What Does the Future of Retail Look Like?

The retail sector has become a minefield for investors as consumer behavior changes rapidly every year. Once-dominant players like Best Buy (NYSE: BBY  ) and Sears have been relegated to has-been status while online retailers Amazon.com and eBay take more share. Target and Wal-Mart nervously try new store concepts and add more online shopping to try to stay relevant and ahead of the game.

So, what does the future of retail look like? I recently took a trip around one of the largest malls in the U.S. -- Minnesota's Mall of America -- and it may hold some answers.

The showroom floor
Buying products online is oftentimes cheaper than buying in a bricks-and-mortar store that requires staff, inventory, and overhead. The challenge for online retailers is showing off what they have without a buyer being able to touch it. This is where the showroom comes in.

At The Mall of America, a trend of brand showrooms has emerged in recent years. Apple made the trend popular by allowing customers to come in and play with devices, turning that into sales both online and in other retail outlets. But others have followed the lead. Microsoft displays the Surface and Xbox at its store across the hall. Oakley has made its way from protective cases at sporting-goods stores to multiple locations in the mall. Brands like Bose, Nike (NYSE: NKE  ) , Disney (NYSE: DIS  ) , Puma, Steve Madden, and many others have also popped up with their own stores. These may be retail outlets, but they're also showrooms for online shoppers looking to get a look at and feel for products they may buy.

One of Best Buy's problems is that it's become a showroom for online retailers like Amazon. I may not be comfortable buying a sound system straight from Amazon, but if I can try it out at Best Buy, it'll be an easier purchase online. For Best Buy, there's zero return on my test run.

Straight to the source
Best Buy may not benefit from a test run by consumers in their stores, but Nike, Oakley, Microsoft, Apple, and others brands do. Nike doesn't care if you buy a new shirt from their retail store or from Amazon, as long as you're buying Nike. For companies that strictly do retail, there's no return on that experience once you leave the store.

No longer do retail chains hold sway over brands. Companies with strong brand names can go straight to the consumer, providing the showrooms consumers are looking for.

The future of retail
It's become apparent that the large chain store model is slowly dying. Sears is on its last leg, J.C. Penney is a complete mess, and Best Buy is having trouble competing with online retailers. Even Bloomingdale's left the Mall of America last year, leaving Macy's, Nordstrom, and a struggling Sears as anchors.

With competition dying, there may be a place for one or two department stores like Macy's to be left standing, but this isn't a bet I would like to make.

The way to play retail now is to go straight to the source. Nike, Under Armour (NYSE: UA  ) , Disney, lululemon athletica (NASDAQ: LULU  ) -- these are the new faces of retail. The distribution channel may change from department stores to Amazon to branded sites to whatever is next, but the brand will be the constant in our retail future.

Betting on a retail outlet -- bricks-and-mortar or online -- is a guessing game at this point. Companies will rise and fall and no one will make a significant amount of profit because price is the great equalizer in retail. Your investing dollars are better spent on brands that will win no matter who the end seller is.

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Read/Post Comments (12) | Recommend This Article (33)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 01, 2013, at 4:12 PM, 48ozhalfgallons wrote:

    Brick and mortar retailers must rise above the stupid position of being no more than an open box exchange... or perish. Here is one concept:

    The greatest cost to consumers is obsolescence, which in turn, is the greatest profit to manufacturers. Manufacturers no longer offer product exclusivity to retailers. Ergo, retailers are cut out of the obsolescence bonanza. A smart retailer could become an exclusive guardian protecting his customer from product obsolescence designed by manufacturers. Many bright unemployed engineers would jump at the opportunity to engineer point-of-purchase upgrade installs and train personnel to install the upgrades in obsolesced product. The upgrades would be considered as repairs and not patent infringements. This argument would prevail in court because the intent of the manufacturer could be challenged. The only way a manufacturer could defend intent is to offer exclusive upgrade services under patent at point of sale. Manufacturers do not want to become repair outlets. Even Apple stores refuse to accept their obsolesced junk.

    Charges for these services must be profitable yet offer enough savings incentive to motivate consumers as well as being competently executed. Therein lies the challenge, the path to survival and perhaps a growth industry for retailers. Only the most innovative of retailers (oxymoron?) can rise to this challenge.

  • Report this Comment On January 04, 2013, at 12:03 PM, FoolishLonghorn wrote:

    @48ozhalfgallons

    Engineers employed by Best Buy are going to upgrade my television, blu-ray player and cell phone?

    It's not clear to me that this is practical.

  • Report this Comment On January 04, 2013, at 12:26 PM, robtddrich wrote:

    When online retailers have to charge customers sales tax they will lose some of their advantage.

  • Report this Comment On January 04, 2013, at 1:28 PM, magnoliamws wrote:

    The old traditional department stores like Bloomingdale's, Nordstrom, Macy's etc. make little or no effort to to make shopping on their websites easy or appealing.

    For example: Imagine you're shopping for a sweater. Zappo's will give you detailed information about that item including a video of someone modeling it. Many sellers on EBay give detailed garment measurements. Compare that with the brief description provided by a department store website.

  • Report this Comment On January 04, 2013, at 2:19 PM, dsciola wrote:

    Liked the 'step back' look at retail here.

    I wonder what Peter Lynch would think of this, I remember how he liked to target good companies in dying / shrinking industries. Alludes to this in his book and then making a killing off PM when cigarettes were becoming taboo.

    Could one of those successful retail distributors, e.g. Nordy's, or mebbe Macy's, be a good PM candidate going fwd? Admit it could be a risky bet, but perhaps also big rewards for the distributor that does it best and still retains foot traffic and $$$ and not just traffic, like in Best Buy's case.

    Dom

  • Report this Comment On January 04, 2013, at 3:16 PM, DJI30K wrote:

    The baby boomers heading for the door may be a large part of the retail problem along with so much turmoil financially and politically in the world.Could mean 70% of the economy in the form of retail is going to have to change.

  • Report this Comment On January 04, 2013, at 3:20 PM, Johny205 wrote:

    I'm guessing in the near future that online sales will have to start paying state sales tax. I can't believe with todays economy the cash strapped states haven't done this allready. It would be billions of dollars in sales tax.

  • Report this Comment On January 10, 2013, at 10:20 PM, DJDynamicNC wrote:

    ^^^ One alternative - a Federal sales tax.

    Not necessarily advocating for this, but it's definitely a possibility and is probably more logical than state based online sales taxes.

  • Report this Comment On January 10, 2013, at 11:04 PM, r2d23333 wrote:

    For maybe 20 years now (don't recall exactly how many) states have been trying everything they could think of to get online sales tax. They've tried various political tactics in the Congress, numerous legal strategies in court battles with the online retailers, and also tried working out some negotiated agreement with online retailers. The states are well aware of the sales tax revenue they're losing. The online retailers have vigorously fought paying sales tax. It's a complex issue to follow, so I haven't a guess whether states will succeed in the near future or even in the long run.

  • Report this Comment On January 10, 2013, at 11:14 PM, r2d23333 wrote:

    DJDynamicNC, Because online retailers complained that the myriad state and local sales rates were too complex to impose on customers, the proposal was floated maybe 15 years ago in Congress to have a flat rate Federal sales tax that would be sent to states. Online retailers and internet proponents objected to it, and It failed to gain much support.

  • Report this Comment On February 02, 2013, at 7:10 AM, Billmcg7 wrote:

    What about home furnishings?

    How will people select the proper lounge chair,with dimensions that provide comfort and scaled correctly for the room?

    Or decorative furnishing ?

    It is one thing to have a watching TV chair or eating table,but another to create a pleasant environment .

    How will wealthy consumers select their home or office furnishings?

  • Report this Comment On March 24, 2013, at 6:34 PM, junkKC wrote:

    Amazon.com now charges sales tax - their advantage over my local store where I can buy item-X just evaporated.

    A retailer like BestBuy should be trumpeting that news in bold type that amazon is dead, "hands-on" is king and no waiting to get your bauble.

    That's my two cents as I am waiting for my most recent Amazon purchase to arrive - nearly TWO WEEKS now for free supersaver shipping.

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