Retail Faces the Wrecking Ball


Last week, my colleague Travis Hoium published a fascinating piece reflecting on the future of retail. He's certainly correct that retail is evolving. That's because it has to. I'd take that idea a step further and ask investors to question just how much of the bricks-and-mortar retail landscape faces the wrecking ball.

The softer side of showrooming
Travis' piece points out that there's a way that "showrooming" -- which has been repeatedly referred to as one of Best Buy's biggest problems -- actually represents an opportunity for brands. His tour of Minnesota's mammoth Mall of America yielded some interesting information: He recognized that a great many brands like Nike, Bose, and Disney were using bricks-and-mortar space to, in effect, "showroom" their products.

In other words, consumers can go straight to the brand source instead of relying on more generalized retailers like Best Buy, which allows consumers to eyeball electronics they very well may simply buy at .

Travis also pointed out that Apple pioneered this idea. Indeed, as of September, Apple had 250 U.S. stores and 140 internationally. Shiny, exciting Apple Stores where consumers can survey and test-drive products and ask questions are more about building the brand than anything else; the retail segment represented just 12% of Apple's $156.51 billion in total sales in the fiscal year ended Sept. 29, 2012.

Compare Apple's small retail-store footprint to the aforementioned Best Buy, which has about 1,400 stores and has had to shrink its physical presence in tough times.

The dead zone
"Brand showrooms" could indeed represent a huge shift in retail, and how we view retail stocks. However, there's another lingering issue that's been drifting around since 2008 or so, even if it isn't discussed much: the overexpansion of retailers like Best Buy as well as shopping malls, leading to many faltering and even failing physical retail locations.

Jeff Jordan, former CEO of OpenTable and a current partner at Andreessen Horowitz, recently penned a piece on the failing health of large U.S. retailers. He started off simply stating that "America has too many malls." As is the case with Best Buy, the situation can be summed up with the fact that e-commerce is making physical commercial real estate far less important.

Jordan pointed out that declining retailer health is having a negative impact on malls and shopping centers as vacancy rates increase and rents stagnate, and he also pointed out that those factors were both present in the economic crisis phase of 2008-2009, but have basically shown no improvement in the ensuing time.

He also predicts that given the ongoing trends and the fact that plenty of U.S. malls are becoming "ghost towns," hundreds of malls are set for future repurposing or demolishing, and that trend will be fed by major shifts like bankruptcies of the once-powerful "mall anchors" that once helped draw customer traffic to shopping malls. Remember when Sears Holdings' Sears & Roebuck was a solid mall anchor, for example?

Interestingly, Jordan also pointed out the kind of showrooming described above; online merchants Bonobos and Warby Parker both have New York City showrooms, for example, but these are simply for customers to physically look at or try on items, not for typical retail selling, which is conducted from inventory in the companies' warehouses.

Demolition derby
In 2009, I actually did predict that wrecking balls would nail some malls. I believed this was simply part of a necessary economic correction after the real estate bubble. Retail locations had grown to match unsustainable factors in the bubbly years, including too much easy credit and Americans' use of their homes as ATM machines. Retail expansion was simply another artificially inflated area, unsustainable in a normal, never mind truly sluggish, economy.

Our economy is still stumbling along, of course, and while there have been casualties like Borders, a good lesson is just how long it takes for some of these outcomes to come to pass. It can be long and painful; Best Buy strikes me as one of the best contenders to be a long, drawn-out casualty.

Savvy investors should stick with the strongest retail stocks while these changes are taking place (and taking out the weak). Strong retailers should have rock-solid brands, and be the ones that can truly differentiate themselves so that they're better than the online experience in more ways than simply price. They should also be retailers with very little debt on their balance sheets.

Costco is one of my favorite retail stocks; its differentiating characteristics, including its low prices and treasure-hunt atmosphere, help keep its loyal, paying members engaged. It also differentiates itself by treating its employees very well.

Over recent years, Target has shown that it probably gets the situation at hand. Take the experimental initiatives the cheap-chic retailer has conducted, like its "boutiques-within-stores" concepts and pop-up shops. This past holiday season, Target experimented with a pop-up-shop partnership with Neiman Marcus.

Last but not least, one can always simply jump directly to the strongest online retail choice and go with the giant e-commerce muscle that is Amazon is credited with making life hellishly difficult on bricks-and-mortar retailers of all stripes, and that may not be fun for many retail shareholders, but owning a piece of Amazon sure makes a good hedge.

Just remember, things won't stay the same for retail. If a retail company doesn't look like it's evolving for the times, don't let a bargain price induce you to buy its stock. And don't let sentimentality convince you to hold such a stock, either. Wrecking balls may be in the future, so don't let your portfolio get demolished, too. has been a longtime pick of Motley Fool superinvestor David Gardner, and has soared more than 1,500% since he recommended it in September 2002. David specializes in identifying game-changing companies like this long before others are keen to their disruptive potential and helping like-minded investors profit while Wall Street catches up. I invite you to learn more about how he picks his winners with a free, personal tour of his flagship service: Supernova. Inside you'll discover the science behind his market-trouncing returns. Just click here now for instant access.

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Alyce Lomax has no position in any stocks mentioned. The Motley Fool recommends, Apple, Costco Wholesale, Nike, OpenTable, and Walt Disney. The Motley Fool owns shares of, Apple, Costco Wholesale, Nike, and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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