The world around us is constantly changing. Most of the time, the changes are subtle and we hardly notice them. But over time, small changes can add up and create something of a tipping point, where seismic shifts can occur.
To see this in action, you need to look no further than your socks. There was a time, not long ago, when the US made socks. Lots of them. And up until about a decade ago, there was a cluster of sock manufacturers in Fort Payne, Alabama. They were a modern and competitive bunch, and they made good money making socks. But suddenly, the sock industry in Fort Wayne died.
So what happened to them? A penny. That was the cost difference of sewing the toe of a sock closed in Alabama compared to sewing it closed in Honduras. And over a short time, that small difference wiped out the sock industry in Fort Wayne.
So small things can lead to big changes.
Right now, the same thing is happening to the US retail industry. Large traditional retailers have made good money selling products to the public from stores dotted along main streets and malls. Generations of shoppers supported this model, and the retailers grew big and strong from the business.
But with the advent of e-commerce, traditional bricks and mortar retailers lost ground to their on-line competitors. Bit by bit, people began shopping from home, having their purchases delivered to them. And as that has happened, traditional retailers slowly saw their sales weaken and their business models erode.
Traditional retailers have survived… until now. Over the last few months, a number of them have begun to hit a wall and collapse. Since the start of the year, there have been about 2 bankruptcies per week, with big names like Gander Mountain, RadioShack, BCBG Max Azria, The Limited, Gymboree and HHGregg joining the ranks of busted retailers.
Sears ($SHLD), which has lost $7 billion over the last 4 years, warned investors that it has “substantial doubt” about its ability to survive. JC Penney ($JCP) and Macy’s ($M) are also losing money. And Neiman Marcus is borrowing money just to make interest payments on its existing debt.
These are some of the biggest and oldest retailers in the country, and if they can’t get it right, the industry as a whole is in trouble.
And because of this, the viability of the entire traditional retail industry is now in question.
If you think all of this turmoil is caused by a lack of money coming out of shoppers’ pockets, you’d be wrong. US consumers are, in fact, increasing their spending, and are now spending more than they did before the recession. So the money is there. It’s just not going to traditional retailers.
To shore up their businesses, retailers are closing stores, selling off brands and selling property. But the biggest change can be seen in layoffs. Since October, the general merchandise industry has shed about 89,000 jobs. That’s more people than are employed in the entire coal industry!
With 10% of US workers employed in retail, the impact of these job losses could be severe.
So what does this mean to investors? First, the bad news: Traditional retailing is broken and many companies will not survive. Investing in retail right now is risky. Investors need to be very careful when looking at these investments.
There is a chance that some of these retailers will be rescued through buy-outs from competitors. But these events will be the exception rather than the rule. If you hold shares in in the hope of a buy-out, but that company goes into bankruptcy instead, you will probably lose a lot of money. This is the worst-case scenario in investing: losing your principal. That’s a big risk to take.
But through the carnage, winners will emerge. It is estimated that 25% of core incremental on-line shopping growth goes to Amazon ($AMZN). And with their pending takeover of Whole Foods ($WFM), Amazon has announced their intention to completely remake the retail landscape. They are the huge winners of the changing retail world.
Even traditional retailers are getting in on this game. Walmart ($WMT) recently bought the on-line retailer JET to jump-start their own on-line shopping offering, going after Amazon at their own game. t
Also look for retailers who focus on customer service, loyalty programs, product showcasing and improved customer experiences. Companies need to give customers a reason to come into their stores (something that Apple ($AAPL) has nailed!).
But the big picture has implications of everybody. Thousands of people will lose their retail jobs as the industry sorts itself out. This will put a strain on the overall economy. For those who find new jobs, they may lose the battle for higher wages. With fewer people working and less income available, the economy as a whole could take a hit.
In the end, understand that systemic change is never easy. There will be bumps on the road to a new retail reality. But look for the companies that are getting it right. They will be the winners coming out of the carnage. And make sure to look at where you spend your own money. Maybe you’re already voting on the winners!