A Big Picture Look at the State of Retail With the Retail Industry Leaders Association

The retail landscape has dramatically transformed with the rise of e-commerce and mobile devices. In this episode of Industry Focus: Consumer Goods, Sean O'Reilly and Vincent Shen welcome Brian Dodge from the Retail Industry Leaders Association, a trade group that represents retailers and suppliers with more than $1.5 trillion in annual sales.

Listen in to hear how retailers are fighting for growth against the backdrop of stagnant consumer spending and heightened competition. Also, we discuss the challenges and innovations that are cropping up in the space, how trade regulations are affecting bottom lines, and more.

A full transcript follows the video.

This podcast was recorded on March 15, 2016. 

Sean O'Reilly: We're talking retail with a very special guest, on this consumer-goods edition of Industry Focus.

Greetings, Fools! Sean O'Reilly here at Fool headquarters in Alexandria, Va. It is Tuesday, March 15, 2016. Joining me in studio is the Brutus to my Caesar on this Ides of March, Mr. Vincent Shen. And joining us via phone for interview week is our very special guest, Brian Dodge, executive vice president of communications and strategic initiatives at the Retail Industry Leaders Association. Good morning, Brian! We can't thank you enough for joining us this morning.

Brian Dodge: Good morning, guys, and thanks for having me.

O'Reilly: So, Vince, I can't believe we actually pulled it together an interview at the last minute. [laughs]

Vincent Shen: Not too bad in the last minute. But I'm actually super excited about our guest. Brian, thanks again for joining us on the show. We really think it's great that your organization has a lot of relationships with companies that we talk about all the time. We were looking at some of the members ...

O'Reilly: You have a large Rolodex, sir. [laughs]

Shen: Exactly.

Dodge: [laughs] We're very proud of who we represent. Some great companies.

Shen: These are companies we cover very often during our show. So it's really great to get some of an inside perspective from you. But before we get there, could you give us a brief description of what the Retail Industry Leaders Association is about, what you do there?

Dodge: Sure. So, as we've sort of alluded to already, we represent the largest retailers operating in the U.S. And like many trade associations based in D.C., we have a heavy focus on advocacy. But we also bring the industry together, the executives from the industry, to talk about the operational issues that they're facing, whether it's in the supply chain, or asset protection, finance, tax, and so forth, and bring those executives together to identify best practices, trends, and ways where a collaborative solution may advance the industry more broadly. So we're really excited about the 80 or so retailers that we work with, all of which are over $1 billion in annual sales, most of which are public companies. And it's a dynamic industry, it's a lot of fun observing these companies as they evolve and adapt to economic challenges, changes in demographics, all the things that I think your listeners are also keeping track of.

Shen: Sure thing. So, based on that, you mention a lot of trends and best practices among the retailers. Recently, this earnings season is winding down. We've heard a lot of the results coming from retailers reporting the fourth quarter, which of course encompasses the very important holiday shopping season. So, what are some major takeaways that some of your member companies have had with overall spending, consumer habits, the different platforms that shoppers are using to interact with these companies? Any comments you have there would be great.

Dodge: Yeah, sure. So I think it's important to look first at the macro level. You can twist the data any way you'd like to, but I think what you'll find on a macro level is that consumer spending is largely flat to modestly growing over time. So, for retailers, that is a complicated scenario in which to operate. There isn't robust growth to buttress financial gains for individual companies. So it turns back on really effective and efficient execution in order to gain share from a very slow-growing economy. 

So I think retailers are recognizing the environment in which they're operating and focusing on the things they can control. How do they make sure those very simple maxims are achieved, which is, have the right product in the right place, at the right time, at the right price? It sounds simple. Obviously, it's very complicated. But I think that's how retailers are looking at, is, "How can we improve our execution so that our customers stay our customers, and others are attracted to our stores or our online or mobile platforms in order to find the products they're looking for?" That's really the focus. It's simple in statement but very complicated in execution.

Shen: OK. And, it's funny you mention that, because, I think it was last week or two weeks ago, we were talking about the movie theater industry, actually thinking about AMC, Carmike, and how they're facing something sort of similar, where ticket sales set a record in 2015 in terms of dollar value, but actual ticket volume is stagnant. So we see how, like you mentioned, consumer spending, flat or low growth. But, I guess, one of the brighter points there that a lot of companies allude to is how online shopping, e-commerce, is growing at potentially even 10 times the rate of consumer spending overall during the fourth quarter. So how are companies thinking about that? We have some, obviously, more traditional retailers, brick-and-mortar operations, moving, trying to get better in terms of their omni-channel strategy. What else are you seeing there? What kind of innovation are companies adopting in that space to better compete against these pure-play online retailers?

Dodge: Sure. I think it's important, first, to break out the fact that, certainly, pure-play online retailers are doing very well. But I think the dot-coms for some of the traditional, referred to as "brick and mortar" retailers, are also doing well. And the investment that retailers have made in their dot-com, but probably more broadly in their omnichannel, is starting to pay off. There's no doubt that the growth -- we all carry a high-powered computer in our pockets. Our ability to access retail items for purchase is ubiquitous. We can do it at any time, in any place. 

For our members, I think we recognize that having stores is a competitive advantage. People like to be able to see and touch products before they purchase them. The challenge is making sure that once they've done that in a store that they actually make the purchase there. And if they choose to take that information and go home and search online for a better price, that they find an equal, competitive price on the traditional retailer's dot-com. That's difficult. Stores are expensive; there are more employees in a traditional retail environment. So retailers kind of grapple with that, to figure out how they can reduce costs elsewhere so they can make sure those prices are competitive once they get online. 

The challenge of omni is the great Rubik's cube of today. How do we figure out -- you have to manage, effectively, three if not more platforms to make the same sale. That obviously adds cost. But how do you do it in an efficient manner so that the whole experience for the consumer is a great one? And I think some are making strong advancements because the omni-channel environment offers great cross-marketing opportunities that the pure-play online folks wouldn't otherwise have.

So I think it's part of a long evolution. These terms like omnichannel have a tendency to pop into the retail vocabulary with the expectation that they'll fade out over time as it becomes sort of standard operating procedure. I think we're going to be talking about omnichannel for a while, because we're a long way from perfecting it. But I think, once we do, you're going to see the consumer experience will blossom. And hopefully, when we get to that point, we'll see more [laughs] robust growth in consumer spending so that retailers themselves can take advantage of that.

O'Reilly: So, what do you expect to see over the next few years as retail evolves? Is the omnichannel strategy just getting started? Or do you think it's going to be more slow and gradual and, you're talking about 10-20 years, they'll actually have perfected getting consumers to buy in-store, whether it's on the phone or at the cashier?

Dodge: Yeah. If this was a football game, I don't think we'd be at the end of the first quarter yet. I think we've got an awful long way to go. In terms of just the underlying technologies, there's lots of innovation that needs to happen. We also have a regulatory space that is largely undefined as it relates to a lot of this stuff. So --

O'Reilly: Is that that big of a deal?

Dodge: I think it is, especially when you get to some of the uses of analytics and store tracking, things of those sorts, where businesses are just not yet sure how they can implement them, knowing the great potential that they have, because of regulatory ambiguity. The loudest voices are ones who are raising concerns. So there's a lot of education that has to happen in that space in order to give businesses the comfort that they need in order to utilize some of these things.

So yeah, we're very early on in this process, and I think we should all expect that it's going to take some time for it to be worked out. But for consumers, there's enormous opportunity. The whole lifeblood of retail is adapting to the demands of the consumers. So as consumers are more vocal and demonstrative in the way that they want to shop, and want businesses to interact with them, you're going to see retailers responding to that. And it's a really exciting time.

And we can't be lost in this. There's a lot of focus on millennials entering their prime consumption age. There's another generation right behind them that is maybe not as large in size but equally as powerful to dictate the patterns of retailers and businesses in general for years to come. It's an exciting time.

O'Reilly: Those darn kids have no idea what I went through on AOL in 1998.

Dodge: [laughs] That's right.

O'Reilly: They do not appreciate downloading a song in eight minutes. Taking a step back to what you said just before that, does this lend itself to, you know the age-old tale of how Borders was basically just a showroom for Amazon.com and books and everything, and that obviously didn't go so well for them. Does that lend itself to a future of retail where, I don't want to say there's more haggling going on, but, I can go into a store, at Macy's or any department store, and be like, "Hey, listen, a very similar Oxford shirt is on Amazon or something else for $10 cheaper. What are we going to do here?" Is there anything else that can be done by retailers?

Dodge: I think the days of the showroom, that was a really popular term a few years ago, I think you're seeing less of that because retailers have a much better sense of what the price competition is, but probably more specifically, what kind of price competition do their customers are able to access instantly. So, the pricing is becoming, I think, more consistent.

O'Reilly: Mm-hmm. But, inventories are coming down, and they're just having giant distribution centers or something.

Dodge: Well, yeah. That's going back to the omni-channel. So, the advantage for some of the large pure-play online folks is their ability to deliver products as quickly as possible, same-day, next-day. That's one of the more attractive things they offer as the price that's sort of the delta between traditional retail prices and pure-play online prices evaporates. In that space, retailers have a great advantage that they can take advantage of, but are struggling to figure out exactly how to do so, which is, if you have a distribution model that recognizes that your stores can be fulfillment centers, then your ability to deliver same-day, next-day is really high.

And so, part of one of the many omnichannel challenges that they're facing is, how do they do that? How do they figure out how to apportion space within a store to distribute product and accept returns? And how do they figure out exactly which ones should be responsible for fulfillment in an area, and which ones should be exclusively for the merchandise that's on sale there for consumers coming into the store? So I think there's a really, really great opportunity there for the brick-and-mortar retailers.

The one thing I think I should carefully say here when it comes to stores is, I think stores are an advantage. I think we're seeing more and more chatter acknowledging that. But there is a degree to which having too many stores, or stores in the wrong locations, is a drag. So, you're seeing a lot of retailers making changes there in order to make sure that a store that maybe was in the right place 20 years ago isn't there simply because of inertia, and that they're placing their stores in the right places.

Shen: OK. You touch on some points there that we have seen personally, not only in some of our content from our writers on Fool.com, but that we talked about here, in terms of some people saying that a Wal-Mart or a Target, with so many actual physical locations, can turn that into an advantage, like you said, in terms of becoming its own distribution center. And then, we've also talked about how Best Buy, for example, is trying to innovate in getting away from showrooming by improving their customer service, the knowledge that their sales staff have on the ground floor, and creating some of these store-within-a-store concepts to attract customers and build up foot traffic. Are there any other innovations or strategies that you've seen companies take? Are there any start-ups, or VCs, even, pushing certain ideas that you think might be a big change five, 10 years down the line, even in terms of payments or anything like that?

Dodge: You mentioned payments. There's a whole world of innovation going on in payments that's pretty exciting to see. I think retailers are largely in the driver's seat, because the ubiquity of acceptance is a key driver to what mobile platforms will be successful. So that's a really exciting space. If I were a betting man, I still wouldn't place a bet on this one, because it's still too difficult to get a read of.

In terms of retailers making innovations, I think we've seen a spike in the last couple of years of retailers starting their own innovation labs or accelerators. And while I think some of the things that have spun out of them so far are a little far-fetched or hard to get your head around, I think there's great opportunity in them. And I think it's exciting that retailers are making that individual capital expenditure to have innovation going on within their company. 

We just had, at RILA, we host an annual meeting of the CEOs of our member companies, which we had in January. It's a two-day agenda. And the agenda was overwhelmingly dominated by the topic of innovation. Our CEOs help us set that agenda, so it's something that they were thinking about a lot. So it's innovation related to how they conduct their operations. It's supply-chain innovation, it's product innovation. There's no, I don't think, limit right now to where retailers' minds are in terms of ways that they can improve their execution. Going back to the point I made earlier, as growth is flat, the importance of execution couldn't be higher. 

So, specific examples, you named the store within a store, that's clearly becoming a popular model. I don't know if I have any others to point to right now, but I would say stay tuned. Maybe within a year or two, we're going to see some new examples roll out that'll be really interesting.

Shen: Awesome! So, wrapping up here, we had two more topics that we wanted to touch on. The first one, actually, Sean, if you wanted to ... ?

O'Reilly: Yeah. So, on a recent show, we talked about, I thought it was a big announcement, Whole Foods is teaming up with SolarCity. And, obviously, these two firms are in with the conscious-capitalism movement and all that. Basically, the team-up was, SolarCity is installing solar panels on 100 Whole Foods stores. As I understand it, Retail Industry Leaders Association, you guys have got a robust sustainability program aimed at helping companies reduce their energy consumption and all that stuff. Is this the first pitch of a big game where retailers are going to start going in this direction?

Dodge: I think our members have recognized for a long time -- and I've been doing this for about nine years, so, in my nine years here, I think I can comfortably say that our members view sustainability as good business. Sustainability generally has multiple effects. One is reducing costs, which is very good for the business, very good for its customers and investors as well. But it has a socially conscious and positive impact on the environment as well. So, we've led a program now for seven years to help the industry share practices and identify ways where they can accelerate their incorporation of sustainability within their retail operations.

One of the things that I'm most excited about right now is a program we have around energy management. Your reference to the Whole Foods, and SolarCity example is a perfect segue to that. I think retailers, our members have identified that there's about $20 billion spent every year by retailers on energy costs. Big number.

O'Reilly: Mm-hmm.

Dodge: Within that, there's an estimated $3 billion of, we'll call it low-hanging fruit, savings that could be accessed relatively easily through solar panel investment, solar panel things of that sort. So, the program that we've put together is to help our members tap into that savings by better understanding the expectation of CFOs when they're making a pitch internally. Working with, not all of our members own all of their property, they lease, so, working with the owners of the property to work on common solutions that could reduce their energy investment. Then, identifying ways to incorporate renewable energy at every turn.

So, we're excited about that. The U.S. Department of Energy recently recognized the program as exceptional and awarded us $750,000 to expand the reach of the program. We're really excited about what we can accomplish over the next couple years with it.

Shen: Awesome! This last question, I think, because it's outside of [Sean's and my] expertise, it's not something we touch on as often during our usual episodes of Industry Focus, is around the legal and regulatory framework. Are there any issues around, even, cybersecurity? We had the tie-up at the West Coast ports last year that affected a lot of retailers in terms of their inventory levels and things like that. Are there any things in that regulatory-legal framework that are coming up that retailers are focusing on that investors might want to know?

Dodge: Yeah, I'll try to mention two really quickly. The first is trade. The Trans-Pacific Partnership is getting a lot of news coverage right now. It is an enormous opportunity for businesses in the U.S., both importers and exporters. The Peterson Institute estimates that the T.P.P. could increase consumer income by reducing costs by $131 billion. For retail specifically, the reduction in the duties on apparel would net a $932 million in duty savings in year one of the T.P.P. So we're in a political environment, presidential election year, there's lots of comments being made about the harmful effects of trade, but the benefits of trade are enormous. Investors, consumers, and businesses should all care about this and should be pushing that the T.P.P be signed as soon as possible.

The other important thing, and it ties up to the T.P.P. and the movement of goods is the importance of resolving enormous congestion problems in America's ports. It's not a particularly sexy issue that gets a lot of attention, but we have choke points at our access points in America, and that's a problem for everybody. It increases costs, it limits the effectiveness of businesses who are trying to export their goods globally. Until we get our arms wrapped around the labor issues at ports, operational and infrastructure issues, we're going to be at a disadvantage to the rest of the world. And so, we've got some key ports around the country, we need to figure out how to get them more efficient, get them a more modern infrastructure, and get the goods flowing more smoothly. So, key step in solving that problem is raising awareness, and I appreciate you giving me the opportunity to do just that.

O'Reilly: You bet, Mr. Dodge. We cannot thank you enough for your time. I can't wait to have you on again.

Dodge: Great!

O'Reilly: That is it for us, have a great day!

Dodge: Terrific, thank you so much.

O'Reilly: If you're a loyal listener and have questions or comments, we would love to hear from you. Just email us at [email protected]. Again, that's [email protected]. As always, people on this program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against those stocks, so don't buy or sell anything based solely on what you hear on this program. For Vincent Shen, I'm Sean O'Reilly. Thanks for listening and Fool on!