In retail, scale matters now more than ever In retail, scale matters now more than ever https://stage-fii.federatedinvestors.com/static/images/fhi/fed-hermes-logo-amp.png https://stage-fii.federatedinvestors.com/daf\images\insights\webcasts\clothing-store-women-small.jpg June 24 2020 June 11 2020

In retail, scale matters now more than ever

As virus accelerates changes, the toughest place to be is in the middle.
Published June 11 2020
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Podcast Transcript
00:04
Linda Duessel: Hello, and welcome again to the Hear and Now podcast from Federated Hermes. I'm Linda Duessel, Senior Equity Strategist. And today I'm joined via phone by Barbara Miller, Portfolio Manager. We're going to discuss one of my favorite subjects, shopping. We'll address the significant upheaval the sector has experienced in recent months. Hello Barbara.
00:28
Barbara Miller: Hello, Linda.
00:29
Linda: Retail sales and consumer spending have been significantly down since stores have been forced to close due to the pandemic. Indeed US savings rate for April hit a record 33% as coronavirus causes Americans to stockpile gas and curb spending. What's your outlook for the retail space going forward?
00:50
Barbara: Well, the retail space has been challenged for a long time because of transformation that's happened in terms of format with the internet taking market share, with digital becoming more important, and with such a plethora of boxes out there incurring lots and lots of competition. So, I think the retail space will continue to transform at an even faster pace. We're going to see the strongest companies survive, the weakest companies fall off, which we've been seeing for a while, but this situation just exacerbates it more and more. And we'll see companies that have become much more adept with technology shine versus some of the others out there.
01:36
Linda: Yeah. It is very, very interesting to watch retail now in light of COVID-19 and to try and imagine what the impact will be longterm. Here I'm thinking about trends that we've already seen going on before the pandemic, the shuttering of malls, the advancement of technology I've seen that would allow, say an apparel shopper to size themselves at home for a perfect fit, order lots of clothes to try on at home, send some back, or even have a personal shopper app that makes outfits based on our personal preference questionnaires. What do you think will be the lasting effects for the sector?
02:16
Barbara: Well, I think they are going to be a number of things. First of all, the ability to access a brand or a store that one likes to access in multiple ways is going to be critical. Can I order something online? Can I return it to the store? Can I go to the store and pick it up at the curb? I mean, if this company is one that I want to frequent, are they able to service me in multiple ways? Yes, there may be more use of technology to figure out what I want before I actually buy it, but that's been happening anyway, whether it's reading user reviews, using some sort of technology, as you mentioned, to figure out fit, et cetera. So I think that's going to be ongoing.
03:03
Barbara: There's definitely going to be much more focus on how am I protected if I'm in the store? Do I have to wear a mask? Are the employees enabling distancing so that customers aren't on top of each other? How can I feel safe within the store? And we're seeing that happen already as stores are opening up. Over time, things will evolve, just as the health situation evolves and the protection available to all of us evolves, but I think we'll continue to see changes in store and out of store, and the strongest companies will be able to deal with that quickly and in a 360 degree way.
03:50
Linda: It's interesting because I'm a good baby boomer and I mean, I like to roam around the mall. We've all seen how many, many malls are being shut down. But now we move side stage and we see those millennials come on board and Gen Zs And my son doesn't go to the store. He has lots of thing sent to him, and he tries them on, he sends them back. My daughter tells me about an app that she took pictures of all her clothing, and the app said, 'You ought to match this with that,' and et cetera. And it just seems like it's maybe a different path we're heading down for the younger people. How do you see that flushing out?
04:29
Barbara: Well, the younger people have grown up with technology. They've grown up with their brain in their hand. It's a phone and it's not really a phone. It does just about everything for you. And the best technology companies have developed ways to visualize and enable the shopping experience in a different way. So they're not as needy as it relates to being right in front of a piece of merchandise. However, that doesn't mean that they're going to completely forsake ever walking into a store, a restaurant, another environment with other people because there's still human contact need out there, but there's no question that they have from the get go become so facile with using technology. They expect it to be available. It's just almost the price of entry for companies versus making the customer work harder to find what he or she is looking for.
05:35
Linda: So, you're saying that's starting to really proliferate across all manner of retailers and just doing what they have to, to stay alive here.
05:41
Barbara: Absolutely.
05:43
Linda: As I travel and talk to clients around the country, every now and again, I get asked about the malls, that they're closing down and will they be a dinosaur. What do you think will happen to all this real estate?
05:56
Barbara: Well, the real estate situation has been challenging for a while. And there's no question that we're over-stored, we've been over-stored. The lesser performing malls have slowly but surely been becoming less populated with stores. And there are creative thinkers out there looking at what to do with some of this real estate, whether it's repurposing it for multi-use, where there's some retail, some outdoor space, some healthcare or wellness related facility, even some living facilities, apartments. Some of it is to be determined. I mean, it's just going to continue to change as consumers' desires and needs change over time. It's going to change with population moves, influx to cities, return to suburbs. It's sitting there waiting to be repurposed. There's more and more e-commerce, which means there's more and more need to move goods from one place to another, warehouse them, cross stock them. So some of that space may in fact be used for commerce, but in a different way.
07:15
Linda: I heard or read a comment by Bezos not that very long ago where he told his employee base, 'Yes, we, Amazon are absolutely dominant and it's great, but it won't be forever.' What do you think he's getting at? What do you think that means where, where he thinks we're headed here?
07:34
Barbara: Well, just about every company with size, scale and forward thinking in retailing has been investing in e-commerce, in last mile delivery, in technology that enables swifter supply chain management and the ability to compete with Amazon. Amazon set the bar, set the bar for rapid delivery, set the bar for endless aisle assortment, set the bar for knowing what the customer is looking at, even sometimes before the customer decides what to look at, but a lot of large companies, and smaller ones as well, increasingly are figuring out how to serve those needs. So Amazon is staying ahead, but recognizes that nobody gets 100% market share.
08:37
Linda: And staying on the topic of Amazon, and I'm a good Amazon Prime shopper and I love to see what came at my doorstep today, but it's also very nice and comfortable sitting at home here with my flats on, but every now and then I go and check out my closet and I look longingly at my heels. And I've been thinking, is curbside pickup really going to be dominant going forward? I mean, can I be the only one who enjoys the experience of walking around and browsing for my shoes and my handbags? Isn't that why they call it shopping?
09:13
Barbara: Oh, absolutely not. I mean, human beings love experience, and there's no question that people are going to want to have experiences again, including going into a store with merchandise to look at and think about before and learn about before buying it. There's just going to be more variety of ways to obtain that merchandise and obtain that experience. And so, the current situation with COVID has accelerated the thought process among retailers, among technology companies that are enabling retailers so that they can offer the option that the customer wants. But retail was not made to be closed. Stores were made to be open. And the evidence that consumers are going to want to come back to stores is showing up already as stores have been opening not only in the United States, but around the world. So yes, people will want to shop, but yes they'll want to have a menu of ways to do it.
10:30
Linda: I know we're both ladies here and I presume you like to shop as much as I do, but I know for certain, my husband here is very anxious to get back to his big box store, his favorite every Saturday store too. So I think we're all shoppers in some sense, aren't we, Barbara?
10:49
Barbara: Absolutely, absolutely.
10:50
Linda: So now I'd like to turn to retail business models and stocks. Can you discuss what kinds of retailers, particularly business model are likely to thrive going forward and provide the best returns for shareholders?
11:05
Barbara: Well number one, scale matters more than ever. Being large, being able to make the investments that we've talked about in omni-channel capabilities, being able to compete in terms of delivery, in terms of assortment, in terms of pricing, scale is going to matter, and management of that scale in a very adept way is going to matter. So you mentioned the big box. There are some big boxes that are incredibly well positioned to thrive. Differentiation is going to matter. If one is selling a differentiated brand, making sure that that brand is represented appropriately, available in select but not omnipresent ways, so the brand doesn't get over assorted in different stores. So maybe being able to control distribution, control the experience and leverage the direct selling of that brand into the organization by using the data that that gives the brand. I mean, that's going to be important and that's relevant for higher priced, more specialized brands.
12:26
Barbara: I think where the toughest places to be is in the middle, not big enough to have scale, not special enough to be exclusive. And that's where over time we are going to see fallout, and we've seen that already. Value is going to be important. Value brands. And that gets back to some of the bigger boxes and some smaller related boxes as well.
12:55
Linda: And possibly some of this really getting accelerated by this lockdown. I'd like to squeeze one more in here, if I may, Barbara. Despite the lockdown, many retailers have reported positive earnings. What's the driver here?
13:10
Barbara: Well, some retailers have been deemed essential and they've been able to stay open. And consumers have been focused on stocking up and making sure they have what they need to be at home comfortably, whether it's food related consumer products, home related products, and those companies have done very well. Some of the numbers have also reflected not great results, but better than expected because companies that have developed great direct businesses have seen those businesses offset their lack of ability to sell in a store. And that gets back to some of the technology investment we were talking about.
13:53
Linda: Yeah. Excellent. Well, thank you very much, Barbara. And thank you to our listeners. We look forward to you joining us again on the Federated Hermes' Hear and Now podcast. If you enjoyed this podcast, we invite you to subscribe to the Federated Hermes channel to get every Here and Now episode, plus our other series, Amplified and Fundamental, for a global perspective on the issues, challenges and trends shaping the investment landscape.
14:22
Disclosure: Views as of May 29th, 2020, and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector. Federated Global Investment Management Corp. 20-30243 (6/20)
Tags Consumer Spending . Coronavirus . Markets/Economy .
DISCLOSURES

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Federated Global Investment Management Corp.