In recent weeks there has been no shortage of news regarding the retail industry. Most notable is that on January 20, 2014, discount retailer Dots LLC filed for chapter 11 bankruptcy protection in the United States Bankruptcy Court in Newark, New Jersey. In the retailer’s initial papers filed with its bankruptcy petition, chief executive Lisa Rhodes stated that a decline in the quality of the merchandise under prior management led to the retailer’s chapter 11 filing. Further, that similar to other discount retailers the chain has had a hard time competing against larger retailers such as Wal-Mart Stores Inc. and Target Corp. The Ohio based chain plans to close 36 underperforming stores and is looking for a buyer for its remaining stores.
In other news, after disappointing holiday sales, several retailers, including Macy’s Inc., Target, J.C. Penney Co., and most recently Wal-Mart have announced that they are planning layoffs. Macy’s said it was laying off about 2,500 employees in an effort to save costs and Wal-Mart is planning to layoff 2,300 in its Sam’s Club warehouse unit. J.C. Penney, in addition to trimming 2,000 positions, is planning to close 33 underperforming stores. Other retailers have announced that they are either closing stores and/or cutting back on new store openings.
The resounding question is has the retail industry fundamentally changed? A large contributor to the change appears to be consumers preferring to shop on the internet rather than at retail stores. While e-commerce was not cited as a contributing factor to Dots’ bankruptcy, it has been cited as the cause for other retailers’ woes. A recent Wall Street Journal article reported that brick-and-mortar retailers only received about one-half of the traffic in 2013 as they did just three years earlier. Meanwhile, online sales increased by more than double the rate of brick-and-mortar sales this past holiday season. It is not just mall traffic that has weakened. Stores like Wal-mart and Target have been affected as well. The Wall Street Journal reported that BestBuy stock can trade around 10 times expected earnings, while Amazon stock can trade at about 145 times expected earnings. The difference is that Amazon can operate at razor thin margins while more traditional brick-and-mortar stores, like Best Buy, simply cannot keep up. Despite brick-and-mortar retailers’ promotional efforts to draw people into its stores they are still not able to generate higher sales to compete against megastar internet giants such as Amazon. As history has told us, it is not only retailers that may need to take warning but also their suppliers as well. For example, the publishing business faced its share of woes when Amazon’s discounting contributed to booksellers going out of business.
What will happen with traditional brick-and-mortar stores will remain to be seen, but the news out the first month of 2014 is not by any means optimistic.
*The first posting on this topic was published on January 6, 2014 (click here to view).