our top 10 predictions for 2017

VIEWPOINT: Retail

But first, a little about that Valentine’s treat many retailers enjoyed. The last few weeks may have been cold and stormy in many parts of the country, but early 2017 gave retailers a warm welcome to start the year. The United States Commerce Department reported strong January retail sales last week that beat economist predictions, suggesting that economic growth will accelerate through the first quarter.¹ Retail sales rose 0.5% after last month, and compared to January 2016, retail sales were up 4.1%.²Electronics and appliance stores were the big winners, jumping 1.6%, and even department stores did well, climbing 1.2%, the biggest increase since December 2015.³ As an added treat, December's seasonally-adjusted retail sales were revised up to show a 0.3% rise instead of the previously reported 0.1% advance.⁴ This is welcome news, particularly given the economic and political uncertainty that lies ahead.

With our usual wishy-washy disclaimer that it’s difficult to predict what’s coming in this rapidly changing retail environment, we again give it our best shot. As is our custom, in this edition of the Retail Viewpoint, we offer our top 10 predictions for the year ahead:

1. The import tax wild card. The Trump administration has floated a new tax policy that would apply a 20% tax on imports from Mexico, as well as other countries with which the United States has a trade deficit.⁵ If implemented, this tax could have a disproportionally large negative impact on merchants that export much of the goods they sell—i.e., almost all of our readers. Details around this new policy so far are sketchy at best. After meeting with six prominent retail CEOs who oppose the tax last Wednesday, President Trump reported that work on the tax plan was going “really well” but offered few further details.⁶ If the plan moves forward as-is, retailers may be forced to raise prices on imported goods—and potentially lose out on sales and hope that the economists are right in their theoretical currency models.
2. Irrespective of the above, we will see cost of goods sold (COGS) spike in 2017. Protectionist stances spreading across the globe could send COGS higher even more rapidly toward the end of 2017. Retailers may have to pass those costs onto consumers. Will consumers be sympathetic when they see these price hikes? Probably not. More likely, we’ll see a drop-off in demand rather than a positive shift to higher prices.
3. Retailers get political. Retailers are increasingly taking public positions on social issues, and we expect this trend to continue. Faced with a volatile political climate here in the US as well as abroad, retailers have decided that the social identity behind their brand matters. Patagonia recently announced that it will no longer attend the annual Outdoor Retailer show in Utah, one of the biggest trade shows in the country, because of the state government’s stance on public lands issues.⁷ Meanwhile, amid a grassroots “grab your wallet” campaign to boycott Trump products, a flurry of retailers including Nordstrom, Sears, and Neiman Marcus announced plans this winter to distance themselves, or drop altogether, Trump Home and Ivanka Trump products because they weren’t selling.⁸ In fact, after President Trump tweeted his displeasure with Nordstrom, the retailer’s shares dipped briefly but ended the day 4% higher⁹—so you never know what can happen! It seems shoppers now have more to worry about than making bad fashion choices when they shop.
4. Aggressive competition—but limited success—against Amazon. We expect to see large retailers take bold steps this year to compete with Amazon. Wal-Mart may be one of the few who can compete with Amazon head-on. Taking on Amazon Prime, Wal-Mart recently announced free two-day shipping on orders costing more than $35.¹⁰ But free shipping doesn’t cover the additional benefits that Amazon now offers, like video-streaming and e-book lending just to name a few. Plus, the network-effect is a powerful thing. Consumers increasingly consider Amazon their one-stop-shop because they think the online retailer has more inventory and lower prices than its competitors do. So we expect the battle of the titans to continue.
5. Data, data, and more data. Psychographics data, or information on customers’ habits, hobbies, and spending habits, will become even more important for retailers this year. Retailers have traditionally focused on demographics such as age and gender (if at all). But psychographics, including customer attitudes, lifestyles, political leanings, personalities, etc., will better help retailers segment customers, create efficient and targeted media buys, personalize messaging, design new products, and explore new opportunities for growth.
6. The huge wave of store closures will finally hit the shore. A number of major retailers announced store closures this January, and we expect to see many more store closures this year. More and more retailers are integrating store closure programs into their overall strategies to stay competitive, and the subject is becoming less taboo than it was in the past. Even strong brands like Starbucks are regularly closing stores.¹¹
7. Dead malls become a bigger problem. With all this retail space becoming available, dead malls will create a real problem, especially as anchor tenants like Macy’s and Sears pack up and leave. But dead malls could, at the same time, create opportunities for renewal. For instance, emptier malls could give growing off-price and value brands a chance to gain a foothold in a prime location. It might be time for REITS and municipalities to get serious about unused square footage and consider tear downs or rethink the space entirely, like the mixed-use facility that one developer plans to build out of what used to be the Granite Run Mall in Pennsylvania.¹²
8. Mobile commerce, or “m-commerce,” will take center stage. Most online shoppers start transactions on one device and end on another (or in-store). In 2017, brands will focus more on how to use a mix of delivery channels to give customers the right messages at the right times to generate the best results. This is an increasing priority for many brands, especially as mobile is on track to reach a 70% share of global e-commerce (in contrast, it was 40% in 2015).¹³ There is a lot more to m-commerce than a “buy” button. Retailers will have to completely re-imagine their engagement platforms to appeal to these customers on the move, including marketing, social media, curating goods and services, sales through delivery, and follow up.
9. Specialty stores find their niche. 2017 could be a big year for niche specialty retailers, for both new and existing brands. Larger retailers might look for opportunities to acquire a specialty retailer to broaden their offerings, or take advantage of the specialty store’s online sales and marketing knowledge, like Wal-Mart is doing with Moosejaw.¹⁴ Or they might focus on creating more shop-within-a-shop opportunities to leverage niche markets and strategies. This shift could result in smaller, yet smarter stores with increased personalization and knowledgeable sales associates.
10. Subscription services make a splash. As brick and mortar shopping becomes less attractive, more retailers may try to entice consumers with opportunities to receive regular shipments of clothing and accessories to try on, along with a generous return policy. Subscription services have been around, but 2017 may be the year they truly gain traction. These programs actually have the potential to increase margins for retailers because the value proposition is more opaque (i.e., the customer cannot easily compare to prices at other stores and within the store). We expect to see more established specialty apparel retailers launch subscription-based services this year.

It may look like we’re in for a roller-coaster year. But uncertainty also means anything can happen, so 2017 could really shake things up and even create fresh opportunities for retailers. Stay tuned.