U.S. retail is under stress. While it seems that this has been in the headlines more and more lately, the fact is that consistent disruption by new entrants has been the story of U.S. retail for decades, with the rise and fall of catalog showrooms, big-box retailers, department stores, and, more recently, mall-based specialty retailers.
U.S. retail square footage per capita already far exceeds that of all other countries. According to retailindustry.about.com, the U.S. has more than twice the square footage of selling space per capita as the next country on the list. The U.S. has 46.5 square feet of selling space per capita, followed by the U.K. at 23, Canada at 13, Australia at 6.5, and Mexico at 1.5. This fact alone suggests that a rationalization of retail space is long overdue.
Well-known retail specialty chains such as Sports Authority, Deb Shops, Delias, Cache, and Body Central have liquidated over the past several years. According to about.com, more than 6,000 store closings were announced in 2015. In 2016, retailers that included Macy’s, Kmart/Wal-Mart, Aéropostale, and even iconic retailer Ralph Lauren announced that they were closing some of their stores.
Industry observers blame the recent spate of Chapter 7 liquidations and massive store closings across a variety of retail channels on the rise of Amazon and the growth of e-commerce, exacerbated by the shopping habits of millennials. While this is undeniably true, it is not the full story. There are other forces at work that are fueling the current disruption among U.S. retailers.
Retail has become global, and this article examines the combined effect of changing consumer attitudes and the effect of fast fashion international retailers on the U.S. retail landscape
The New Normal
The Great Recession of 2008 created a new normal for consumers and retailers. According to consumer research by AlixPartners, there has been a fundamental reset in the way that American consumers expect to spend and save. This new normal transcends demographics, gender, and income. Consumers have changed their spending habits, and there is a significant drive to value that is no longer temporary.
Consumers are willing to cede service, experience, and, to some degree, quality to save money. While great product remains the most important driver for consumers in choosing where to shop, price is now a close second, replacing service for many retailers. This is forcing retailers to re-examine their reliance on category dominance or past positioning to determine when consumers want high quality and when product only needs to be “good enough.”
The rise of fast fashion apparel retailers and the multiplicity of choices made available by Amazon and other e-tailers have forced retailers that want to continue to be relevant to answer these questions and determine where to target specific improvement efforts and how to allocate resources to what really matters.
Research on the Manhattan retail market five years ago showed that the retail landscape had changed dramatically and had become a microcosm for more broadly applicable retail trends.
Shopping areas that had targeted a specific demographic and that traditionally had been geographically segregated now had mixtures of stores. Fifth Avenue, the most expensive retail street in the world with rents above $3,000 per foot, had been a carriage trade location. Now, it reflected the convergence of luxury, bridge, specialty, and fast fashion retailers. A new dynamic shopping experience was emerging.
SoHo had also reflected that convergence trend, with Bloomingdale’s sitting side by side with luxury boutiques, fast fashion, and specialty retailers. Times Square, the theater/entertainment district, saw an influx of huge flagship retailers for specialty brands, from American Eagle to H&M and Sephora.
Lower clothing prices, made possible by competitive pressures and the introduction of inexpensive fashionable clothing offered by mass merchandisers that sourced in foreign countries that have inexpensive labor, made the latest fashions available to all.
Shoppers are increasingly willing to shop multiple retail segments through multiple points of access. Customers have changed how and where they shop. The customer who at one time was loyal to Saks or Neiman Marcus now will also shop at Zara, H&M, or Uniqlo to complete her look.
The in-store shopping experience now must be even more compelling to lure shoppers away from their desktops or mobile devices. Retailers have become or are becoming omnichannel in an effort to stay competitive.
Attracted by the world’s largest consumer market, foreign chains are expanding into the U.S. as a key component of their global strategy. They view the city, with its huge metro market supplemented by 58 million tourists in 2015, as the launching pad for their U.S. invasion, and they have all established a beachhead in Manhattan with global flagship stores, both in terms of store size and capital investment, as part of their strategy. New York is a showcase to the world and allows global retailers to create brand awareness cost-effectively.
Before this invasion by international retailers, retail had been dominated by U.S. chains focused on the North American market, except in the luxury/designer segment. This international retail invasion is altering the dynamics of U.S. retail (Figure 1).
These international retailers are highly profitable and have strong balance sheets with little or no debt. Strong cash flow allows them to finance expansion, invest heavily in infrastructure, and play for the long term in developing new markets.
They originated in smaller countries whose populations cannot sustain seemingly unlimited growth as the U.S. can. To continue to grow, these retailers had to look at how to expand internationally and to create brands that resonate and are accepted in multiple markets. They understand that they must adapt to the marketplaces in which they trade, while maintaining their brand essence.
While most of the major international retail chains have been focused on apparel, the first major player to enter the U.S. and have a major impact was furniture and home furnishings retailer Ikea in 1985. Ikea and the chains that have followed, however, all share the following common characteristics:
Beginning in the mid-1980s, international retailers started to enter the U.S. market in earnest as part of their global expansion strategies. As the largest consumer market in the world, the U.S. represented a market that offered almost unlimited potential for growth, once these companies adapted their products and go-to-market strategies to U.S. consumers’ tastes and customs.
Ikea. Ikea was the first to expand into the U.S., with a revolutionary take on clean, modern furniture that was taking the world by storm. Currently the second-largest furniture retailer in the U.S., with $2.5 billion in sales through 42 stores, the Netherlands-based retailer’s U.S. sales represent 15 percent of its global total. Ikea is now second only to Ashley Furniture’s $3.1 billion in sales through 493 stores. Highly profitable worldwide, Ikea’s 2014 annual report claimed profits of $3.79 billion on $33.34 billion in sales.
Ikea established itself in the U.S. market by offering a supermarket warehouse approach to home furnishing, innovative marketing, a cash-and-carry approach for flat-pack products requiring assembly, a unique store experience, and value pricing. Its stores are chic and modern, and feature a restaurant and a play area for children. Its merchandise is exhibited in room settings to drive multiple sales. Ikea’s model continues to evolve as the company responds to consumer interest in delivery and assembly services and higher-end products.
Who’s been hurt? Wickes Furniture, Seaman’s Furniture, and Levitz Furniture are all no longer in business.
Zara. Launched in New York City in 1989, Zara is the largest division of parent Inditex. Based in Spain, Inditex is currently the largest specialty retailer in the world, with 7,013 stores in 88 markets. Sales in 2015 were $22.7 billion and net profit was $3.1 billion, according to Inditex’s 2015 annual report. Zara currently operates 69 stores in the U.S.
Zara captivated American consumers with a combination of fashion-forward, off-the-runway style, and great quality at affordable prices. Its customer-centric brand essence captivated the new consumer who demanded high-quality, value-priced fashion. Zara’s pricing resulted from its efficient and low-cost supply chain and its laser-like focus on wringing out cost efficiencies throughout the business.
New merchandise is delivered to stores every two weeks, which brings customers back to Zara stores more frequently than to their U.S.-based competition and lowers markdown liability. The store experience is a reflection of Zara’s brand, with the clean, modern aesthetic of its product reflected in the store design and visuals. Zara demonstrated its major commitment to the New York market with its global flagship in Manhattan on Fifth Avenue and 53rd Street. The company has committed to omnichannel growth as part of a global initiative, with e-commerce rolling out in all categories in the U.S.
Zara’s growth has impacted fashion retailers across all channels, from high-end department stores like Bloomingdale’s and Saks to specialty retailers like Express, The Limited, and Guess.
H&M. Based in Sweden, H&M is the largest brand owned by Hennes & Mauritz. H&M generated total 2015 sales of $24 billion, operating 3,924 stores in 61 markets, according to its 2015 annual report. The company was highly profitable, with a 14.9 percent operating margin and 38.1 percent return on equity (ROE). The company has no debt and finances all expansion and capital expenditures internally.
H&M’s 415 U.S. stores generated nearly $2.9 billion in 2015 sales, making the U.S. the company’s second-largest market after Germany, according to the company’s 2015 annual report. Strategically, the U.S. is the focus of a rapid and aggressive expansion strategy that calls for 10 to 15 percent growth per year.
H&M is now one of the largest specialty retailers in America. Its dynamic growth is an outgrowth of its strong brand message—fashion and quality, with a European twist, at the best price. This value story is driven by an efficient sourcing model, with all production outsourced to keep costs low.
H&M’s distinctive store design creates a unique experience. The focus is on the clothes but with a relaxed, fun approach to fashion. Innovative, highly visible marketing campaigns promote the excitement of fashion, and the company’s collaboration with famous designers for capsule collections reinforces H&M’s fashion leadership and drives traffic. H&M has a distinctive corporate culture with values around sustainability, human rights, and the environment. Innovation is part of the culture, with such diverse initiatives as its long-term commitment to investment in information technology and digitalization to drive efficiencies and sales, as well as garment collecting for recycling.
This continuous drive to innovate is reflected in the new Fifth Avenue flagship store, which offers full concierge service, cosmetics, the first Mama maternity shop in the U.S., a plus-size collection, and the company’s first in-store home collection. H&M is fueling its U.S. growth with a commitment to omnichannel growth and the broadening of its product range. Retailers such as Aéropostale, Old Navy, Abercrombie & Fitch, Wet Seal, Express, Macy’s, and Kohl’s have all felt the fallout from H&M’s continued penetration of the U.S. market.
Uniqlo. Based in Japan, Uniqlo is the flagship brand of Fast Retailing, accounting for 82 percent of the company’s total 2015 revenue of $13.8 billion, according to the company’s 2015 annual report. Fast Retailing operates 1,700 stores in 17 countries, including 46 stores in the U.S.
Uniqlo opened its global flagship store in Manhattan on Fifth Avenue, and its innovative store design is world-renowned. The company’s very ambitious goal is to achieve $50 billion in U.S. sales. Utilizing smaller suburban stores, the company’s initial efforts have fallen short, and Fast Retailing has adjusted its growth strategy to focus on opening large flagship stores in prime locations in major cities like New York. Long term, the strategy is to continue to invest and become a dominant player in the U.S., and Fast Retailing has the cash flow to drive this strategy.
Uniqlo has captured the imagination and loyalty of American shoppers with its brand message of casual clothing made for all. High sales productivity is achieved through a combination of a wide variety of high-quality, value-priced products; in-depth inventory featuring a wide color selection; and the ability to promote sharp prices to drive traffic. Uniqlo’s innovative store design is expressive of the brand, with clean, bright interiors; modern, massive product displays; and interactive elements to engage consumers.
Despite its low prices, Uniqlo delivers high-quality products that often feature technical fabric innovation and offers a level of customer service more commonly associated with high-end specialty retailers. There has been a strong push for digital omnichannel growth since 2012, and that is accelerating. Uniqlo is taking share from a variety of retailers up and down the value chain, such as Gap, Old Navy, American Apparel, Aéropostale, and Macy’s. Uniqlo is in the U.S. market for the long haul.
Topshop. Based in the U.K., this trendy apparel chain is a division of Arcadia. Topshop achieved profits of $387 million on global sales of $3 billion in 2015, according to Arcadia Group’s 2015 financial results. Topshop operates 440 stores worldwide.
The chain launched in the U.S. in 2006 but has taken a different approach than other international retailers to penetrating the U.S. market. Topshop has only nine freestanding U.S. stores but has an additional 93 locations in Nordstrom stores across the country. Its merchandise is also sold through Nordstrom.com. The strategy was to leverage the Nordstrom brand and its traffic, and has proven to be a cost-effective way to establish brand credibility and garner exposure. Not until 2014 did Topshop and Topman, its male brand, open a flagship store on Fifth Avenue in New York, its second-largest store in the world.
Topshop is capturing American consumers with up-to-the-minute, affordable style geared to fashion conscious shoppers and industry insiders. The strategy is to be first to market. It’s all about trends and not about basics.
The brand launched an exclusive athletic streetwear line called Ivy Park in 2016, partnering with Beyoncé to leverage the power of her iconic position in American culture. The stores and shop-in-shops mirror the core customer—the fashion insider—with a boutique, buzzy atmosphere. Topshop has a strong digital focus, with 1.9 million users visiting the global site weekly.
Fashion specialty retailers and department stores, such as Urban Outfitters, Anthropologie, Bebe, Macy’s, Bloomingdale’s, Saks, Express, and Abercrombie & Fitch, are feeling the effects as Topshop continues its U.S. expansion.
Primark. The most recent of the international retail invaders, Primark launched its U.S. expansion in the fall of 2015. It has now opened five megastores and had plans to expand to 10 by the fall of 2016. Founded in 1969 in Ireland, Primark is a division of Associated British Foods. With 293 stores worldwide in 10 countries throughout Europe, the company reported 2015 profits of $1 billion on $8.2 billion in sales in its annual report.
Primark is capturing America with value-priced fast fashion at prices that are 40 percent below H&M’s and 33 percent below Old Navy. Its business model takes a page from supermarket retailers by selling goods at small margin percentages. The company relies on sales velocity and high volume to generate huge profit dollars. Primark’s efficient supply chain and large unit volumes enable the company to drive down prices. Multigender and multicategory assortments include men’s, women’s, and children’s clothing; accessories; and home, giving consumers many reasons to shop.
Primark’s innovative store design, featuring large dramatic flagship locations and great visual merchandising, creates an exciting shopping experience. The marketing strategy of using strong key items and classification promotions is designed to drive volume and multiple sales. Primark’s channel strategy is store-based only and, as such, is differentiated from its international competitors. It offers no e-commerce due to low average unit prices and its desire to use its stores to build average unit and ticket sales and maximize store volumes to take advantage of operating leverage.
Who will Primark begin to hurt in U.S. as it continues to expand? Its combination of fast fashion and super low prices with a great store experience will likely hurt retailers across the board, from Aéropostale, Old Navy, Target, Kohl’s, Macy’s, JCPenney, American Apparel to even H&M and Forever 21. This will be a fascinating march through the American retail landscape.
Adapting to New Realities
Retail-focused international brands will continue to gain market share and outpace their U.S.-based competition. This is reflected in their current market capitalization, and this trend is unlikely to change unless the U.S. verticals and large department store/mass retailers can adapt to the new realities of retail (Figure 2).
U.S. retailers must recognize that competition in the U.S. market is now global. The face of U.S. retail is already changing as international retailers accelerate their rollout of stores and e-commerce platforms in the largest consumer market in the world. These global retailers are here to stay, and they intend to become dominant players in the U.S.
These companies have articulated this growth strategy in their communications to shareholders. Supported by the capital on their balance sheets and free cash flow, they have the means to make this strategy a reality quickly. U.S. retailers have been ignoring this to their peril, with resultant liquidations and massive closing of stores.
New York is in the forefront of this growth strategy. The huge number of tourists—46 million of its 58 million visitors in 2015 were domestic tourists—enable these brands to attract brand recognition before expanding their footprint across the U.S.
To effectively compete going forward, U.S.-based retailers must:
Vertical brands should consider partnering where appropriate with other nonvertical retailers and expand their footprint to minimize lease liabilities. J. Crew, Bonobos, Topshop, and Warby Parker are using this approach as a vehicle for growth.
U.S. retail is now part of the global retail marketplace. Retailers who don’t respond now will find themselves part of the history of retailers who are no more.