THE ENTERPRISE
A couple of weeks ago Kiplinger Forecasts led off its newsletter with a prediction of a dramatic retail shakeout that will significantly thin the ranks of store chains over the next 5 years. Kiplinger made a sweeping series of statements, synopsized below:
--Change will force thousands of retail suppliers to adapt and consumer products makers to merge. Landowners will redevelop malls for new uses; good space for small merchants will vanish. Hardest hit will be mid-tier department stores--squeezed out by discounters and luxury chains.
--Supermarket chains are getting pounded by discount food sellers such as Wal-Mart and Costco. Wal-Mart food sales are 10 times higher than those of many food chains, including A&P and Winn-Dixie. Also on the endangered list: All types of specialty outlets... consumer electronics, linens, cosmetics, auto parts, furniture. Discounters are extending their reach in these areas at a fast clip, as they have in toys.
--Up to a quarter of the current 47,000 centers may disappear. Every time a Lord & Taylor, or Sears disappears, its host mall loses a draw that generates vital customer traffic.
--In spite of this, total retail space will hold steady as discounters plan to open still more megastores, surrounded with small specialty stores. Defunct malls will become new office or residential projects with limited, related retail space.
--Suppliers will continue to feel pressure to cut prices and yet, endure less-secure buying relationships. Far fewer retailers will lock in shelf space for slotting fees. That'll cut costs for suppliers but increase volatility.
--Suppliers of consumer products have to bulk up to gain clout in negotiating with big chains. The merger of Procter & Gamble and Gillette is just the beginning. Johnson & Johnson, Nestlé, GE and other big players may go shopping, too.
--Strong Internet sales growth is reinforcing this retail consolidation as demanding consumers find it easier to comparison shop before they actually shop to buy. Expect on-line sales to increase 20% annually and account for at least 10% of total retail sales in the next decade.
These statements, even if only partially/directionally accurate will have far-reaching implications for both suppliers to retail and to consumers. America has been over-retailed (by perhaps 1/3) for the past decade or two, possibly more. This has led to many of the retail store/chain consolidations and closings.
Two conclusions come immediately to mind.
1) If you sell to retailers, understand your retail customers' businesses, and if you are once removed from retailing, then study your customers' customer. Some retailers are fundamentally better positioned for growth and profitability. Learn their business model and strategies and consider them in your own.
2) This next one will not surprise anyone who knows what I believe in. Choose your partners carefully. You will need to "choose sides" and align your business strategies and tactics with the retailers that will survive and prosper. If you do this, you will get dragged along in their growth. If not...well, you know the answer to that one...(Can anybody say Kmart?)
I didn't say it would be easy, but it will be critical. A wise man once told me "there are only two kinds of problems in business--growth problems and liquidation problems." I know which kind I'd rather have.
Best, John
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