The Future of Retail and How to Invest in It
The 2013 holiday shopping season is in the books, for the most part, and it's becoming more apparent that having an effective online presence is crucial for retail success. Fewer people are actually going out to brick-and-mortar retailers, which is the result of a combination of factors.
The convenience of online shopping is the most obvious, but people have known this for a long time. Online-only promotions, free shipping deals, and online "doorbusters" being offered are quickly making the holiday trip to the mall not worth the effort.
According to ShopperTrak, year-over-year store traffic declined by double-digit percentages for the last three full weeks leading up to Christmas. This includes a drastic 21.2% year-over-year drop in the week that ended Dec. 22, which includes the last weekend before the holiday.
However, sales did not decline quite as much. Actual sales only fell 3.1% year over year, which indicates more spending by the average consumer. Still, the massive decline in foot traffic through stores has to be worrisome to retailers, especially those without strong online sales to make up for it.
Some had good traffic, but at what cost?
The decreased traffic was a good thing for shoppers who did go out. Many stores were offering some of the best deals of the season in a last-ditch effort to boost sales. For example, Abercrombie & Fitch was giving shoppers 50% off their entire purchase just before Christmas.
While these discounts surely lured in some last-minute shoppers, the companies that offered these types of discounts will certainly feel the pain in their profit margins. In fact, Abercrombie warned their shareholders back in November that this holiday season would bring lower sales because of the need to offer promotions. The company adjusted its yearly guidance down to $1.40-$1.50 per share, from $3.15-$3.25.
Who is winning the online battle?
While Abercrombie and several other retail brands may be suffering, there are some retailers who have embraced the shift to online retail. The sales are definitely out there to be had. Overall holiday sales rose 2.3% from 2012, which, combined with the decrease in sales at physical stores, means business is quickly shifting to virtual storefronts.
Amazon.com , the king of Internet retail, said the 2013 holiday season was its best ever, with more than 36.8 million items ordered on Cyber Monday alone. In the week before Christmas, the company added more than 1 million new memberships to its Amazon Prime service, which guarantees free two-day shipping on items. The online sales volume this year was so great that it overwhelmed UPS, which missed many holiday shipping deadlines.
Aside from Amazon, there are plenty of traditional retailers that are doing a great job transitioning to an Internet-based business model, with some growing quicker than Amazon. Urban Outfitters has done the best job in this department, with an average annual growth rate of more than 65% over the past decade when it comes to online sales. The company sold about $663 million in merchandise online last year, compared with just over $7 million in 2003. Other companies such as Macy's, T.J. Maxx, and Gap have also seen their online business grow tremendously.
Best Buy has done a particularly good job of transitioning its business online, as well as maximizing its in-store business. Over the past few years, the company has reduced and restructured its stores and has implemented price-matching and free shipping programs in order to compete with Amazon. In fact, the difference in price between buying an LCD TV in a Best Buy store as opposed to at Amazon has dropped to less than a 1% difference, making it more practical to buy in store than in years past.
How to invest
While there will always be a need for physical retail stores, the addition of a viable and significant online presence is essential to effectively compete. Pay attention in 2014 to the companies that are most aggressively growing their online businesses, as it will be these companies that will likely surprise the market during next year's holiday season.
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The article The Future of Retail and How to Invest in It originally appeared on Fool.com.Fool contributor Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, United Parcel Service, and Urban Outfitters. The Motley Fool owns shares of Amazon.com. 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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