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Sales are decreasing in retail stores. Dramatically.
The weekend before Christmas, sales fell 6.7% at brick-and-mortar stores compared to the same time last year. Nov. 1 to Dec. 14 saw a 5.8% decline in sales.
But foot traffic doesn’t necessarily reflect the same decline in sales. People increasingly visit a store to try on clothing or look at products, and then go purchase that same product online.
To compete with its online counterparts, retail chains are diving into deeper and longer promotions. However, it is completely unsustainable. Retailers are losing revenue, but they are still burdened with high operational costs.
The holidays did make one thing very clear. The winners in retail were those that have been able to seamlessly integrate both an in-store and online presence.
This ongoing trend of shoppers opting to purchase online rather than in-store continues to become more prominent. Amazon.com (NASDAQ:AMZN) is among the leaders in pushing out brick-and-mortar retailers.
Amazon Killed the Bookstore
Retail companies today have the chance to learn from the mistakes of past failures. Among the most notable failure was the former bookseller Borders. After 40 years of operation, Borders shut its doors in 2011.
What was the primary cause for the failure of Borders? Amazon.
Simply put, Borders was too late to the Web and too late to e-books. It outsourced its online bookselling to Amazon.com. Anytime you wanted to purchase a book online from Borders, you were redirected to Amazon.com. The decision severely damaged its brand, and also resulted in speeding up Borders’ loss of market share to Amazon.
How Did Barnes & Noble Survive the Rise of Amazon?
In contrast to Borders, Barnes & Noble (NYSE: BKS) quickly developed its own e-reader, the Nook, when e-book tales started to take off.
While Borders was making a big bet on DVDs and music, Barnes & Noble was pulling out of that market segment. Borders’ bet ultimately failed big time. Just as it was making big investments in music and movies, the industry was going digital. Barnes & Noble was making its own big investments in online sales at the same time.
Still, Barnes & Noble has also fallen on hard times. In its most recent quarter sales declined 4.5% year-over-year. The company posted a net loss of $39.2 million compared with a profit of $12.3 million in the year-ago quarter. Barnes & Noble shares fell more than 40% in 2015.
Amazon’s Next Victim
Now the question remains: Who is doomed to repeat the fate of Borders?
Amazon is not slowing down. It is a clear buy, with analysts predicting it will sustain its 20% growth rates in 2016.
In addition to staggering growth rates, Amazon’s profit margins are moving in the right direction, driven by its highly profitable and promising cloud-computing segment. Amazon Web Services is the secret sauce to Amazon’s ability to keep margins low in e-commerce while still maintaining a strong overall profit margin.
Companies and brands that fail to invest in a strong e-commerce platform that integrates with its in-store presence will fail. One benefit of having both an online and physical presence is the ease of returns. For example, buying a pair of jeans online from Kohl’s (NYSE: KSS) is an easier return than making the same purchase from Amazon.
The stocks I expect to be hit the hardest are the major shoe retailers. Shoes are a top item that are looked at in stores, but then bought online at sites like Amazon-owned Zappos.com. Footwear retailer DSW Inc. (NYSE: DSW) shares fell 34% in 2015.
However, this isn’t an issue for the entire footwear industry. It is a problem for non-brand-specific retailers. Companies like Steve Madden (NASDAQ: SHOO) have both branded retail stores and strong presence across top e-commerce sites It remains a strong stock, despite suffering a 5% decline in 2015
Non-brand-specific, big-box retailers are going to have the hardest time competing with online sellers as they suffer most from high overhead costs, and their same merchandise can be found conveniently online.
So, for 2016 add Amazon to your portfolio if you haven’t already. Then, re-evaluate any of the big-box retailers you have in your portfolio. If they are failing to adapt to online sales, it is time to sell.
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