By Business & Finance 
It’s been a rough ride across the consumer landscape, writes Aidan Donnelly, but could that be about to change?
The last weeks of every quarterly corporate reporting season in the US tends to be dominated by news from the large retailers like the department stores and Walmart. Although there are the official retail sales numbers released each month by the US Census Bureau, the commentary from company managements tend to give far more insight into what is going on in the economy and as a result they are closely watched by investors.
A MAY MASSACRE
During the month of May many of these retailers released the first quarter profit numbers and they didn’t make for great reading. It proved to be a challenging quarter as a slowdown in footfall into department stores and a reduction in apparel sales in late March/early April reduced like-for-like sales growth, causing overall revenue numbers to miss expectations.
As if this wasn’t bad enough, several department stores commented on the need for greater promotions (price markdowns) due to elevated inventory levels and unseasonable weather – before you ask, yes the weather always gets blamed!
What has left many investors scratching their heads has been the fact that, as the quarter progressed, several retailers saw trends meaningfully decelerate despite many economic indicators showing a consumer that should be doing at least ‘okay’.
So the big question is are we seeing a consumer that is reining in their spending or simply shifting their spending away from these traditional retailers to other categories of consumption? While it is always dangerous to read too much into any one quarter of results, for many years there have been two major trends dominating the retail sector and changing the competitive and purchasing landscape.
IS E-COMMERCE THE ONLY COMMERCE?
The first of these trends has been the rapid growth of online channels at the expense of brick-and-mortar stores. Investors are naturally concerned with the long-term revenue and margin implications for traditional retailers as it seems that Amazon is taking over the world!
That said, over the last five years the majority of large retailers have implemented an ‘omnichannel’ strategy of some form – click and collect, ship from store, ship from warehouse. E-commerce sales for these retailers have meaningfully accelerated as a result. The ultimate profit implications will depend on each retailer’s ability to offer differentiated assortments (with less price competition) and develop strategies that optimise all their channels of distribution.
IT’S JUST AB ‘FAB’ SWEETIE
The second major trend is best described as emergence of the ‘FABulous’ era – footwear, accessories and beauty. These FAB categories have been responsible for nearly all of the growth in overall sales for the department stores in the last seven years. The growth of FAB has been a profound structural shift in business for those that were able to capitalise on it, particularly the department stores.
Are we seeing a consumer that is reining in their spending?
This broad shift appears to be coming to an end, with 2015 the first year in which sales of FAB categories grew at a rate slower than department store sales as a whole. And FAB producers have also commented on weak performance in the department store channel during their first quarter results, suggesting that the category is now in contraction mode. But only in this channel it seems.
That still leaves us with the question is consumer spending falling or broadening? In order to get some insights on this, I recently met with a variety of companies across the various verticals that compete for those prized consumer dollars – retailers, hotels and restaurants.
THAT’S RETAIL BABY
While it would be very easy to write off all of retail given some of the negative trends we have seen, it’s not all bad news. Retailers remain focused on differentiating their brands and shopping experiences to engage consumers in a rapidly evolving landscape. The competitive threat of Amazon was a consistent topic and one which retailers (and investors) are closely monitoring.
While FAB sales may be slowing at department stores, the beauty category continues to grow, particularly in the dedicated stores, like Sephora and Ulta Salon, as well as the pharmacy chains. Management teams took a more cautious tone on apparel/accessories spending but even here there were some bright spots.
Within the footwear and apparel category innovative brands, particularly in ‘activewear’, with good momentum and differentiated positioning continue to grow at very strong rates despite various industry challenges.
One factor that was very evident is the insight being generated from loyalty programmes and how these can be used to drive marketing and promotional activity. The combination of these and online communication with customers are providing enhanced shopping experiences both at store and online.
WELCOME TO HOTEL CALIFORNIA
Hotel companies, in general, remain optimistic that the upcycle they have seen for the last few years will continue through the near-to-intermediate term, albeit at a more moderate pace of growth.
While corporate demand remains sluggish, a better consumer has seen leisure demand trends remain strong and secondary destinations continue to exhibit above-average growth.
The travel sector has been at the sharp end of the e-commerce battle with the proliferation of online travel agencies (OTAs). The large hotel companies continue to persuade the customer to book direct through their loyalty programmes and other incentives. While it is too early to measure the success of the major brands’ lowest price promises – Hilton Hotels have a ‘Stop Clicking Around’ campaign – which is aimed at steering customers away from higher-cost OTA channels, they are seeing more people joining their loyalty programmes.
FEED ME
Aidan Donnelly
The tone of commentary from the restaurant companies was less clear cut. Recent industry demand trends were somewhat mixed, with some companies indicating comfort with underlying fundamentals and others pointing to some softness in recent weeks.
In general, management teams seemed optimistic that a supportive economy and more normalised weather would support better traffic.
Let’s hope April represented a blip and that Mr and Mrs Consumer continue to spend their bounty
The one theme common across all restaurant groups was the need to provide greater convenience to the consumer in the form of enhancing/launching platforms for online ordering, mobile apps, and delivery. If you build it, they will come!
There is no denying that for certain parts of the consumer landscape, 2016 so far has been a fairly rough ride. While there were obvious short-term issues, what is less clear is if the slower sales in some areas were the result of the consumer pulling down the shutters or just being more discerning in their purchases.
With the economic backdrop remaining positive, let’s hope April represented a blip and that Mr and Mrs Consumer continue to spend their bounty.
–––––––––––––
About the author: Aidan Donnelly is head of Equities at Davy Private Clients. Views expressed in this article reflect the personal views of the author and not necessarily those of Davy. Follow him on Twitter @aidandonnelly1. J&E Davy, trading as Davy, is regulated by the Central Bank of Ireland.
