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Numerous challenges are plaguing today’s traditional retailers, or those with brick-and-mortar stores that rely on foot traffic for sales. Yet, these companies are finding innovative ways to adapt and are reversing a sector-wide sales slump.
The rapid growth of online shopping has posed perhaps the most urgent problem for traditional retailers, but this sector faces several other complex economic setbacks that are having a dramatic impact on the way they do business.
Today's financial news headlines warn of a “retail apocalypse,” or a dooms-day scenario wiping out traditional retailers. And indeed, this sector is awash in bankruptcies from companies like Toys“R”Us, Nine West and The Bon-Ton Stores, which are among at least a dozen large companies that have filed for Chapter 11 protection this year.
The retail industry is undergoing a shakeup, but many factors show that it is not dying — it is evolving. The traditional retailers that are shuttering locations are usually already saddled with debt from leveraged buyouts. They are often based in malls, which are seeing shifts from the straightforward shopper to the experience-seeking consumer. Finally, they are typically behind in adapting to rapidly changing technology that is crucial to survive in today's retail world.
Many other traditional retailers are finding ways to thrive amid these changes. They are adding innovative experiences to their physical locations, and are pivoting toward consumer preferences. These retailers are connecting with shoppers through the latest technology, including offering mobile shopping channels and connecting on social media.
Even mall landlords are adapting to the new retail environment by providing family-friendly activities. They are converting vacant retail spaces into other uses, such as theaters and even apartments. Through these efforts, they are seeing positive results.
Perhaps the most cited reason for the demise of traditional retail in the United States is the rise of e-commerce. By any measure, the shift toward online shopping, especially through online retailer Amazon.com, is significant.
U.S. e-commerce sales increased 16.9% in the fourth quarter of last year compared to the same quarter in 2016, while total retail sales increased 5% during that time, according to U.S. Census Bureau data. E-commerce sales totaled $453.5 billion in 2017.
Of course, Amazon.com dominates the online retail business with about 44% of all e-commerce sales last year, and 4% of sales across the entire retail sector. But even for traditional retailers with online channels, customer returns from e-commerce purchases can pressure the success of brick-and-mortar locations. When customers purchase an item from a retailer online then return it at the physical store, the brick-and-mortar location's total sales take the hit. For mall landlords, the surge of returns from online purchases has reduced sales-per-square-foot, a key metric in the industry.
Still, traditional retailers like Walmart, Nordstrom and Target have generally accepted the challenges from the rise of e-commerce as an opportunity to create new and better ways of doing business. They are adjusting quickly to these trends with revamped websites, mobile spending options and more efficient deliveries — and they are seeing their efforts pay off. For example, Walmart reported its online sales grew 33% in the first quarter year-over-year thanks to massive investments toward e-commerce.
Millennials, or people born between 1982 and 1996, are a key demographic for retailers as they're now a larger group than baby boomers. These younger tech-savvy shoppers are disrupting retail in several ways, including by using their mobile devices for comparison shopping. Now, many Millennials are becoming parents. Having grown up with the Internet, they are spending their money with the help of technology.
Millennials are still going to the malls in droves, but it's not strictly for shopping. Instead, they go to shopping centers for experiences like seeing a movie or going to a restaurant … as well as to browse the stores. When they connect with physical stores, they are also connected to their mobile devices, according to the National Retail Federation. These bargain hunters research product information and cross-check prices more often than previous generations.
Millennials also often follow brands on social media, and they're loyal to them. However, 66% of Millennials say they would switch brands if they were offered a discount of 30% or more. In addition, the majority of Millennials say they look for a coupon before making a purchase either online or in a store.
Traditional retailers that have found a way to follow Millennial shoppers across all channels — from social media to mobile purchasing — are more successfully connecting with this target demographic to strengthen sales.
Overall, the retail sector is growing. The National Retail Federation expects retail sales will grow between 3.8% and 4.4% this year. That means consumers are generally spending more. But the picture is complex, as a combination of forces is driving consumer spending in different directions.
For one, consumers are grappling with more debt. Consumer debt increased at an annual rate of 3.6% in March to a record high of $3.87 trillion, according to the Federal Reserve. Of that, revolving debt, or credit card debt, declined 3% while non-revolving debt, or those from auto loans or student loans, rose 6%.
But while consumers owe more, they are also increasingly confident. In fact, consumer confidence was near an 18-year high in April, according to The Conference Board. Americans are more optimistic about their finances in part because jobs for the unemployed are opening. The U.S. unemployment rate declined 3.9% in April to an 18-year low, as average hourly earnings inched up by 4 cents per hour to $26.84, according to U.S. Bureau of Labor Statistics data. In addition, as the labor market tightens, wages rise because employers must be competitive to land good employees.
“With consumer confidence high, unemployment low and wages growing, there is every reason to believe that retail sales will be robust throughout the year,” National Retail Federation President Matthew Shay said.
Traditional retailers are responding to consumer demands for more than just shopping. Companies like Nike and JCPenney are providing creative in-store experiences to lure consumers back to their stores.
Nike opened a five-story, 55,000-square-foot store in New York City with a range of personalized experiences — from laser engraving to custom printing. The store has a small soccer court to test Nike's sneakers and a fitting room with digital checkout. JCPenney has improved its department stores with renovated salons and partnered with brands like beauty products line Sephora, which set up mini-stores within their department stores.
“Despite headlines to the contrary, the retail industry is strong, growing and meeting consumer demand with the products they want at the prices they expect and the shopping experience they want to have, online or in store,” Shay said.
Several economic factors are contributing to today's retail environment, which depends on a strong economy.
First, the U.S. stock market's bull run is in its ninth year, making it the second-longest in history. Many analysts fear that its days are numbered. Another recession would have rippling effects on the economy.
Second, today's interest rates are rising. This has a number of economic consequences. Higher interest rates often provide greater returns on savings accounts, but they also result in more expensive loans, so the costs of debt related to mortgages and credit cards, for example, would rise.
Finally, political factors such as the new tax plan and potential tariffs on imports also have dramatic impacts on the retail sector. The new tax plan provides some savings for consumers, but more significantly, it reduces taxes for corporations. That provides more free cash for retailers to reinvest toward modernizing their operations. Meanwhile, higher tariffs could increase the cost of consumer goods imported to the U.S.
The traditional retail sector faces numerous challenges from a rapidly changing landscape. From the rise of online shopping to shifting consumer preferences, retailers that depend on brick-and-mortar locations are working diligently to find ways to survive. The strategies that retailers are employing now, such as focusing on mobile channels and offering more consumer experiences, are positioning this industry for a rebound in sales and long-term success.
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