Transcript:

The list of US retail bankruptcies is long. It began when neighborhood stores started losing out to department stores decades ago, which were then themselves disrupted by big-box retailers; now e-commerce is stealing the market. In the past, new retail models did not necessarily cause immediate death of the incumbents; department stores were not entirely displaced by the big-box retailers. But today it’s different; if retailers cannot adapt to the changing landscape, they die (Display).

What’s Changed?

Why do retailers experience so much disruption over time? Because consumer tastes and behaviors are always changing, driven primarily by who’s doing the shopping. Today, it’s millennials, those born between 1980 and 1996. Millennials are projected to be the largest demographic group in the country, surpassing Baby Boomers next year. They’re redefining consumerism because their behaviors, habits, and tastes differ drastically from past generations.

Different Today

But there’s something else going on that has caused retailers in the US to fail, and fail quickly. It’s partly the result of recent changes to bankruptcy laws, but primarily, failures are because of two distinct factors. One is the ownership structure. More than half of the retailers that have filed for Chapter 11 protection in recent years were owned, at least in part, by private equity.

Not only did private equity encourage a massive proliferation of essentially “me too” stores, all competing with the same merchandise and the same business model, but they also loaded them with a lot of debt, creating very inflexible structures. So when e-commerce came along, and in the process created price transparency and lower prices, these models could not invest in technology or adapt their high-cost structures to compete.

Overstored

The second is competition. US retail is extremely crowded, worsened by the growth in “me too” formats, which added to an already overstored system (Display). Reeling from the era of giant malls that began in the 1960s, which was followed by the growth of big-box retail, epitomized by Walmart Supercenters, stiff competition cut into profits. Today the industry remains highly fragmented; there’s over 600,000 US retail companies that have fewer than 20 employees.

But as retailers fail, substantial market share should come up for grabs as those with less competitive business models and high-cost structures fall by the wayside. Strong retailers should benefit.

Some Will Win

While the digital behavior of millennials will push e-commerce forward, physical retail will retain a significant, albeit evolved, role with shoppers. Successful retailers will engage with their customers in ways that are a blend of both old and new. On one level, it will be a return to the old ways of shopping when retail was an experience, before stores strived for volume and efficiency. The new wrinkle is the critical need to understand customers through the efficient use of data. Retailers who harness the power embedded in customer data and use it to guide merchandising decisions and customize the shopping experience for individuals, will have a leg up on competitors in the all-important race for market share. Those who do not, will likely die.

An information edge can mean the difference between getting ahead—or being left behind. That’s why many of our entrepreneurial clients look to us as a source of intellectual capital. For more insights on disruption, check out the related blogs here.

The views expressed herein do not constitute research, investment advice, or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams and are subject to revision over time.

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