line? It’s called the race to the bottom and the devaluation of brands.

That’s All Folks.

Fini, Over and Out, Adios.

We Wish You Good Luck.