JC Penney: Sacrifice the Few for the Many

I applaud JC Penney's management on pushing through with store closures as they realize the current trend doesn't require an annual grooming...but something a bit more drastic to return to the more profitable days. Many of the legacy retailers need to face reality and close the long tail of stores driving low returns or negative returns. Sacrifice the few for the many.

Penney said Friday that it will close 130 to 140 stores as well as two distribution centers over the next several months as it tries to improve profitability. The company said that it would also initiate a voluntary early retirement program for about 6,000 eligible employees.

The stores it is closing represent about 13 percent to 14 percent of its current store count of about 1,000, but less than 5 percent of total annual sales.

Source: http://www.startribune.com/j-c-penney-to-c...

Retail Apps Dead?

Surprised we are still debating this as both are arguably needed. Your most willing and loyal customers need an app. Everyone else, needs the mobile web.

Is the app dead? It has certainly been written off in conference speeches over the year as well as the occasional alarmist headline, but what we've all pretty much known all along really does now appear to be coming true. Consumers just don't want a mobile phone packed with screen after screen of apps. They don't want to scroll through page after page of icons, looking for an app that only allows them to interact with one brand.
The research also showed that the majority of retailers are focusing on mobile Web marketing. They are putting money into mobile advertising, content and search that will be discovered through a browser, not by swiping right and left a few times before their app logo comes into view. People are accustomed to searching online for relevant content, and the retailers' reaction to apps would suggest they are happy to search on mobile too.
Source: http://www.mediapost.com/publications/arti...

January Retail Sales & 2016 Recap

January sales were up 5.6% to January 2016. The top 3 growth businesses were gasoline, internet retailers and health & personal care stores:

  • Gasoline posted a 14.2% increase year over year as price increases have set in.
  • Non-store/online retailers posted a strong 12.0% gain over last year. 
  • Heath and personal care stores posted an increase of 8.5% year over year monthly gain.

One point to note is the food services (restaurant and bars) now exceed the general merchandise category of warehouses and department stores. 

On the downside, the bottom 3 included:

  • Department Stores multi-decade decline continues but was muted vs. previous months only down 3.2%.
  • The Electronics vacuum of sales to online continues with a decline of 1.3%. 
  • Sporting goods, hobby, book and music stores saw a decline of 0.8%. 

Overall a very strong report even when excluding the massive spike in gasoline. Traditionally weak categories even saw muted weakness compared to last several months. When looking at the recap of 2011 through 2016, the overwhelming themes remain:

  1. General merchandise struggles with the department stores
  2. Non-Store internet retailers and Restaurants/Bars continue to ascend and gain at the expense of others and capture the overwhelming majority of growth.

December Retail Sales were posted here.

Source: http://www.census.gov/retail/marts/www/mar...

Amazon's Growth Breakdown

Amazon recently provided a bit of granularity on their growth rates by business that helps to illustrate total size of Amazon Prime (65 million members) and the rate at which Prime subscriptions are growing.

A few points to note:

  1. Retail products are growing at a slower rate due to law of large numbers but still accelerated in 2016. 
  2. 3rd party is growing at a 40% clip and continues to be the 2nd largest revenue category.
  3. Other which includes advertising and co-branded credit cards remains small but has exploded as Amazon has focused on providing 3rd party sellers with tools to sell more through keywords and banner ads.
  4. Prime and AWS growth rates have slowed but remain above 40% and 50% respectively.
Source: https://www.bloomberg.com/gadfly/articles/...

Bezos on Alexa In Relation to Shopping

Billboard: This is about more than just music, isn’t it? If you succeed, you’ll have placed an Amazon cash register in every house in the country.

Bezos: It’s not about that. For sure, if you have a 2-year-old and you see that you’re running low on diapers, we want to make that easy for you. But voice interface is only going to take you so far on shopping. It’s good for reordering consumables, where you don’t have to make a lot of choices, but most online shopping is going to be facilitated by having a display. Alexa is primarily about identifying tasks in the household that would be improved by voice. Music is one. Another is home automation. So, you can say, “Alexa, turn off all the lights in the house.” “Alexa, turn the temperature up two degrees.” That’s really an amazing thing to be able to do.

Source: http://www.billboard.com/articles/business...

Why Amazon Won't Buy Macy's

Olivia Chen of Cowen & Co. recently outlined why she believes Amazon should buy Macy's. Her reasoning consisted of a few reasons:

  1. Tremendous vendor/supplier scale: Macy's would give Amazon access to a whole bunch of new apparel brands and help expand its first-party seller relationship.
  2. Speed: Amazon could take advantage of Macy's vast number of physical stores and warehouses to improve delivery speed.
  3. Big data meets retail: Amazon has the "best" predictive analytics technology in retail, so it could help Macy's make better decisions across inventory and pricing, and potentially lead to higher sales.
  4. Merging physical and digital retail: Amazon would gain foot traffic from loyal department store shoppers and get to utilize Macy's physical presence to showcase products and have customers return products easily.

None of what she says is wrong but the idea of Amazon buying the largest department store chain doesn't make a whole lot of sense. Amazon isn't interested in the high legacy costs burdening the old guards of retail leading to their downfall. Amazon isn't interested in stores that are 150,000 to 250,000 square feet in prime real estate locations. Amazon has historically bought businesses with similar models to their internet pure play mentality. Examples being Quidsi/Diapers.com, Zappos, Shopbop. Macy's is none of those and requires extensive cost cutting and store closures to ready itself for the type of business consumers are demanding. 

Bottom Line: Amazon isn't willing to pay for the price of history and would prefer to continue building a leaner business with marketplaces and small format stores. Whose to say that Macy's won't be half the cost it is now in 2-3 years?

Amazon's Q4 Gift

Q4 is always the largest quarter for Amazon due to the overwhelming majority of spending coming in Q4 for the gift giving holidays. This past Q4 continued to show a strong growth number without the law of large numbers setting in just yet. Amazon matched the growth rate of 22% from last year to drive just under $44 billion in Q4 total net sales. AWS posted its' weakest growth rate yet but was still strong by growing over 47%. As mentioned in previous reviews, nothing to worry about here, the growth story is intact and I personally am buying more Amazon shares as the post earnings weakness is a gift. 

PayPal Earnings

PayPal released earnings this past week. Growth in users continues at 10% with transactions per user growing 13%. All of this is driven by Venmo and Braintree while the rest of the business seems to struggle to grow at the same clip of previous years. Because the large percentage of Venmo transactions are free P2P transfers, PayPal has been seeing lower transaction margins in every quarter dating back to Q1 2015. Cause for concern? Well, growing revenues on a declining margin is never a good thing. However, the business continues to generate strong cash flow and is establishing itself as one of the key payment platforms. PayPal has stated margins should be flat year over year but keep a close eye to see how well PayPal is converting P2P users into paying users.

 

 

Source: https://investor.paypal-corp.com/releasede...

Apple Pay Growth

I recently called Apple Pay and other mobile wallet services as the stealth growth story of 2017 and 2018. As more and more merchants adopt the technology and more importantly "train" the customer and employee on mobile payments, we will see a steady increase in brick & mortar. On the ecommerce side, I am nothing but bullish as mobile sites join the apps already accepting mobile wallets.

TXN recently released a study providing a bit of insight on that growth. A few takeaways:

1. The study is based on 3 million payment cards of their consumer panel. Keep the small size in mind when reviewing. 

2. Growth in transactions year over year is 50%.

3. Mobile only service providers like HotelTonight and Caviar saw the highest percentage of transactions using Apple Pay at just over 3%.

4. Retailer websites such as Boxed and Raise were just under 2% in total transactions that were paid with Apple Pay.

5. Brick & mortar players such as Duane Reade and Whole Foods were just under 2% of total transactions using Apple Pay. 

Bottom line: While none of these statistics are mind blowing, I believe we will see a steady increase over the course of the next few years. Nothing but optimism for this space.

 

 

Source: http://blog.txn.com/apple-pay-on-the-rise/

eBay Snoozefest

eBay released earnings earlier today for Q4 and the full fiscal year. Overall, the auction house posted tepid growth in users, listings and overall merchandise sold via site. Earnings per share largely showed a decent growth rate due to $1 billion in shares repurchased. While I don't expect eBay to ever return to blockbuster growth, I am hopeful the site changes in product hierarchies will provide a better organized site allowing for a return to double digit growth. A couple of highlights:

  • Active buyers were up 3%
  • Sold items were up 5%, GMV in US up 3%, GMV in International markets up 7%
  • Stubhub saw a sharp deceleration in growth rates to 20% down from 40% and 32% in prior two quarters
  • Earnings per share were up 8% but largely a result of a $1 billion share repurchase paid for by the sale of the $1.3 billion MercadoLibre stake
  • Q1 revenue guidance of up 2-4% with EPS growth of -2% to up 2%
Source: http://files.shareholder.com/downloads/eba...

Airbnb vs. Hotels

STR released their latest findings on Airbnb's impact on hotels in various markets. Findings aren't entirely new but definitely worth registering for the quick read. Here is summary of findings and takeaways:

  1. Airbnb exceeds total room nights of all legacy hotel chains but not all room nights are comparable to hotel nights. On an apples to apples basis, Airbnb is #2 to Marriott International.
  2. Hotels occupancy rates exceeded Airbnb's each day of the week.
  3. Hotel nightly rates exceeded Airbnb's each day of the week.
  4. Airbnb's share grew in each major market but currently only sits in the 3-5% range in market share.
  5. Airbnb stays are significantly longer in length and hotels continue to dominate business travel. 

Bottom line: When tides rise, all boats rise. Hotels remain strong while Airbnb continues to growth on a much smaller base. Major impacts have yet to be seen specifically within the business market but traction continues for the mobile app offering the 2nd most room nights in the industry.

Cadillac Launches Subscription Cars Direct to Consumer

Cadillac launches an innovative program that brings monthly car subscriptions to customers for $1,500 a month:

A member pays a flat monthly fee of $1,500 (there’s also a one-time $500 initiation and processing fee).  For all this, the member gets unlimited access to several Cadillacs – from the V Series, XT5 and CT6 to an Escalade – for as long and whenever wanted. These same cars would cost between $60,000 and $100,00 if purchased outright, according to a Reuters report. The car is home delivered and the fee includes registration, taxes, insurance and maintenance costs. There’s no mileage limit and if you want out of the program you just have to give 30 days’ notice.

Keep in mind that this model completely eliminates the dealer and is the car industry selling direct to the consumer. Program launches in NYC February 1 and should be interesting to see if other manufacturers follow suit.

Source: https://www.washingtonpost.com/news/on-sma...

December Retail Sales

December sales were up 4.1% to December 2015 due strong auto sales with aggressive year end promotions. 

The top 3 growth businesses were internet retailers, health stores and restaurants/bars:

  • Non-store/online retailers posted a strong 13.2% gain over last year. An acceleration from the last few months.
  • Motor vehicle dealers posted the second largest growth rate with 7.2% year over year growth.
  • Heath and personal care stores posted the third largest (excluding gasoline) increase 6.2% year over year monthly gain.
  • One point to note is the positive yet declining growth rate trend in food services & drinking places.

On the downside, the bottom 3  remained the same:

  • Department Stores multi-decade decline continued with a sizable 8.4% decline.
  • Sporting goods, hobby, book and music stores saw a decline of 3.6%. 
  • The Electronics vacuum of sales to online continues with a decline of 2.4%. 

Strong auto sales brought rosier sales than expected, nothing new here in terms of shifting sales to online but the degradation in restaurant sales growth is a trend worth noting. 

Amazon Prime Traction & 3rd Party Stats

In light of Amazon announcing that 50% of their units are being filled through consigned inventory, thought it would be worthwhile to highlight a few points from Baird's recently updated Q4 Amazon numbers:

  • Prime membership is now up to 48.5% of US households. This is up significantly from 39.5% in Q4 of 2015. The numbers above would assume 55-60 million of the total 125 million US households now have Prime.
  • 45 million items are now Prime eligible vs 38 million in Q4 2015. This is a slight deceleration in growth from 28% year over year to 24% year over year. 
  • Fulfill by Amazon (FBA) consigned product growth is up 24% year over year vs 37% last quarter. This also compares to Amazon's own product growth of 17%.

What does this all mean? Amazon is getting tougher on what can be added to their various sites as they fight unauthorized brands while the Prime membership grows and the amount of items in the Prime network increases. A healthy grooming needed as they continue to grow their audience.

Retail 2016 Prediction Results

2017 is here. Let's review how I did on the 2016 predictions:

  • Retail sales growth will remain tepid - Spending will continue to be hampered by consumers paying more for healthcare and housing. Pockets of strength will be restaurants & bars, non-store retail (online), auto and home improvement.  

Partially Correct. Restaurants are starting to slow a bit.

  • Discount & Outlet vs. Department Stores - The "perceived deal" and "the find" will continue to earn customer wallets. The only way to provide both of those two is through discount & outlet stores...much to the dismay of department stores.

Correct. No major department store other than Nordstrom posted a positive quarterly comp in 2016.

  • Cheap chic reigns supreme - H&M, Uniqlo, Zara, Forever 21 and now Primark will continue to drive the mindset of the consumer and steal share from legacy retailers. Mindset: Apparel should be cheap and viewed as disposable. 

Correct. No stopping this train. Inditex (Zara) and Primark continue their assault.

  • Ecommerce is truly here - Although brick & mortar still owns the overwhelming majority of spend, 2015 truly made the customer comfortable with shopping online. Online grocery shopping truly became available and mobile sites/apps hadn't reached the tipping point. That all changed in 2015 and will make previous year's growth seem small.

Incorrect. Grocery is taking a long, long time.

  • Marketplaces thrive - Shoppers start their shopping in a search engine or at a site named Amazon. Sometime in 2016, 50%+ of everything purchased on Amazon will be from a 3rd party seller. Brands will realize the need to list in these marketplaces or risk losing the "eye share."

Correct. We hit 50/50 break point on Amazon a quarter ago.

  • Minimal retail footprint downsizing - Although most industry pundits agree that North America has too much retail space, we likely won't see much downsizing in 2016. Stubborn retailers will still open stores in smaller sizes and hope to steal market share from competitors. 2017 will be a different story... 

Partially correct. Macy's announced 100 closings for the headlines and a few other bankruptcies recently announced. 

  • Liberation of brands - Brands will make further progress in "owning the conversation" with the customer as they focus on selling direct and cutting out the middle man. Some will earn organic sales due to being front of mind whilst others will realize paying for awareness is addictive and expensive.

No scoring possible.

  • Etail is a losing game - It has become increasingly more difficult to run a retail business as 100% ecommerce. With the cost of acquiring an order and/or customer increasing monthly, etailers cannot survive paying for every order. The existing etailers realized this in 2015 by focusing on marketplaces/services to pay the bills.

Incorrect. Limited adoption of marketplaces by the etailers. 

  • Shippers with deep pockets survive - Customers are no longer willing to pay for shipping yet want the product now. Large, comprehensive delivery networks are costly. The Instacarts and Delivs of the world can survive in highly dense markets but the end of domination by FedEx and UPS using USPS for final mile delivery is nowhere near. 

Correct. No major changes in 2016 on the shipping front. Plenty of growth and funding for everyone.

Never Say Never

Mr. Outwater is among the 17% of U.S. primary household shoppers who say they never shop on Amazon, according to data from Kantar Retail ShopperScape. While the percentage has steadily declined over the past five years, roughly 22 million American households didn’t use the retailer this year.
Some 80% of U.S. adults had either a smartphone or a home broadband subscription in 2015, according to Pew Research. Lack of access to web-enabled devices, or living in places where it is difficult to receive packages, are key reasons people avoid e-commerce, said Stefan Weitz, chief strategy officer at retail technology provider Radial.
“There’s still a decent amount of fear and mistrust with the web,” Mr. Weitz said. “And 80% of consumers still want to go to browse and shop in-store.”

Misleading headline and subtitle from the WSJ. Of course there will always be segments of the population unwilling to shop one way or with a specific retailer. The article should have focused on the declining portion of that survey population.

A Rational View on Amazon Go Stores

Now that the hype of the Amazon's press release of laborless stores has slowed, time for a few thoughts:

  • Amazon uses press releases, videos and 60 Minutes to fuel the fire that Amazon is focused on innovation and frictionless/thoughtless commerce
  • Amazon stores, drones, robot distribution centers and laborless stores are all incredibly exciting and impressive. Before any small release, long periods of testing and refining are needed.
  • Any large scale release of laborless stores and drones is years away. Small tests will be available in certain markets like the Pacific Northwest, but rolling out hundreds of stores can take many years.
  • This should be a "call to arms" to any store based retailer. Amazon is explicitly calling your attention to their planned model. Nothing new from the "virtual store" many have shown but Amazon seems to be the first to actually put one together.
  • Amazon knows Grocery and consumables is where the lion's share of customer spend is and that is their #1 focus area. Amazon's Prime Pantry and Amazon Fresh offers via delivery will continue to be their focus over the next few years as they test and learn various store models.

Bottom line: The outlook remains rosy but realize that Amazon Go stores are years away from being in your neighborhood.