In this segment of Industry Focus: Consumer Goods, Sarah Priestley is sitting in as host, and she's joined by Motley Fool contributor Daniel Kline to discuss the reality of what's actually happening in retail. The two talk about how perception is not always reality and note that although many retailers are struggling, chains such as Dollar General (DG 1.12%) are adding locations at a rapid pace.
The two discuss the Amazon.com (AMZN 1.04%) effect and how it's driving some chains out of business while others are figuring out ways to thrive. In addition, they look at some data showing how overall physical retail sales have grown, at least in Q4, even though the perception may be that they have shrunk.
A full transcript follows the video.
This video was recorded on April 25, 2017.
Sarah Priestley: Retail spending as a whole, according to the Census Bureau, is up 5% year over year, and up 17% in the last five years. But the conventional wisdom, as you described it in one of your recent articles, is that the retail industry is kind of dead, it's dying. And there's a lot of enthusiasm for that, and I'll play devil's advocate here for just a minute and go into that. On the surface, there's a lot of evidence that backs up that point. In the past year or two, we've had bankruptcies from [Payless ShoeSource], The Limited, Wet Seal, Gander Mountain, Sports Authority, and recently we're seeing a lot of news about store closures. Macy's is closing 100 stores, J.C. Penney over 100, [Sears Holdings] -- 78 Kmarts, 26 Sears locations, and they've even admitted substantial doubt in their ability to keep the doors open.
Dan Kline: It's one of those things where what you see isn't what's actually happening. You walk around the mall -- we were talking about this upstairs -- the mall near me, the lower-grade mall, about a third of it has become the fake edifices where they put a vending machine and a "Coming Soon" sign, and there's nothing there, because a lot of stores have gone out. RadioShack is one you didn't mention; they've closed 1,000 or 1,100 on their way to complete oblivion, their second bankruptcy. You look and go, "Oh my God, mall retailers are closing." My Macy's closed; the Macy's I could walk to from my house literally closed. And it would seem like that makes sense. The narrative is, the internet is killing physical retailers.
Priestley: Yeah. The Amazon effect, as people call it.
Kline: And I believed it as well. And then I went to the Shoptalk conference. I mention this because this research came from a gentleman named Kasey Lobaugh from Deloitte. What he pointed out, and he only showed one quarter's worth of data, and the people who track retail data, National Retail Federation and others, they don't break out internet versus physical retailer sales. So this is a bit elusive. But what he said is, during the fourth quarter, the holiday season, the overall dollar growth of physical and online was about the same; it was $12 billion each. In terms of physical retail, which is much bigger, that turned a 2%-3% gain. On the online side, it was 13%-15% gain. But the reality is, what we're seeing is, failing stores are closing, and there are plenty of chains that are taking their places. If you look in the discount space, Dollar General is opening 1,000 stores this year, and they opened 1,000 last year. Even chains that have a perception of struggling, like Target, are opening and adding. Target is going into markets that Wal-Mart had decided to not go after, which is cities, and they're putting in 20,000- to 30,000-square-foot stores, about 20% the size of their regular stores. You're seeing fragmentation and a shift in retail. Today, there was a story that Warby Parker, the eyeglasses people who both of us would probably do well to visit, is opening more retail stores. So you're absolutely seeing the Amazon effect killing certain retailers, but it's also creating opportunity for other retailers.
Priestley: Absolutely. I think the retailers that are being rewarded are the ones that are actually listening to their customer and understanding what their customers want. As you quite rightly pointed out, retail as a whole is growing. E-commerce is growing at a faster rate, but e-commerce as a whole is growing. I think Moody's estimates the discount environment to grow 7% this year. Obviously, people are still going to the stores. It's not like we're going to be telling our grandchildren what a shop was like and staying inside all the time. So why do you really think that some of these stores have it right, and what do you think investors should be listening out for?
Kline: If you're Dollar General, you're competing on price, you're basically going in and saying, "Amazon might be as cheap or even cheaper, but I have it now." They have hit the sweet spot when it comes to pricing. But a lot of the chains that are working are ones that offer an experience. Best Buy has turned the corner, and part of the reason Best Buy succeeds when we just lost hhgregg is, when you walked into hhgregg, it was a very 1980s retail experience. There were refrigerators over there, there were stereos over here, there were computers. There was nothing joyous or interactive about the store. When you walk into a Best Buy now, you can go play with a Nintendo Switch, you can go sit in a chair and try out different audio systems. There's stores within a store, which is a concept J.C. Penney is using, too. We've talked, I have a background in retail, I ran a giant toy store for two years. If you give people a reason to come in, it could be as simple as there's a coffee shop in my bookstore and people want coffee, if they have to walk by all your merchandise on the way to the coffee or on the way to play the Nintendo Switch or on the way to get a haircut at J.C. Penney or take their picture at Sears or wherever it happens to be, that's a chance to capture them as a customer.
So retailers have to think smarter. I think that's something that Macy's missed out on, and Sears really missed out on. You go to Sears now and they're struggling, and it's still hard to find the merchandise you want. They have not made them. And I buy clothes at Sears sometimes; they have not made the shopping experience easy. The alternative is, I can go to Amazon and say, "I want pants; I want this size and color," and in two days they show up, and if they don't fit, I'm supposed to return them but I don't, so Amazon just gets another pair of pants sales from me.
