RetailA Special Report from Media Group Online, Inc.

Rising from the Ashes

The media has been filled with stories about a so-called “retail apocalypse,” citing the large number of store closings, abandoned and eerily quiet shopping malls

and the explosion of the Amazon phenomenon (and online shopping in general) as some of the primary reasons.

It’s true that retail has been battered and bruised during the past years, especially 2017, but just as life must evolve to sustain itself, so must retail.

Instead of crashing and burning, retail is rising from the ashes, similar to the mythical Phoenix bird that purposely leaped into the fire when it knew its current life had to end to be reborn again as something new. No doubt, many traditional retail brands will disappear, but that is necessary, even welcomed, if the retail sector is to thrive and flourish in the new world of the 21st century.

Despite how much disruption retail has experienced recently, there has also been much good news.

• The US Commerce Department reported that retail sales increase 0.2% during October 2017, which was a larger increase than expected.

• September’s retail sales were revised from +1.6% to an even more robust +1.9%.

• Through the end of October, the increase in retail sales for 2017, on an annual basis, was 4.6%, which is considerably higher than the National Retail Federation’s (NRF) most recent annual forecast (September) of 3.2% to 3.8%.

• The NRF and other business-forecasting sources predict a good to excellent fourth quarter and holiday shopping season.

Of course, the US retail industry is part of a larger economic universe – global and domestic economic policy, tax reform, the stock market, housing, employment, etc. – and it must become more nimble and responsive to the economic and political vagaries of our times.

It’s important that you understand how retail is evolving, so you can act as a guide and advisor to the smaller, local retailers who will also be affected, and to help them find new opportunities.

Retailwww.mediagrouponlineinc.com

Rising from the Ashes pg. 2

Bad News Always SellsBad news always sells in all media channels, so there has been an over-emphasis on the large number of store closings, the bankruptcies of traditional chains, the effect of Amazon and e-commerce and other factors. In many cases, these reports are not wrong and retailers (and media ad reps) should be aware of how these factors created retail’s current tough environment.

Store closings – The number of store closings seems, on face value, to be credible data to serve as the basis of the media’s coverage of the “retail apocalypse.” Despite a number of recessions, retail property developers, including the shopping mall industry, took advantage of low interest rates and plentiful money to expand at a feverish pace since the 1970s, and especially since the end of the last recession.

What didn’t receive equal coverage was that just two of 10 major retail sectors experienced net negative store growth during 2017: department stores, -400, and specialty softgoods, -3,133. In addition, just 16 retailers accounted for 48% of the store closings and, many of them, Radio Shack being a good example, were stuck with business models that were not competitive in the 21st century economic environment.

A smaller middle class – Another storyline that has been aggressively reported in the media, and which has had a negative effect on retail, is the shrinking of the middle class.

Changes to US Class Dynamics, 1971 and 2015

Class% of Adults Share of US Income

1971 2015 1971 2015

Upper class 14% 21% 29% 49%

Middle class 61% 50% 62% 43%

Lower class 25% 29% 10% 9%IHL Group (Pew Research Center), August 2015

As painful or unpleasant as this trend has been for many Americans, retail property developers and retail chains seemed to be unaware (or disregarded) of it, resulting in the overbuilding of malls and store locations.

Retail prices increasing faster than household incomes – The lower and middle classes have always been the primary and largest groups of retail consumers, but their household incomes haven’t kept pace with the 55% average inflation of prices for core consumer goods and services during the 20-year period, 1996–2016.

US Household Income by Quintile, 1996 and 2015

Quintile 1996 2015 Dollar Increase

% Increase

Lowest $8,595 $12,457 $3,862 +44.9%

Second $21,097 $32,631 $11,534 +54.7%

Third $35,486 $56,832 $21,346 +60.2%

Fourth $54,922 $92,031 $37,109 +67.6%

Fifth $115,514 $202,366 $86,852 +75.2%IHL Group (Bureau of Labor Statistics), August 2017

Retailwww.mediagrouponlineinc.com

Rising from the Ashes pg. 3

With less buying power, lower- and middle-income Americans were faced with the prices of necessary products/expenditures increasing much more than products still considered a luxury, especially by those of limited incomes.

Price Increases of Selected Necessary vs. “Luxury” Products, 1996–2016

Necessaries Price Increase Luxuries Price

IncreaseCollege tuition and

textbooks +200% Cellphone service -45%

Childcare +125% Software -70%

Healthcare +120% Toys -72%

Food and beverage +65% TVs -95%

Housing +6-%IHL Group (Bureau of Labor Statistics), August 2017

More consumers attracted to fast-fashion stores than department stores – As the two lowest household income brackets didn’t increase at the pace of inflation (and even the third quintile barely exceeded it), department stores were vulnerable to the growth of fast-fashion competitors, such as Zara, H&M, TJ Maxx and Ross Stores. These retailers brought new products to their shelves faster and offered consumers the bargain prices that better matched what they could afford.

In addition, new beauty and cosmetic retailers, such as Sephora, Ulta and Lush, took many of department stores’ longtime customers in these product categories with a more-diverse selection and more-affordable pricing for some products.

Not prepared for online shopping – In hindsight, it’s now clear that traditional brick-and-mortar retailers were slow to react to the online shopping phenomenon. Of course, many of them and the media like to cast Jeff Bezos and Amazon as a band of desperados riding roughshod over retail. They were just smarter and faster at recognizing the benefits of online shopping both for themselves (and their imitators) and consumers.

Even so, the growth of e-commerce during 2017 is just 28% of all retail growth and Amazon’s impact on brick-and-mortar stores, especially department and fashion stores, is less than 5%.

Retailwww.mediagrouponlineinc.com

Rising from the Ashes pg. 4

Positive Signs AboundMany people don’t want to hear it or admit it, but there is no “status quo.” Everything is in constant flux, including the US retail industry. Statistics vary, but approximately only 20% of new businesses survive beyond their first year, 50% have closed their doors within 5 years and just 34% celebrate their 10th anniversary.

Therefore, it is perfectly “natural” for retailers, especially the largest, to close locations regularly, as they are constantly evaluating their performance.

More stores will open than close during 2017 – Approximately 4,080 more stores will open than close during 2017, and 5,500 are forecast to open during 2018. As mentioned on page 2, only two major retail sectors, department stores and specialty softgoods, will have negative net store growth during 2017.

Net Store Openings, by Retail Segment, 2017

Segment Net GrowthSupermarkets +674

Drug stores +345

Superstores/Warehouse Clubs +82

Department stores -400

Specialty hardgoods +153

Specialty softgoods -3,133

Mass merchandisers +1,905

Convenience stores +1,700

Bars/Restaurants +728

Fast food +2,026IHL Group, August 2017

In addition, there are two primary causes for the common misinterpretation of the storing opening/closing paradigm. First, more of the store openings are locations with smaller footprints, such as dollar stores and convenience stores, so consumers are less conscious of these openings.

Second, the closing of large-chain locations, such as Sears, Macy’s and JCPenney, are much more evident in their communities, especially if they are anchor stores in shopping malls, which falsely trigger thoughts of an “apocalypse” among retail analysts and commentators.

Earnings and revenues are increasing – According to Goldman Sachs analysis, 76% of 50 retail companies exceeded their earnings estimates for Q2 2017. FactSet Research Systems reported 80% of consumer-staples companies and consumer-discretionary-spending companies in the S&P 500 exceeded their Q3 2017 earnings estimates.

Of 15 retail sectors, 9 had increased revenues through July 2017, compared to 6 with decreased revenues. Although those with decreases are clearly facing tough competition from Amazon and other pure-play online retailers, many of the sectors with increased revenues face the same competition, indicating there are other factors involved.

Retailwww.mediagrouponlineinc.com

Rising from the Ashes pg. 5

Selected Retail Sectors’ Revenue Performance Through July 2017

Sector Revenue Increase Sector Revenue

Decrease

Convenience/Gas +8.4% Sporting goods -8.1%

DIY and home goods +6.8% Department

stores -4.3%

Mass merchants, dollar stores and off-price stores

+4.5% Electronics -1.3%

Cosmetics and vitamins +4.0% Shoes -0.9%

Furniture +3.8%Drug

stores/Pharmacies

-0.9%

Restaurants +3.0% Clothing -0.1%

Jewelry +2.6%

Supercenters and warehouse clubs +2.0%

Food and beverage stores +1.8%

IHL Group, August 2017

Macroeconomic basics are steady, even strong – The basic structure of the economy is also always in flux, but most of the indicators portend a good to very good foundation for the retail sector to survive, even thrive during the near term.

• Employment: The latest job report (October) cited an increase of 261,000 jobs and an unemployment rate of 4.1%. Of greater importance, the broader metric of unemployment, including discouraged workers and those who work part-time because they can’t find a sufficient full-time job declined significantly, to 7.9% from September’s 8.3% and October 2016’s 9.5%.

• Consumer confidence: The Conference Board Consumer Confidence Index for October increased from September’s 120.6, to 125.9, with the Present Situation Index increasing from 146.9 to 151.1 and the Expectations Index increasing from 103.0 to 109.1.

• US small business owner confidence: For Q4 2017, the Wells Fargo/Gallup Small Business Index was 103, slightly lower than Q3’s 106 (a ten-year high), but compares favorably to Q2 2017’s 95 and even more so to Q4 2016’s 80. Small business owners’ biggest concern is finding and hiring qualified workers, which bodes well for employment.

• Housing starts: October 2017 recorded the highest seasonally adjusted annual rate since October 2016 for housing starts, or 1.29 million, a 13.7% increase from September.

Millennials forming households – The housing market and all the ancillary businesses, industries and retailers that benefit from it are feeling better about the present and future, as more Millennials are starting to form households and buy homes. According to the National Association of Realtors, Millennials are the largest generation of all homebuyers, accounting for 34% during 2017.

Although research suggests Millennials are more frugal spenders than their parents and grandparents, forming families and buying a home have a way of causing similar spending patterns for furniture, appliances, building supplies, remodeling, etc.

Retailwww.mediagrouponlineinc.com

Rising from the Ashes pg. 6

The Online Competition Is RealThe competition from online retailing – whether the online component of a traditional brick-and-mortar chain or pure-play retailers – has less to do with the current state of affairs and more to do with the trend line.

According to the latest data from the US Census Bureau, total e-commerce sales during Q3 2017 was $115.35 billion, or 9.1%, of all retail sales, which totaled $1.269 trillion. The significant comparisons, however, are the percent change from the prior quarter and the percent change from the same quarter of the previous year.

Comparison of Total US Retail Sales and E-Commerce Sales, by Percent Changes, 2016 and 2017

Quarter Percent Change from Prior Quarter

Percent Change from the Same Quarter of the Previous Year

Total Retail E-Commerce Total

Retail E-Commerce

Q3 2017 +1.1% +3.6% +4.3% +15.5%

Q2 2017 +0.4% +4.7% +4.0% +16.0%

Q1 2017 +1.1% +4.7% +5.1% +15.4%

Q4 2016 +1.6% +1.7% +3.7% +14.2%US Census Bureau, November 2017

Fung Global Retail & Technology (FGRT) provides another insightful comparison. It estimates that US consumers will spend approximately $36.5 billion for the selected products and services in the table below during 2017; however, this is just 1.1% of 2017’s forecast of $3.42 trillion for total retail spending.

Estimated Consumer Spending on Selected Digital Segments, 2017

Segment TotalOnline and mobile games $12.1 B

E-books, magazines and newspapers $7.5 B

Music streaming and downloads $5.6 B

Meal kits $2.7 B

Online apparel resale $2.3 B

Online restaurant deliveries $2.1 B

Video downloads $2.1 B

Beauty and personal care subscriptions $1.5 B

Online apparel rental $500 MFung Global Retail & Technology, November 2017

Although these segment totals are not large, they signify not only those segments, such as books, music and video, which have already “doomed” bookstores and music and video stores, but also consumers choosing to bypass other brick-and-mortar retail segments for online sources.

Retailwww.mediagrouponlineinc.com

Rising from the Ashes pg. 7

Another Online Trend: Direct Purchase from Brand Manufacturer’s Website

Brick-and-mortar retailers, large and small, are also facing another e-commerce trend: consumer choosing to purchase directly from a brand manufacturer’s Website instead of retailers offering multiple brands.

A mid-year survey of 1,000 US adults from Astound Commerce, an e-commerce technology and strategic services company, provided detailed insights about this trend.

Expectations Regarding Purchasing Directly from a Brand Manufacturer’s Website Versus a Retailer with Multiple Brands, 2017

Expectation PercentMore comprehensive information and guides about the product and category being sold 54%

Better prices than retailers selling multiple brands 50%

Broader assortment 45%

Expert customer service 44%

More engaging experience to obtain a strong sense of the product and the brand 37%

Information about brand manufacturers’ stores where products can be purchased 35%

Interactive tools to help select the right product 35%

Richer experience, including better product photography 31%

Information about other sources that carry their products either online or brick-and-

mortar stores22%

Marketing Land (Astound Commerce), August 2017

As has been revealed in many surveys of this type, the largest percentage (77%) of the adults in the Astound Commerce survey said they visited the brand manufacturer’s physical stores in addition to their Website. The #1 reason continues to be “I want to touch and feel the products,” at 70%.

Of additional interest from the Astound Commerce survey is what prompted these consumers to visit a brand manufacturer’s Website.

Top 10 Prompters to Visit a Brand Manufacturer’s Website, 2017

Prompters PercentSocial media advertising 51%

Ads in search engines 47%

Online/Offline recommendations from family/friends 38%

TV/Radio 35%

In-store visits to brand manufacturer’s physical store 31%

Promotions (discounts/coupons) 25%

Emails with a personalized offer 25%

Newspapers and magazines 25%

Direct mail, print catalogs or weekly circulars 23%

Banner advertising on content Websites 22%Marketing Land (Astound Commerce), August 2017

Retailwww.mediagrouponlineinc.com

Rising from the Ashes pg. 8

Solution Strategies for SMBsHere are a few ideas that can elevate your “brand” as a trusted advisor among your prospects and clients in the midst of the “retail apocalypse” they see occurring in the country and on the street where they are located.

• Fill the void – As major retailers either file for bankruptcy or close a significant number of locations, there may be many opportunities for small, local retailers to offer some of the products and services that are no longer available.

• Create an experience – Multiple research sources indicate that offering customers an experience can beat the convenience of online shopping. Events and demonstrations are good ideas, but it may be as simple as store personnel becoming customers’ personal shopping advisors or guides, with both in-store attention and personalized email/mobile communications.

• Unique products – Consumers are dissatisfied with many major retailers’ product selection: too much sameness and not enough uniqueness. Small, local retailers can take advantage of this trend with an occasional display of unique products that could be locally sourced, such as handicrafts, or exotic imported products related or unrelated to their regular inventory.

• Digital presence – According to an October 2017, Wells Fargo/Gallup poll, just 44% of small businesses said they had an “active social media strategy.” A larger percentage may use social media, but haphazardly. Without a social media strategy, small, local retailers can’t compete with other retailers, of any size, and will be ill-prepared for future technology already entering the retail realm, such as artificial intelligence and robotics.

• Employees as company marketers – Too many small, local retailers overlook the value and power of their employees as marketers for their businesses. Pew Research Center found that the average American has 634 social media connections. Even if a store only has 5 employees (and some part-time), creating an active social media strategy in which they are the primary voices can reach more than 3,000 potential customers. Plus, multiple studies reveal that employees are likely to generate more trust than the impersonal voice of the store brand.

Sources: CNBC Website, 11/17; National Retail Federation Website, 11/17; eMarketer Website, 11/17; IHL Group Website, 11/17; USA Today Website, 11/17; FactSet Research Systems Website, 11/17; CustomerThink Website, 11/17; The Conference Board Website, 11/17; Gallup Website, 11/17; Forbes Website, 11/17; National Association of Realtors Website, 11/17; US Census Bureau Website, 11/17; Fung Global Retail & Technology Website, 11/17; Marketing Land Website, 11/17; ScribbleLive Website, 11/17.

Prepared: November 2017

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