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What's Behind the Retail-Stock Market Paradox

Posted by Dan Wallace-Brewster on August 17, 2017

America’s economy is considered the most consumerist in the world. The average citizen has a tremendous amount of spending power relative to his or her peers around the world, and this spending power is often allocated towards goods and services that are wants, not needs. The U.S. retail industry has benefited greatly from consumerism, but has been experiencing a slump in recent years that alarmists are call the "retail apocalypse."

In the last few months, the stock market indexes continued their momentum from 2016 and have reached all-time highs. Investors are receiving phenomenal returns, and it appears a market paradox has been born. So, the question at hand is how can we reconcile record stock prices with record retail store closures?

retailers-stores-closing-2017.pngRetail in a Nutshell

In 2016, the United States retail industry brought in $1.087 trillion dollars and created nearly 5 million jobs. To put this into perspective, consumer spending accounts for roughly 70% of our GDP “Gross Domestic Product” and is a huge part of the United States economy.  Let’s define retail as how producers of services and goods get their products to the consumer. Retailers often work with manufacturers, wholesalers, or distributors to get their goods.

Behind the growth of ecommerce, retail as an industry has been growing even as stores and chains close their doors. The perceived slump coming out of the Great Recession has been influenced by multiple factors, including tepid wage growth, currency strength at home and abroad, changing demographics and consumption preferences. The general consensus is that the struggles of bricks and mortar retailers are a product of a prolonged state of being over-promotional and over-stored.  The struggles of retail during a period of remarkable innovation has run in parallel with a record run on Wall Street.

It's unusual because stocks and retail performance rise and fall in harmony. At the risk of oversimplification, if consumers don’t have enough money to buy products, they won’t. Inventories increase, production orders decrease, manufacturing slows, unemployment rises, spending is reduced and so the cycle goes. Retail is essentially the head of the dog that wags the tail, and is so interconnected that its role as an economic indicator is magnified. So how are stocks rising without retail riding the bulls?

The Retail Industry is Evolving

In the early part of the decade, retail was enjoying enormous growth behind the rise of ecommerce. In a race to expand market share, many merchants took on debt from private equity to fund expansion of bricks and mortar stores and developers obliged by building more shopping malls. Production increased to fill department store shelves while "fast fashion" created a taste for fresher looks at lower prices. Meanwhile foot traffic, diluted by more stores and shoppers' ability to buy from their phone, was starting to drop.  Prices followed. Lower profit margins, coupled with rising interest payments on their expansion loans put pressure on retailers to move more product faster, feeding deeper discounts and the rise of fast fashion and off-price retailers. Overall, it has been a destructive cycle, but is retail circling the drain?

Store closures have been painful to branding but it doesn’t necessarily mean the retail industry is becoming weaker. Disruption happens. Surviving stores are restructuring their debt, closing stores (reducing headcount and operating costs) and focusing on a multi-touch omnichannel value proposition for shoppers. Instead of stores being a relic to a bygone era, they are being re-imagined as distribution centers and showrooms that provide everything that ecommerce either needs to be more efficient or can't provide in the first place. Stores are becoming more and more artisinal and experience-based

WarbyChicago_3_ext.pngWall Street is Watching and They May Like What They See

Shoppers are making permanent changes to the way they purchase goods and investors are rewarding the companies that have propelled that change.  Whether it's real estate, technology (Apple) or convenience (Amazon), retail is alive and well in the minds of investors. Brands that find ways to manufacture and deliver product that consumers want more efficiently (Fabletics and Warby Parker) are opening more stores, not less. Legacy retailers like Wal-Mart are acquiring the companies that can help them compete. Customers still want stores as a compliment to a complete shopping experience.  The retail industry isn’t suffering as much as it seems, it’s merely changing form.

Wall Street follows profits and potential, and this potential is a reflection of where consumers take their money. In the past decade, the extreme growth of the online retail set the path for a new stronger retail industry in motion.

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Topics: Ecommerce, Economy, Retail

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