2018 Retail Predictions
1. Mobile is never ending and never finished. Mobile has been an initiative for retailers for years and has come a long way. In 2017, 29% of sales between Black Friday and Cyber Monday occurred on mobile e-commerce websites and apps. Mobile is an extension of the store, and retailers must be able to facilitate rapid delivery of everything available in-store on mobile devices, and then some.
In 2018, retailers must continue to improve their mobile platform capabilities so that it works seamlessly or risk losing sales. This goes for mobile applications and in the mobile Web browser.
2. Retailers will shift their organizations to be truly customer centric. How a retailer is perceived by consumers and the experience that consumers have in stores and online, is critical to success, and retailers must include empathy and emotion to correctly measure the overall customer experience. If a retailer is not organized properly to be customer centric, they need to take action to realign the company. In addition to the people-work required, they must ensure they can capture and centralize customer data and insights from in-store and online interactions.
For some organizations, this will require a complete transformation of their data storage processes and architecture. Once retailers have the customer-centric data, they must know what to do with it. Analysis tools that deliver actionable data and enable organizations to correctly respond to changing conditions with actionable and repeatable processes at the point of service – whether instore or online, will be key.
3. More focus on the customer journey. Retailers must be able to assist customers before, during and after they enter the store. Before consumers visit a brick-and-mortar retailer, many check online first to ensure the specific item they are looking for is in stock. If the retailer is not able to provide this information, the customer may look to a competitor instead.
Once the customer is in the store, the experience must be as positive and seamless as possible, and the journey does not stop after the purchase. Post sale follow-up in the form of customer experience surveys, review requests, etc. and other tactics are common place. And promotions designed to encourage repeat sales – discounts, personalized recommendations, etc., are essential. Looking into 2018, retailers must be aware of how they are interacting with consumers and how they are perceived by consumers at all times.
4. Pop-ups power retailers’ customer experience reinvention. For many retailers, pop-ups are quickly becoming a critical part of the store experience reinvention journey. In fact, a recent study shows that pop-up stores now account for more than $50 billion a year in revenue. If done properly, these unique stores allow retailers to experiment and find out which consumer experiences work and which fall flat.
In many ways, experimenting with pop-ups enables retailers to go on a reinvention journey without making long term commitments or investments. Pop-ups also enable retailers to measure the impact of a new physical experience within their complete, omnichannel ecosystem, before rolling out chain-wide. As retailers continue to figure out the best ways to leverage new experiences and technologies along the shopper journey, I predict that pop ups will find their way to more retailers’ agendas in 2018.
Vicki Cantrell is retail transformation officer of Aptos.
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Regulatory Wrap-Up: Swipe fees, wage theft back in the spotlight
Ohio: A Cuyahoga County judge ruled that a state preemption bill passed last year is unconstitutional on the grounds that the law violates the single-subject rule of the Ohio Constitution. The current law, passed in 2016, prevents localities from implementing wage, leave and scheduling ordinances. This ruling follows a similar opinion issued by a Cincinnati judge in September. The state is expected to appeal, and the legal process will likely take many months. In response, two ballot initiatives brought by community groups were certified by the attorney general’s office, affirming municipalities’ constitutional right to local governance. The two initiatives will be reviewed by the Ohio Ballot Board and if approved, supporters would need to collect roughly 300,000 signatures from half the state’s counties to qualify for the statewide ballot.
Miami Beach, FL: The Third District Court of Appeals upheld a circuit court ruling that the citywide minimum wage scheduled to take effect in early 2018 violates the state preemption law. The law would have set a minimum wage of $10.31/hr. with annual increases slated through 2021.
Minneapolis, MN: A county judge ruled against the Minnesota Chamber of Commerce’s request for a temporary injunction of the city’s new minimum wage law. The chamber has indicated that it plans to continue its legal challenge. As of today, the minimum wage will rise to $10/hr. on January 1, 2018 for businesses with more than 100 workers. Smaller businesses will have to comply by July 2018.
New Jersey: A bill that strengthens enforcement procedures and criminal sanctions against employers who fail to pay wages, compensation or benefits to their employees passed the senate this week after house passage earlier this year. Term-limited Governor Chris Christie will leave office in a few weeks, and it’s unclear if he will veto the bill before then. Incoming Governor Phil Murphy will likely support the legislation if passed again next year.
Labor Department: The Labor Department extended the public comment period by 30 days (to Feb 5, 2018) for the proposed tip-pooling rule change. Under the proposed rule, employers could establish tip-pooling policies that include all employees. A final rule will likely not be issued for many months.
NLRB: The National Labor Relations Board overturned the Browning-Ferris decision, returning to the pre-2015 joint employer standard. In future cases, an entity will be deemed a joint employer if there is proof that “one entity has exercised control over essential employment terms of another entity’s employees and has done so directly and immediately.” The decision brings to conclusion, for now, a long-fought battle for the industry and provides clarity for the franchisor/franchisee business model.
NLRB: The National Labor Relations Board overturned the Specialty Healthcare decision, erasing the controversial concept of “micro-unions” established by the Obama-era board in 2011. Under the micro-union standard, bargaining units could consist of a smaller subset of employees within a single enterprise such as the shoe department within a department store, creating a myriad of challenges for employers. The reversal reinstates the traditional ‘community of interest’ test, such as common supervision, for determining appropriate bargaining units in representation cases.
NLRB: The National Labor Relations Board issued a request for information (RFI) regarding the Obama-era “ambush election” rule which established a shorter time period for union elections benefiting labor interests. The rule also mandated that businesses provide personal phone numbers and email addresses to unions who have petitioned to represent a workplace. The RFI is the first step in a lengthy process, but notable in that the Board is moving quickly to initiate the rule process before the impending retirement of one of the Republican board members. That retirement will temporarily revert the board to a 2-2 partisan stalemate until President Trump’s nominee is confirmed by the Senate.
Wisconsin: A bill that would preempt local governments from enacting laws dealing with right to work, wage theft enforcement, employment benefits and salary history questions was introduced in the senate. The state already preempts localities from enacting local minimum wage and paid leave mandates.
U.S. Congress: Conferees agreed on a tax reform proposal that combines the Senate and House-passed language. Republican leaders have approved a few key changes to appease some senators who had expressed concerns with the package. The bill will likely be taken up early this week by both chambers with a goal of advancing it to the President’s desk prior to Congress adjourning for the year.
Maryland: Prior to a rally with Senator Bernie Sanders, Democratic gubernatorial candidate Ben Jealous announced his intent to push for a single payer healthcare program for the state should he get elected. Jealous did not release details of how the plan would be funded and is one of eight primary candidates seeking the Democratic Party nomination to run against Republican incumbent Larry Hogan.
Supreme Court: Seven merchant trade associations, led by the National Association of Convenience Stores and the Retail Industry Leaders Association, have joined in an amicus brief laying out the industries’ concerns with American Express rules that bar retailers from offering discounts to consumers who use cards with lower interchange fees. The case, now pending before the United States Supreme Court, could result in more transparency for consumers and more choice for merchants at the point-of-sale.
Los Angeles, CA: The City Council voted unanimously to explore potentially banning companies that classify their port truck drivers as independent contractors from doing business at the ports. The city attorney must now produce a report to determine the usefulness of the city’s land use laws in denying access to port property for companies that are found in repeated violations of employment laws. The council is also directing the Harbor Department to review lease agreements with trucking and warehouse companies to determine if those agreements can be leveraged to block access to proven violators.
• The election results this week in Alabama are the latest indications of an energized Democratic base, particularly among African-American and suburban women. It remains to be seen what impact, if any, this may have on the Republican agenda in Congress, particularly with regard to traditional “women’s issues” like paid leave. Rising frustration by women with the tone and tenor of the current political discourse could have significant electoral ramifications for Republicans next November.
• The fallout from the sexual harassment issue continues unabated and appears to be picking up momentum. This issue has the potential to re-frame many other industry issues like benefits, wages and even scheduling under the guise of “protecting workers.” Brands will likely find themselves under increased internal and external scrutiny and need to prepare accordingly.
• In a victory for the employer community, the NLRB overturned several challenging precedents established by the Obama board. While the outcome isn’t a surprise, the timing of the ruling was somewhat unexpected and Democrat members of the board argued in their dissent that Republican members overreached. While the rulings are a win for employers, it demonstrates that the NLRB, like other agencies, has become increasingly political. That volatility worked in favor of the employer community this time, but future elections could impact this and other issues yet again. As a result, companies should continue to work toward long term solutions through the legislative process.
Legislature Status for Week of 12/18/17
• The United States Senate is in session this week
• The United States House is in session this week
• The following state legislatures are in session year round
o IL, MA, MI, NJ, NY, OH, PA, WI
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From the frying pan into the fire? U.S. retailers to feel the heat in 2018
Earlier this year, S&P Global Ratings said adverse secular trends were far more likely to accelerate than abate. Our view, which we discussed in a February 2017 research entitled “Distressed U.S. Retailers: 2017 Is Shaping Up To Be A Tipping Point,” has proven to be accurate as measured by the number of downgrades, defaults, lowered earnings guidance and merger activities that have occurred since then.
As we head into 2018, here are the key trends we believe will drive the U.S. retail sector:
Consumers will continue to seek value. The strong performance and continued growth of discount retailers demonstrate that U.S. consumers remain focused on value a decade after the great recession. Retailers have also had to compete with larger-ticket items such as autos and housing (including higher rents), and other pressures on consumers’ wallets such as health care, student loans, technology and “experiences” (e.g. travel, dining out). With wage growth sluggish, shifting consumer preferences and competition for share of wallet have confounded the best efforts of many retailers. Rampant growth in online sales has created more price transparency and has made comparisons easier for a range of products. At the same time, in the U.S., the millennial generation’s evolving retail behavior is both an opportunity and risk for retailers.
Rapid e-commerce growth has created a severe strategic challenge. Many retailers across subsectors lack technological capabilities and are still in the early stages of addressing the shift to e-commerce. We are seeing strategic shifts with large investments in online commerce and delivery logistics and continued growth of successful retailers with world-class supply chains. Many retailers face difficulties in changing parts of their business models including supply chains and distribution networks, while also enhancing customers’ store experiences.
E-commerce is disrupting almost all segments of retail to greater or lesser degrees with no end in sight. Its evolution has already shown that previously successful retailers may not remain so. However, it’s not all downside for those retailers that can manage their physical footprint while building successful online capabilities. Signs of winners and losers are emerging now, although the upheaval of the retail landscape will continue.
While e-commerce sales are still only around 10% of total U.S. retail sales, it has a disproportionately large impact on the traditional retail sector. For example, any news of Amazon entering a segment of retail is usually sufficient to trigger a drop in market value of even well- established players in that sector. At the same time, retailers are building out their capabilities – with significant fanfare. Two dramatic examples in the last two years were Wal-Mart’s purchase of Jet.com in 2016 and Amazon’s purchase of Whole Foods in 2017.
One analogy to consider is FedEx and UPS – FedEx started off mainly in the air and moved into ground, while UPS was almost exclusively ground based and moved into the air. Both have grown and co-existed to serve the customer base. We think consumers are comfortable with multiple channels and that many retailers are working to catch-up. Because of this, we do not see e-commerce penetration diminishing, but neither do we imagine the vast majority of sales in most segments occurring online. Grocery is a good example of how the mixture of bricks and mortar and online channels are evolving. In the U.S., grocery online penetration is low, Amazon is not dominant and large traditional grocers have all been investing in and testing different online formats such as “click and collect“ We would not be surprised to see similar e-commerce ramp- up in other retail segments such as pharmacy and auto parts.
Excess real estate still needs to be addressed by most retailers. The U.S. is far more oversaturated than other countries with too much retail real estate that is costly and cumbersome to sharply reduce for those that need to do so. In 2016, we noted the acceleration of the pace of store closures and we think this will continue into 2018. Many store closures in the challenged retail segments, reflecting the over-saturated U.S. retail sector, will be a necessary but not sufficient condition for future success.
Downgrades and defaults in a growing economy will continue. The economy or consumer spending hasn’t suddenly worsened – and it might even be better in 2018. However, we have had more rated defaults in the retail sector in 2017 than during the financial crisis. A good swath (but not all) of the rated U.S. retail sector is running out of room to maneuver towards a business model that looks sustainable in the evolving retail landscape.
As of late-November 2017, 35% of outlooks were negative versus just 4% positive. The specter of defaults continues to loom large over the rated universe: About 17% of the rated portfolio was in the ‘CCC’ category (implying substantial future defaults), about double the level of the financial crisis. The performance of issuers in the department store and specialty apparel are the most challenged, along with a mixture of other retail concepts.
Downgrades have not been limited to lower rated credits – in 2017 S&P Global Ratings took many negative rating actions involving investment-grade rated entities and most have a negative outlook, meaning further downgrades are possible. The amount of debt trading at distressed levels remains elevated.
Geopolitical shifts – they could still impact retail
Changes following recent U.S. presidential elections have not yet triggered the extreme scenarios on trade flows, tariffs, and taxes that could influence or disrupt the global retail sector such as margins and supply chain. Regardless, we think many rated retailers need to up their supply chain game, and many are working on it, but more needs to be done in 2018. Supply chain effectiveness has always been a key to success in retail, but the stakes are even higher now with the consumer so focused on value and e-commerce. The benefits and economics from timelier merchandise flow and lower inventory are tangible. The discounters, supported by their supply chain and logistics skills, have benefitted from consumers’ greater sensitivity to price and/or private labels and the sector has expanded rapidly, hurting traditional apparel retailers.
Who will do well in 2018 and what can retailers do to compete effectively?
Discounters will continue to do well and the dollar store segment will continue to expand. We assume the 2017 holiday season will be weak for the segments that have struggled over the last few years. There will not be a slowdown in the growing preference for shopping online, so adapting to shifts in consumer preferences is critical.
Meanwhile, millennials’ buying habits (including brand choices) are affecting retail in new and complex ways that retailers are trying to address. Technology has driven a high degree of price transparency and go-to market preferences to which many traditional retailers are struggling to adapt. Few segments are immune from e-commerce or the shifting consumer preference, so successful retailers will be ones that adapt to the new landscape.
Robert Schulz is a managing director and U.S. retail sector leader at S&P Global Ratings based in New York City. S&P Global Ratings’ research, ratings and analyses on the retail sector can be found at spratings.com/retail.
I found this interesting: Swipe Fees Supreme Court: Seven merchant trade associations, led by the National Association of Convenience Stores and the Retail Industry Leaders Association, have joined in an amicus brief laying out the industries’ concerns with American Express rules that bar retailers from offering discounts to consumers who use cards with lower interchange fees. The case, now pending before the United States Supreme Court, could result in more transparency for consumers and more choice for merchants at the point-of-sale. WHAT ABOUT A DISCOUNT FOR CASH???