The first day’s program set the stage with a panel of housewares executives discussing issues in managing their businesses, followed by two experts who presented CHESS attendees with big picture overviews of the U.S. political scene and global political/economic risks. Day Two offered deep dives into the competitive retail landscape, the complexities of IP protection in China, omnichannel fulfillment strategies and how to capitalize on the aging consumer market.
CHESS veterans Dana Telsey, Retail Analyst, CEO, Telsey Advisory Group (TAG) and Joe Feldman, Senior Managing Director, TAG, returned to update their 2015 interpretations with their latest proprietary research on the rapidly changing U. S. retail landscape. Their insightful presentation was illustrated with many colorful charts and detailed data on specific retailers, financial metrics and spotlighting laggards and leaders.
Telsey Advisory Group (“TAG”) is a leading equity research, sales and trading, consulting, and investment banking firm focused on the consumer sector. TAG was founded in 2006 by Dana Telsey, a retail industry expert with 30+ years of buy-side and sell side experience focused on the consumer sector. In 10 years, the firm has grown from 12 to 50 employees, and its areas of study grew from 38 companies in four sectors to 118 companies in 15 sectors. TAG affiliate Telsey Consumer Fund, a long/short hedge fund focused on the consumer sector, recently launched its capital raising efforts.
Telsey began by outlining the macroeconomic and consumer environment. Overall retail sales are subdued and consumer spending is soft. Millennials are an important long-term contributor to consumer spending and a focus for retailers.
Retail sector update and key trends include
- Robust growth in off-price and activewear with slight improvements in specialty apparel and department stores.
- Omni-channel initiatives, new technologies, and experiential retailing are key retail trends.
- Continued strength in the housing market, home-related sales have maintained a growth rate in the mid-single-digit range.
- Digital marketing and multi-channel distribution are important growth drivers for the sector.
- New entrants have emerged in the housewares industry, differentiating themselves from traditional retailers with variety, pricing, inspirational, and experiential customer value propositions.
Expect continued momentum in the housing sector supported by the continuing improvement in the economic backdrop.
Structural changes are occurring in spending patterns for consumers of all ages and income levels and channels of distribution, both physical and digital. Companies adjust the way they manage inventory, allocate marketing dollars and integrate technology.
Current Consumer Landscape
Generally, the big picture has improved from last year with job creation in the labor markets, disposable income growth, and inflationary pressures that are controlled. Second quarter 2016 consumer spending grew at 2.7%, continuing the trend of decelerating growth since early 2015.
Consumer spending being driven by:
- Promotions: companies have learned to manage their margins, and they plan discounts.
- Product innovation: More evident in some sectors than others (e.g., wearable technology driving consumer electronics whereas limited newness in apparel).
- Seamless storefronts: Consumers visiting more channels (e.g., brick-and-mortar, online, mobile, outlets, etc.) and spending more across those channels (2-3x spending of one-channel customers).
Tourism, especially in gateway cities (e.g. New York and Miami), negatively impacting the U.S. while having the opposite impact in Canada.
Retailers focus on:
- Capturing millennial wallet share: 27% of population; nearing $1.1 trillion in spending by 2035.
- Enhancing social media presence and “experiential retail” to engage this demographic.
- Capitalizing on product trends.
- Increasing traffic and conversion: Enhancing in-store experience and differentiating product.
- Leveraging big data and technology: Significant investments to optimize targeted marketing and ultimately increase conversion.
- Driving profitable growth across all channels: Maximizing supply chain to enhance profitability.
The housing market is recovering:
- Sales at home-related retailers have benefited from home price appreciation, remodeling projects and housing turnover.
- Existing home sales rebounded in 2015 and rose at a mid-single digit rate in the first half of 2016. Sales declined in July and August and could hinder growth at the end of 2016.
- Home prices continue to rise.
- After rising to over 4.0% in July 2015, mortgage rates have moderated over the past year to 3.44%. The Federal Reserve is expected to increase rates, but a small increase should not have major impact on demand.
- The home remodeling market index has risen significantly, suggesting that professional remodeling activity is increasing, with minor additions/alterations, maintenance and repairs driving the growth.
- The number of occupied housing units has continued to rise, driven primarily by rental units.
Retail Sector Update:
In a grid comparing nine sectors—specialty apparel, department stores, off-price retail, hardlines retail, discounters, food retail, footwear and activeware—Telsey and Feldman analyzed key competitors, same store sales and perspectives on strengths and weaknesses.
Key retail trends include:
- Growth in e-commerce and m-commerce is disrupting market share
- Omni-channel and technology are changing retailer priorities and consumer shopping behavior.
- Retailers are focused on expanding outside of core product categories, especially home.
- Growing retailers are taking space vacated by struggling retailers.
- Consumers are demanding experiences and services over goods.
Emerging Retailers and Response from Established Players:
TAG analysts provided examples of a new crop of high-growth retailers with disruptive online and mobile-based business models that are challenging larger, established players. These e-commerce “invisible” threats include sites in home retail, pure-play online retailers, subscription services, rentals, consignment sites and grocery delivery services that are gaining consumer acceptance.
Established retailers like Target, Williams-Sonoma, Best Buy, Macy’s and others focus on developing their “one-channel experience” by integrating all channels of distribution. Catalog businesses have a head start because of their fulfillment infrastructure and information gathering capabilities. Physical locations drive traffic for online shopping, in-store pickup and purchase returns. Consumers also buy in-store and ship home. This approach requires significant investment in technology to harness big data to enhance growth.
They then walked the CHESS audience through a store footprint to highlight points of contact with consumers to show how some innovative retailers capture information and move a shopper to purchase.
Experiences, Not Products
This shift in consumer spending is driven by millennials who prefer experiences that provide access to products without the burden of owning them. Telsey and Feldman provided many examples of experiential retailers with unique products and interactive services, “eatertainment” venues for millennials who eat out more than any other generation, and retailers that integrate fitness for millennials who values health and wellness. These examples illustrated the many approaches retailers are exploring to satisfy such customers.
Trends in Home-Related Retail, Discounters, Department Stores
Lifestyle and apparel stores have added home products. Sales of home furnishings sales are growing, but have yet to reach the 2006 peak. Online penetration for home furnishings is growing, but sectors insulated from the impact of e-commerce and m-commerce are those that offer products that are rarely purchased online, including home improvement and major appliances.
At risk sectors are those that offer products that are regularly purchased online, including housewares and small appliances. Home furnishings retailers are trying to differentiate their assortment by adding exclusive lines and designer collaborations. Some are also testing membership programs to drive traffic and increase customer loyalty.
Discount retail is well positioned in the uncertain economic environment as consumers seek compelling values. Department stores are struggling to maintain share against off-price, discount retail, warehouse club and eCommerce competition. Multi-channel distribution is a key tenet of the growth strategy for department stores. The opportunity to facilitate fulfillment through a wide store base is an advantage department stores have over e-commerce competition. Multi-channel distribution strategies provide opportunity to broaden the customer base and improve inventory management. Online penetration is growing significantly in the home-related categories.
Disruptive Entrants in the Housewares Industry
Telsey and Feldman discussed some of the successful emerging retailers that focus on the customer experience, such a Joss & Main, One King’s Lane, Wayfair, Pirch and Houzz.
Their retail industry outlook outlined product category performances to reveal that the home-related categories are in the positive range because of the factors mentioned earlier about the housing and home improvement market rebound as well as the field of flexible retailers that are adapting their ways to satisfy the changes in consumer buying habits and preferences.
Telsey and Feldman told about Wall Street’s valuations of various retailers. Omni-channel distribution is a requisite for success. The store goes to the customer instead of the customer going to the store. Areas of focus include: exclusive merchandise, more experiential stores, digital marketing (i.e. targeted promotions and social media), and supply chain investments.
Many retailers are focused on faster shipping, better website functionality and product descriptions and simplified checkouts.
After presenting such deep information on many fronts, TAG closed its analysis with comparison charts of sales and profitability forecasts for more than a dozen established major retailers.
Questions from the audience asked about growth in millennials’ preference for experience, TV shopping, data on entertaining at home with the gap between food prices and restaurant costs, as well as interest in Amazon’s share of home furnishings sales and the online share of other retailers like Williams-Sonoma. Best in class retailers focus on supply chain management and execution, and investment in learning about their customers= customer relations management (CRM). Other questions related to Alibaba and TMall. Future disruptors are likely to be in the supply chain and distribution, with innovations like driverless cars. What’s the difference between a fad and a long-term trend—a three-year cycle, product extensions and growth. The moderator announced that Dana Telsey and Joe Feldman will be back next year for 2017 CHESS.