Analytics

June Retail Sales: A Good News, Bad News Story for Merchants

Last week the US Department of Commerce released its most recent monthly sales and inventory figures for the retail industry. Total sales rose to almost $448 billion in June, up from $422 billion in June of last year, a seasonally adjusted increase of 5.2% on a 12-month smoothed basis (which is not a straight average, but a calculation that takes into account several months of data so that it conveys a more accurate idea of trend). Total retail inventory rose by 3.6% in May, the most recent month for which inventory data are available, and the smallest monthly increase in almost three years, sending the inventory-to-sales ratio edging down for the month.

RR chart Retail Total

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Whether or not the news was good for you depends largely on what business sector you’re in. If you’re in a well-run business selling automobiles or health and beauty aids, you probably saw your sales grow. If you’re selling food, apparel, electronics, home furnishing or most other discretionary consumer products, then you’re probably having a considerably different experience.

First, the Good News

Automobile and parts dealers enjoyed an 8.3% increase in sales on a 12-month smoothed basis. Though this was the sector’s smallest growth in four months, it outpaced overall retail growth and drove much of the overall gain in retail sales. According to research firm Autodata, Inc., 1.42 million new cars, light trucks and SUVs rolled off car lots in June, putting 2014 on track to be the best year for the auto sector since before the Great Recession. Despite all the recalls and safety concerns at GM and Toyota, US auto retailers are expected to sell 17 million new vehicles this year for the first time since 2006. Auto inventory levels have been declining steadily over the past few months, as dealerships have made much better use of technology to access a bigger “virtual fleet” of cars to sell from without actually having them on the lot.

RR chart Retail Auto

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Drug stores, pharmacies and other health and personal care product retailers also did gangbusters business in June, benefitting from the surge in consumer spending by both aging Baby Boomers and people signing up for the Affordable Care Act on prescription and over-the-counter medications and other healthcare care products. Sales in the segment, which includes drug store chains such as Walgreen’s and Rite-Aid, beauty stores like Sephora and Ulta, and independent pharmacies and health and beauty aid retailers, rose by a record 8.4%. (Monthly inventory figures are not available for this channel.)

RR chart Retail Health

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Non-store or pure-play e-commerce retailers (read: Amazon, since they dwarf everyone else in this space), also continued to fire on all cylinders. Sales rose by a 12-month smoothed 8%. The government doesn’t publish inventory figures for this sector, either.

RR chart Retail Nonstore

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Here’s the Other Side of the Story

Now for the not-so-good news. If you’re selling discretionary consumer goods like apparel, home furnishings, and electronics, or if you’re selling food and beverages, you had a pretty disappointing month.

Department and discount stores were, on average, the most challenged in June. Sales in the channel that include Macy’s, JCPenney, Sears, Walmart, Target and Kohl’s experienced a collective 1.4% drop on a 12-month smoothed basis. And although inventory plunged by 6.4% in May (the most current month available) for the big stores, the unexpectedly slow sales in recent months caused the inventory-to-sales ratio in the channel to rise slightly after falling in each of the previous four months.

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Apparel specialty stores, which include brands like Gap, Men’s Wearhouse, Forever 21, Ann Taylor, Abercrombie and small independent specialty stores, had a somewhat better time of it. Sales growth, despite underperforming the total retail industry, edged into positive territory for the third straight month in June with a 2.8% increase, to $21.3 billion, beating last month’s gain. It was this sector’s highest monthly growth in seven months, helped somewhat by the arrival of more seasonable weather. This space, which contains some clear winners, some beleaguered losers, and some brands that are barely holding their own, continued to fare better than department and discount stores, a trend that is expected to persist, as consumers prefer their easy-to-navigate stores and e-commerce sites chock full of curated merchandise and generally improved service. Specialty store inventories dipped by 1.8% in May, but the inventory to sales ratio, after dropping for three months, edged up in May.

RR chart Retail Spec

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However, and this is a huge however, to generate traffic and sales growth, many department, chain, discount and specialty stores (in fact, almost all of them) have had to resort to super-aggressive price promotions to even get on their customer’s radar. Most retail CEOs have spent the better part of the last few months bemoaning the decline in store traffic (which some have even put at double-digit levels) and cutthroat promotional environment about which one industry analyst said: “40% off is now the price you pay to play” in this business.

These widespread promotions have resulted in some pesky inventory pileups that are giving retail management sleepless nights worrying if all this discounting they’ve had to do isn’t just the beginning of a never-ending downward spiral that is going to beget more discounting in the second quarter. If it is, and if those clearance sales bleed into third quarter, it could result in a disastrous Back-to-School season, and cast a pall over Holiday. And … well, you get the picture. It’s not a pretty one.

Other sectors with fairly lackluster results include food and beverage retailers, whose low growth of 2.5% was blamed on price spikes on beef, dairy and other products that caused consumers to tighten spending wherever possible. To counter this, many of the major supermarket chains have intensified the share wars in some parts of the country, which often results in lower average transaction values.

The combined furniture, home furnishings, and building and garden supplies segment also saw below-average growth in spite of the improving housing market. The biggest gain within this sector was at building supply retailers like Home Depot, Lowe’s, Menard’s and others, where sales rose by a smoothed 4.3%, helped by the long-awaited arrival of seasonable weather in many parts of the country.

What’s the secret to sustainable growth? One key is to get closer to your customers, because they wield more power than ever. Understand them, engage them, connect with them. Too many retailers make the mistake of thinking that retail is just a product business, when in fact it’s a people business. The customer connection is essential to success. Customers can find good product anywhere today. The trick is to get them to find your stores, your brand, and the shopping experience you provide superior to the hundreds of other options out there.

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