Retail 2019: The Thinning of the Herd Continues

After a good start to the 2018 holiday selling season, December sales fell flat. Year-over-year (YOY) sales improved just 1.1 percent from December 2017, and overall holiday sales finished just 2.6 percent above 2017. Retailers felt the impact to their gross margin line and now face potential inventory issues due to lower-than-expected December sales.

Thus far in 2019, store closures have already exceeded 2018 totals, and several major retailers have filed for bankruptcy. Is this the continuation of a retail apocalypse, or could it be a thinning of the herd that will see retail emerge stronger and better able to tackle the challenges of an ever-changing landscape?

2018 Operating Results: A Reason for Concern?

Headwinds persisted for companies as they entered 2019. Few retail segments showed comparable store sales that met or exceeded the 3.1 percent YOY sales increase in total U.S. retail sales. Several retail segments ended the quarter with negative same-store sales overall, including office supply, sporting goods, jewelry, home furnishings, and men’s apparel.

Promotional activity had its impact in last year's fourth quarter. Sales increased 3.1 percent, and gross margin dollars increased 1.9 percent. However, gross margin rate declined 30 basis points, and EBITDA declined nearly 500 basis points.

The sharp drop-off in December sales may have created additional problems. Unexpected sales dips from month to month are never welcome news, but the impact is magnified when the sales “surprise” occurs during the holiday season. One is left to consider how much markdowns will impact Q1 2019 operating results.

2019 Store Closures and Bankruptcies

Retail store closures to date in 2019 have exceeded closures for all of 2018. Bankruptcies have played a big part in the significant rise, but many companies are taking steps to optimize their store portfolios — this is a positive move. A key part of the process of continuous self-renewal in retail is understanding the dynamics of store performance. In today’s omnichannel environment, C-level executives have to prioritize rigorous analysis of the store portfolio.

The Continuing Evolution of Retail — A Call to Action

“Retail apocalypse” is a term tossed around with some frequency, and it's apropos certainly from the perspective of companies that have liquidated and vanished from the landscape. There will be more fallout in the months and years to come.

However, one constant in the sea change is that consumers still spend. YOY retail sales have increased about 4 percent per year, and while certain retail operations may shut down, those sales dollars will go somewhere else. The looming question is: Which retailers will take the steps necessary to ensure survival?

To offer our “call to action” for retailers in 2019, these are the salient and critical themes on the minds of the retail C-suite:

1. Investment in omnichannel capabilities and e-commerce, with a focus on buy online, pick up in-store (BOPIS)
2. Commitment to customer relationship management and compelling customer loyalty programs
3. Shopper personalization, which must be driven by a strong understanding of a retailer’s customers
4. Pricing, with a specific focus on reducing markdowns and controlling promotions
5. Effective inventory management practices that enable retailers to have the right products at the right time across all shopper touchpoints
6. Store portfolio optimization beyond traditional four-wall analysis

Retailers know they need to make investments to drive omnichannel success. Companies that have committed to such priorities have seen fruitful returns and are well positioned for the future.

Companies that can solve the retail puzzle have a survival opportunity. Stronger operating capabilities can support companies as they exercise dynamic capabilities that allow them to create new business model(s) and channels needed for long-term evolutionary fitness.

Let’s see what the rest of 2019 brings!

Keith Jelinek is managing director, retail, at Berkeley Research Group (BRG), a global consulting firm that helps leading organizations advance in three key areas: disputes and investigations, corporate finance, and strategy and operations.

Richard (Rick) Maicki is a managing director in BRG Corporate Finance specializing in performance improvement.

Darren Morrison is a director in BRG Corporate Finance and focuses on financial and operational performance improvement.

David Simon is a director in BRG’s Corporate Finance practice.

Michael Casey is a director in BRG's Retail practice, and advises clients on store operations, supply chain management, decision support analytics, and merchandise strategy, planning, and operations.

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions, position, or policy of Berkeley Research Group, LLC or its other employees and affiliates.