These 5 retailers have the happiest customers

The American retail business, at least when it comes to traditional brick and mortar stores, has been reeling.

A number of one-time giants including Sports Authority, Borders Books, Linens-n-Things, and others have gone out of business while the number of struggling mall-based chains has grown disturbingly long. Even iconic American brands including Sears (NASDAQ: SHLD) and Macy's have closed stores.

Consumers have more choices than ever when pretty much anything they might shop for now sits a few clicks and two-day (maybe free) shipping away. That has likely spurred many retailers to treat people better and for the first time in two years the annual American Customer Satisfaction Index (ACSI) (registration required) shows a rise in how people feel about retail in general. The overall score on the report, which is culled from interviews with roughly 70,000 people, showed a 5% overall improvement rising to a 78.3 on the 100 point scale -- an all-time high.

In some cases the increase may be because stores with less customers have more time to pay attention to those who remain. "Fewer customers can lead to shorter lines, faster checkout, and more attention from the sales staff," noted ACSI, which also acknowledged that the increase goes beyond that. "...Retailers also have made strides to improve the customer experience with omnichannel offerings. Moreover, better customer service, lower gasoline prices, and food price deflation are contributing to stronger customer satisfaction."

The ACSI covers six retail industries, department and discount stores, gas stations, drug stores, specialty retail stores, supermarkets, and online retail. Each category posted gains in 2016 and below is the highest-ranked company in each of five categories -- because ACSI only looks at gas stations on a sector basis, not by individual retailers.

Department and discount stores: Dillard's

Dillard's (NYSE: DDS) does not get the media attention of some of its rivals, but it scored the top score in this category once again gaining 4% to score an 83. The chain has not been immune to the problems facing other retailers. Sales for its fiscal 2016 dipped to $6.25 billion down from $6.59 billion the year before and earnings per share (EPS) dropped to $4.93, down from $6.91 in 2015, but the company remains on steady ground.

While many of its rivals in this space are simply trying to survive -- a process that even if it works can be disruptive to customers -- Dillard's has the ability to make changes from a position of strength. CEO William T. Dillard II explained his chain's philosophy and what he said in his earnings release remarks sheds some light on why Dillard's outscored other department stores.

"We are ramping up our efforts to bring more distinctive brand and service experiences to Dillard's, both in-store and online," he said. "Our strong balance sheet provides us support in these challenging times."

Dillard's is working on improving its customer experience and it has the money to not have to panic. In 2017 that's a recipe to keep gaining on the ACSI.

Specialty retail stores: Costco

Costco (NASDAQ: COST) may be a no-frills chain, but consumers accept that because the company returns the savings to customers in the form of low prices. That formula has helped the warehouse club not only top its ACSI category, it also posted a 2% increase in its score from an 81 in 2015 to an 83 in 2016.

And unlike many retailers on this list Costco has not struggled in the face of online competition. The company steadily increased its membership base in 2016 while also growing same-store sales. In addition the chain maintained its high customer service rating despite making a major change by switching its longtime rewards credit card provider. That process was not without problems, but consumers were likely placated by the fact that the new program offered dramatic improvements in the cash back offered.

Drug stores: K-Mart (Sears)

This may be the exception that proves the rule. K-Mart, a Sears-owned company that has been closing locations and fighting off rumors of being entirely shuttered, saw the rating for its pharmacy rise dramatically. The company posted an 11% increase to score an 84, handily beating the traditional pharmacy-first brands.

ACSI pointed out that K-Mart benefited from having "only the most-loyal customers left." That, plus the fact that consumers rated pharmacies located in department stores or supermarkets above stand-alone drug stores may have combined for this unexpected win.

Supermarkets: Trader Joe's

Trader Joe's not only scored the highest in the supermarket category the unique market scored the highest of all brick and mortar retailers. The company saw its score jump from an 83 in 2015 to an 86 on the 2016 ACSI, a 4% increase.

Having grown steadily Trader Joe's actually climbed over last year's winner (and this year's runner-up) Publix. The retailer, which operates smaller stores than most supermarket chains, has grown from 300 locations in 2013 to 460 at the end of 2016.

Online retail: Amazon

Amazon(NASDAQ: AMZN) dominates online retail and it dominated the ACSI as well. The company raised its score 4% over 2015 putting up an 86 to tie Trader Joe's for the top score earned by any company.

The online leader has kept customers happy by continuing to evolve its Prime membership program. The free two-day shipping offer now includes Sunday delivery in many markets and has grown to over 50 million available items. In addition Amazon has thrown in perks like its streaming video and music services to sweeten the deal for consumers.

See the brands young Americans love the most:

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Millennials' favorite retail brands
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Millennials' favorite retail brands
24. Levi's

23. Calvin Klein

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22. Ralph Lauren

21. Michael Kors

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20. Walmart

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19. Macy's
18. Vans

17. Old Navy

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16. Converse

15. Adidas

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14. Gap

13. Under Armour

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12. Bath & Body Works

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11. Nordstrom

10. Target

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9. Urban Outfitters 
8. J.Crew
7. H&M

6. Sephora

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5. Lululemon

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4. Zara

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3. Forever 21

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2. Victoria's Secret

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1. Nike
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Daniel Kline has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon and Costco Wholesale. The Motley Fool has a disclosure policy.

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