Evaluating Risk: A Look At the Retail Industry

Traditional brick and mortar retail has had a specifically tough few years.  Although holiday sales were strong for retailers such as Kohl’s,  Macy’s, and Target, companies like L Brands and Nordstrom have faced struggles.  Nordstrom has rejected a low private equity buyout offer, despite lower net income and $2.68 billion in long term debt.

https://www.wsj.com/articles/nordstrom-board-rejects-familys-buyout-offer-1520290064

https://www.wsj.com/articles/retailers-look-for-momentum-after-holiday-boost-1519909462

This begs the question is there a future in brick and mortar retail?  With increasing e-commerce sales and the continual rise of Amazon, it is hard to see growth in the brick and mortar industry.  Companies will then need to use decision theory with risk to decide how to move forward.  For this companies can factor in different alternatives.  These can include whether to spend more on online or in store marketing, whether to spend money on website development or on opening brick and mortar stores, what type of personnel to hire (e-commerce or retail workers).  Looking at historical performance and earnings, companies can then project future return on expenditures.  To factor in risk companies can look at competitor projects and their successes, success of past expenditures, and industry growth and trends.  Decision theory with risk is just one component of decision making but it can allow companies to make solid decisions on strategic planning.

Risk theory is important because although retail has declined in past years, retail has had a strong quarter and is subject to change.  Some sectors of retail are doing particularly such as off price retailers such TJX corporation and Ross Stores.  These retailers almost exclusively operate brick and mortar stores.  The “treasure hunt” process continues to resonate for middle America.  Additionally, traditional retailers experiencing positive earnings may indicate that brick and mortar may not be totally out of the question.  Increase in retail earnings can be a sign of stability and growth in the overall economy.

https://www.wsj.com/articles/the-unloved-retail-sector-is-quietly-attempting-a-rebound-1519995600

What do you think about growth in the retail industry?

How do you think retailers should evaluate processes and projects?

What retails companies or stocks do you follow?

 

7 thoughts on “Evaluating Risk: A Look At the Retail Industry

  • March 8, 2018 at 10:53 am
    Permalink

    I think it’s such an interesting time for retail in general. I’ve had the pleasure of interviewing with a few large retailers and while they mention growing and improving their online platforms, they still believe that traditional brick and mortar retail will never go away. Some people enjoy shopping in stores, some things can’t be bought online, and there’s a level of personal touch involved in traditional retail.

    Should a company decide to move away from brick and mortar retail, they should still consider what people value in type of shopping and aim to replicate that in online platforms. This could be virtual styling, AR/VR, and other forms of personalization and customization.

    The fashion industry is always changing and is influenced by so many different factors. Evaluating risk and responding to it in a way that makes sense for each individual companies is the only way that 1) brands will be able to stay relevant and 2) compete against other brands 3) stay profitable.

    While fashion is creative and artistic, it is also has a very systematic supply chain. The topics that we talked about in class such as waiting lines and lean systems can all be applied to this industry. The fashion industry is about getting the products into the hands of as many customers as possible but it is also about building brand recognition. If a company is able to create a process that is efficient, defect-free, and continuously produces quality product, customers will continue to go back and buy from them.

    I have been following the Neiman Marcus Group and talking a look at how their company is changing to keep up with smaller, millennial – driven brands while staying true to their root as a luxury retailer.

  • March 8, 2018 at 3:56 am
    Permalink

    Kate,

    The “death of brick and mortar” is always such an interesting conversation. I have read many articles on this topic and some people believe that brick and mortar stores will continue to exist, but they have to evolve. This could include implementing technology like VR and AI, or more interactive shopping experiences. This also relates to the supply chain because stores like Zara continue to be innovative and successful in the times of declining brick and mortar sales. They have implemented disintermediation and limited their supply chain greatly and it has shown to be successful. Although, it would be interesting to see if the idea of Zara and their strategy is as special and successful when more retailers move towards a similar (or better) supply chain and retail strategy.

    • March 8, 2018 at 4:14 pm
      Permalink

      Brandon,

      I think your discussion of implanting new technology into traditional brick and mortar stores is extremely interesting. My friend from Silicon Valley, CA was telling me about a supermarket that responded to the trend of ordering groceries online. In this store, they implemented the use of tablets on carts to help direct customers towards products that they need. Through brick and mortar stores adapting to changing trends in their respective industries, they can continue traffic in their stores. Specifically with retailing, brick and mortar stores are faced with a challenge to differentiate themselves from the easier option of just ordering clothing online. I agree with your comment about Zara. If all stores are moving towards their supply chain and process strategy, will Zara be phased out or will they start a new trend.

  • March 7, 2018 at 11:06 pm
    Permalink

    Katherine,

    This is a great post and brings up a great point. In a one-click Amazon world, the future of brick-and-mortar retail is an interesting topic. It is no secret that consumers are turning to e-commerce, for retail shopping and more. To survive, companies like Nordstrom, Macy’s, and Target will have to invest in and shift energy towards their online businesses, but I do think that brick-and-mortar stores will continue to play a large role in the retail market.

    The strategy behind brick-and-mortar stores will have to change, however. There will have to be an emphasis on the customer. One article I found discussed the need to create a “sensory experience” and to “wow with your customer service,” and at the same time offering online options to increase merchandise options.

    Warby Parker is a good example of this. While it is a primarily online company, they have slowly began to open up stores to allow customers to try on their glasses before ordering. The stores are well-designed and create that “sensory experience.” It will be interesting to watch to see if more retail companies adopt these strategies.

    Link: https://www.fireflystoresolutions.com/retail-design-blog/4-ways-brick-and-mortar-stores-can-stay-relevant-in-an-amazon-world/

  • March 7, 2018 at 2:57 pm
    Permalink

    Katherine,

    Thanks for your post! The question you posed “is there a future in brick and mortar retail?” is one that I think many retailers are asking themselves as they are being forced to innovate and adapt to the changing marketplace. According to USA Today’s article “Nordstrom Sees Record Sales in 2017”, Nordstrom recorded $15.1 billion in sales in 2017, up from $14.4 billion in 2016 as a result of new ideas and innovations as well as and customer-focused programs.

    Nordstrom has done a great job of evolving in a changing environment as shoppers increasingly choose to buy online from retailers such as Amazon and Gilt. During most recent the holiday season, Nordstrom tested around-the-clock curbside pickup in ten of their stores and was extremely successful. Nordstrom also opened a “Nordstrom Local” store in the fall in Los Angeles. This store is much smaller than the typical size of the department store (3,000 square feet compared to 140,000). At this store, customers can enjoy a glass of wine while being helped by personal shoppers who pick out clothes and accessories for them or get a manicure. Further, while customers can return or pick up items at the store that the bought online, there is no dedicated inventory in the store and it is all ordered online, a pull method of inventory.

    Nordstrom uses a front office model when it comes to customer contact as there is extremely high interaction with customer as well as highly customizable services. Nordstrom prides themselves on their customer relationships and customer service.

    https://www.usatoday.com/story/money/2018/03/01/nordstrom-sees-record-sales-2017/382982002/

    http://www.businessinsider.com/nordstrom-new-store-concept-opens-2017-10

  • March 7, 2018 at 11:27 am
    Permalink

    Katherine,

    With the growing popularity of online shopping, retail stores had a tough time producing sales. Retail stores, traditional bricks and mortar retail, look to holiday sales for a boost in their sales. While some retailers such as Kohl’s, Macy’s, and Target saw strong sales: other companies such as Nordstrom did not. The availability of Internet access has grown over the years from dial-up Internet to now having smart phone Internet access. Consumers have Internet in the palms of their hands. Online shopping or ecommerce offers consumers convenience. We have seen consumers’ desire for convenience with the rise of grocery delivery services-Amazon Prime, Amazon Fresh, and food delivery services such as UberEats.

    The future of brick and mortar stores is uncertain. Consumers want convenience to optimize their time. If brick and mortar stores want to succeed in this new environment, then they need to incorporate convenience into the shopping experience. We have begun to see retail stores adding the convenience factor by offering in-store pick up. This allows consumers to skip the lines in the stores while also getting their purchases that day instead of waiting for their goods to be shipped. Retail companies need to use risk theory in analyzing their alternatives that can result in an increase of sales.

    Personally, I would rather try on clothes and shoes that I intent to purchase before I purchase them. Returns present an inconvenience to my schedule. However, it is convenient for me to purchase these items online and have them shipped to me if I already know my size. Lastly, I think there is still a future for brick and mortar retail. Ecommerce cannot provide the social experience that accompanies the event of going on a shopping spree with your mom or your friends or interaction with a sales clerk. It also provides the opportunity to try new styles or trends without the necessity to make a purchase. Here, is article from Forbes that shows five signs that ecommerce is not the future of retail: https://www.forbes.com/sites/barbarathau/2017/06/27/five-signs-that-stores-not-online-shopping-are-the-future-of-retail/#7348ad44641c.

    • March 7, 2018 at 3:07 pm
      Permalink

      Hi Erin,

      I definitely agree with you that I would rather try on clothes and shoes in-store to make sure that they are the right color, style, and fit. Returns are extremely inconvenient and take up a lot of time in my schedule. However, there are actually companies such as ReturnRunners that are revolutionizing the way returns are made. ReturnRunners has an app that matches you with a “runner” who will pick up your merchandise whenever it is convenient for you (8:00 a.m. to 6:00 p.m. seven days a week), will drive and return it to the store on your behalf, and notify you when the return has been processed. For busy people who have very little time to go do returns, this service is a great idea! ReturnRunners charges a nominal fee of $9.99 and $0.99 per item.

      https://www.returnrunners.com/

Comments are closed.

css.php