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:UAA), 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.