As an investor, you have a lot of different options when it comes to businesses to invest in. You can choose manufacturers, real estate companies, and yes, even retailers. Although you probably can think of some retailers off the top of your head, there's a lot more to retail than what most people imagine. Read to get the full picture.
What is a retailer?
A retailer is a company that buys products from manufacturers or distributors and sells them directly to the general public. These items are generally sold in small quantities, differentiating retailers from wholesalers, which sell products to customers in bulk, often with bulk discounts attached.
Retailers, though, aren't limited to businesses with physical stores. They can be those kinds of stores, but they can also be companies that are only online, that only do mail-order through catalogs, or vending machine operators. You can buy almost any kind of good from a retailer, from food to gasoline, car parts, and groceries.
Types of retailers
As mentioned above, retailers are a lot more than just stores. There are two main categories of retailers: store retailers and non-store retailers.
Store retailers are what most people think of when it comes to retail. There's a physical location that you walk into, make your purchases, and then take them home immediately. These are very popular types of retailers, and they sell almost anything you can imagine. Some specialize, such as furniture stores, and others are more general, like department stores.
Non-store retailers are the lesser-seen part of the retail landscape. These include online retailers that solely operate in the e-commerce space, mail-order houses, direct selling establishments, and vending machine operators. Amazon (AMZN -1.60%) is a giant non-store retailer, though the company did complicate its categorization when it added Whole Foods to its mix; it's better to think of those as two different types of retailers working together.
Retailer vs. wholesaler vs. distributor
Retailers are often the last stop on the road for products, but they aren't the only stop in many supply chains. There are other players, too, including the wholesaler and distributor.
Distributors often partner directly with manufacturers as a dedicated distributor of a particular product or type of product. It's considered a business-to-business (B2B) relationship, and is often the first link in the supply chain after the manufacturer. Distributors may sell to retailers or wholesalers, but don't really sell to the public.
Wholesalers are similar to retailers in that they buy products from distributors and may sell directly to the public, but with a twist. Wholesalers generally buy in huge bulk from the distributor (products are also generally packaged in bulk), then sell to consumers in bulk. Wholesalers are both B2B and business-to-consumer (B2C). Sometimes they sell to retailers (B2B), and sometimes they sell directly to consumers, such as at warehouse clubs (B2C).
Why retailers matter to investors
Retailers are the backbone of many investment strategies. In fact, consumer staples are generally considered good hedges against downturns in the economic cycle, and retailers that focus on these areas can be good offsets to segments that struggle during these times, like many areas of the tech industry. However, retailers aren't good investments simply because they're retailers -- some are much better than others, and you should consider the consumer base and how the retailer markets itself, among other things.
Related investing topics
You should also think about retailer performance when investing in certain types of real estate investment trusts (REITs), especially those that use retail stores as anchors, or that solely manage retail stores, such as malls. For example, if the economy is in a downturn, retailers that occupy malls may do poorly as consumer spending retracts, dragging down a REIT that only owns full-price retail space.
On the other hand, retailers like outlet stores may perform well under the same conditions, given that consumers still need certain products, like clothing and shoes, and may be trading full-price retail for discounters that are set up in outlet stores. The same can be said for discount box stores versus more premium stores. The fancy grocery store may be great when money is easy and fast, but the market that offers good coupons and discounts its groceries, relying on lots of consumers rather than wider margins, can be a good choice in leaner times.
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