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Retail Trends

Top 100 Retailers 2012

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The nation’s retail power players

The retail industry is a many-splintered thing, with the variations clearly showcased in the annual STORES Top 100 Retailers report.

Big-box retailers, from No. 1 Walmart to No. 27 Meijer, are shrinking store sizes, even as other operators — notably No. 28 Dollar General and No. 48 Menard — are opening larger units.

Drug store chains Walgreen (4) and CVS Caremark (7) continue to expand their food offerings, while supermarket operators from No. 2 Kroger to Whole Foods Market (37) are emphasizing health and nutrition. No. 3 Target wants nothing to do with Kindle but is expanding its Apple offerings, while No. 60 Dollar Tree is adding prescription counters in some locations.

Several Top 100 performers are without peers on the chart:

  • Amazon.com (15), the e-commerce pioneer and dominant online merchant
  • Toys “R” Us (46), popularizer and last survivor of toy superstore retailing
  • Army Air Force Exchange Service (47), operating in more retail segments than any other Top 100 company
  • GameStop (59), where console-based video games are the stock-in-trade
  • QVC (70), with its multi-channel home shopping model
  • Tractor Supply Co. (81) and its chain of ranch and farm stores
  • Michaels (90), the hobby and crafts specialist.

Retailing strategies are as diverse as the business models: Urban planning vs. sites outside of town; shopping centers vs. thinking outside the mall altogether; bricks-and-mortar vs. greater investment in e- and m-commerce; staying focused on the domestic market vs. looking for opportunities abroad.

Amazon’s unique business model is at once audacious and inimitable — audacious because margins and profits are not immediate priorities to senior management nor, apparently, shareholders; inimitable because the opportunity to define and dominate an entire retail channel doesn’t often present itself.

Amazon is empire-building online in much the same way Walmart established itself as the world’s largest physical retailer. Walmart grew through logistics expertise and an everyday low-price (EDLP) policy.

The unarticulated EDLP strategy Amazon follows keeps consumers mindful that items are probably cheaper online. To be sure, Amazon has some advantages over bricks-and-mortar — most notably, the lack of overhead associated with building, stocking, staffing and maintaining stores. But Amazon also sells Kindle Fire at or near cost, eats shipping costs and, by some estimates, loses money on every loyal Prime customer, just to keep people shopping at Amazon.com.

Last holiday shopping season, Amazon raised the profile of “showrooming,” encouraging consumers to use its Price Check smartphone app to inspect items on their gift lists in stores, then purchase them at lower cost online — with a 5 percent bonus discount as an incentive.

Jeffrey Bezos, Amazon.com’s founder, is running the show with a long-term focus he articulated in his shareholder letter after the company’s first public stock offering 15 years ago. His emphasis, then and now, is on market share. “We believe that a fundamental measure of our success will be the shareholder value we create over the long term,” Bezos wrote. “This value will be a direct result of our ability to extend and solidify our current market leadership position.”

Kantar Retail forecasts Amazon.com will reach $81 billion in retail sales in five years. “Amazon redefined broad assortment at low price, much like Walmart once did,” says Anne Zybowski, retail insights director for Kantar Retail.

Comparing the two, Zybowski expects Walmart to add about $60 million in sales over the next five years (about 3 percent a year), in contrast to Amazon’s annualized growth rate in the high teens.

Zybowski doesn’t see retailing as a channel vs. channel proposition: Rather, she sees successful retailers as those who offer the best integrated brand propositions. “Bricks-and-mortar retailers should realize it’s a shopper trend, not an Amazon trend,” she says.

Other one-of-a-kind retailers on the Top 100 chart are dominant, but most do not enjoy Amazon’s competitive advantages. Toys “R” Us was the first to open big-box stores with a narrowly edited deep merchandise assortment: Competition came not from other toy sellers, but rather general merchandise retailers like Walmart and Costco. After running into operating difficulties a decade ago, Toys “R” Us is controlled by venture capitalists who have expressed interest in taking the company public again.

Right behind Toys “R” Us on the list is AAFES, which operates base and post exchanges for the U.S. Army and Air Force. The operations include almost every type of retail format, from general merchandise stores to fuel stations and e-commerce in more than 3,100 locations in all 50 states, five U.S. territories and 30 countries around the world, including war zones.

GameStop built itself into a global giant in part by buying and re-selling used video games and hardware built around PlayStation, Wii and Xbox, and began to deal with PC- and Mac-based games within the last year. The question is, will GameStop go the way of music stores and movie rental dealers, where physical products were displaced by digital downloads? Or will it hang on to a bricks-and-mortar presence while adopting technology that allows it to compete with digital rivals?

At the end of 2011 came news that video game and accessory sales were approximately one-quarter below prior-year holiday-selling levels, according to data tracker NPD Group. The economy may have had something to do with it, but so did the fact that Sony, Nintendo and Microsoft game consoles haven’t seen improved versions in at least five years.

GameStop is planning for tomorrow, says CEO J. Paul Raines. “Are we paralyzed in fear that our business model isn’t working? Not at all,” Raines says. The retailer has moved into downloadable games and has expanded its used hardware market to include iPods and iPhones, an area where Raines expects growth. “We’re on a mission and you can’t accuse us of not driving a heck of a lot of change,” he says.

Raines’ enthusiasm notwithstanding, GameStop reported total sales and comparable store sales declined by about 12 percent in the first three months of the current fiscal year. The earnings drop (about 10 percent) was less severe. One bright spot: Digital receipts rose 23 percent over last year’s first quarter figure.

QVC reaches about 100 million U.S. households and has moved vigorously into e-commerce; 36 percent of its U.S. sales were online last year. While some of the goods are recycled from TV broadcasts, at times as much as half the goods purchased online had not been previously shown on air.

Home products, accessories (including beauty) and electronics were strong sellers for QVC in 2011, helping raise revenue by 4 percent. QVC’s parent, Liberty Interactive, also owns a large stake in rival home shopping retailer HSN, whose $3.2 billion sales last year just missed making the cut for the Top 100 Retailers.

Tractor Supply Co., which began as a Depression-era mail order tractor parts business, has more than 1,100 stores in 44 states. As part of its corporate plan to expand its store base by 8 percent annually, the company opened 33 stores in the first quarter of this year, up from 26 stores opened in last year’s first quarter.

Thanks to the mild winter, revenues in the first quarter rose 22 percent over the prior year’s comparable period, giving the company its first-ever billion-dollar sales quarter at the start of a fiscal year. The steep markdowns the retailer took on winter merchandise did erode gross margin, however.

No. 77 Dell differs from other computer makers in that it sells direct to consumers, primarily its own brand of computers, peripherals, accessories and software. Dell did report to shareholders that consumer business declined 4 percent last year; its mobility business, however, increased revenues — largely on more unit sales — even though competition forced the company to lower merchandise prices.

Foot Locker (86) operates athletic retail stores in 23 countries, but at its core remains a shoe store: Associated garments and accessories account for only about 24 percent of total sales, and much that is sold via its Champs Sports locations or its CCS operation, catering to skateboard enthusiasts.

Among its mostly mall-based Foot Locker, Lady Foot Locker and Kids Foot Locker units, the company closed 57 more stores than it opened last year. The store closing continued this year, with Foot Locker shuttering 34 more locations in the first quarter — although it also opened 25 new locations and remodeled or relocated 53 others. The company’s financial performance in the first three months of 2012 was “outstanding,” says chairman and CEO Ken C. Hicks, as sales rose 8.7 percent and same-store sales advanced 9.7 percent.

Michaels is controlled by Blackstone Group and Bain Capital, and earlier this year filed notice of its intentions to return to public ownership, though no date for the initial public offering (IPO) was announced. Blackstone and Bain, along with Highfields Capital Partners, took over the company in 2006; since then, the retailer has added more than 160 stores to give it close to 1,100 locations in the United States and Canada. Michaels has also increased both sales and earnings in the process.

Power Players 2012

Apparel

Good or bad times in the national economy don’t seem to faze customers of TJX Companies’ Marmaxx division, including T. J. Maxx and Marshalls. The division is coming off a good year in which the top-performing merchandise categories were dresses, menswear, shoes and accessories.

The company expects to keep the ball rolling. “We are extremely pleased that our strong momentum continued into the first quarter” of 2012, says TJX CEO Carol Meyrowitz. “Consolidated comparable store sales increased 8 percent and earnings per share were up 41 percent” over last year, and there have been “significant increases in customer traffic” so far this year.

“We are convinced that we will continue to grow our customer base with our compelling values, more powerful marketing and upgraded shopping experience,” Meyrowitz says. Plans for 2012 call for adding about 85 net new stores, increasing selling space about 4 percent.

No. 2 apparel power player Gap has been struggling for a number of years and is in the midst of a campaign in North America that will see some 20 stores shuttered by the end of next year. The move has caused problems for shopping center operators like Simon Property Group, General Growth Properties and CBL & Associates, for which Gap, Banana Republic and Old Navy represent the largest specialty store tenants by rent.

Gap may be turning the corner, however: Earlier this year the company saw first-quarter numbers at least even with the same period in 2011. That was encouraging enough for the company to boost its earnings forecast for this year to $1.83 a share, higher than its original forecast of $1.80 in February.

Department Stores

Some perennial department store power players are posting rejuvenated financial performances, while others are showing the scars from battling through the recession and changes in consumers’ shopping habits.

Dillard’s posted a 24 percent earnings gain and 5 percent same-store sales growth in the first three months of this year, while Neiman Marcus extended a streak of revenue growth in the quarters leading up to the end of its fiscal year this month. Belk is riding a wave of popularity as it continues to remodel and upgrade its store base, while Nordstrom has put together a string of double-digit year-over-year sales gains.

Sears has been selling stores as it struggles with the hybridization of its catalog/general merchandise legacy and the Kmart discount store format. At J.C. Penney, things seemed to be tooling along nicely under former Apple executive Ron Johnson until Q1 figures were announced. Shares plunged, but major investor William Ackman says consumers just haven’t grasped all the new things the retailer is doing.

“It’s a difficult transition,” Ackman says. “There are some extreme couponing customers who we probably lost money on, who may not come back, but [with] the people who are focused on quality and value and ultimately product, we should do very well.”

Macy’s is using its iconic name, first-class real estate and a well-executed multi-channel strategy to reach the forefront of retailing. Growth “came from stores and online and across geography and categories of business,” says chairman and CEO Terry J. Lundgren. “We are seeing the ongoing benefit of … My Macy’s localization, omnichannel integration and associate training to enhance our customer engagement.”

Drug Stores

Major chains handle approximately half the retail prescription market in this country, according to Research and Markets, but the real power player right now in the retail drug store industry is Express Scripts, a pharmacy benefits manager (PBM). PBMs usually operate in the background, encouraging patients to use lower-priced mail-order houses to fill prescriptions.

At the end of 2011, the contract between Express Scripts and Walgreen expired after the two failed to reach an agreement on how Walgreen would be compensated for filling prescriptions of patients covered by Express Scripts’ insurance and employer clients. As a result, Walgreen has seen consumers in the Express Scripts network transfer their business elsewhere, particularly to CVS and Rite Aid. In the first quarter of 2012, CVS retail revenues grew 9.9 percent and same store sales increased 9.8 percent over prior year levels.

CVS president and CEO Larry Merlo said his team “has done an outstanding job capitalizing on the unprecedented opportunity for share gain afforded to us by the impasse between two of our industry peers” and predicted that “the longer the impasse lasts, the stickier that [newly acquired] customer is going to be. They’re going to have an opportunity to visit a CVS multiple times and begin to establish a relationship with the CVS pharmacists.”

Rite Aid’s sales are improving and operating losses have been narrowing as it benefits from the current environment. In March and April of the current fiscal year, same store sales advanced 3.3 percent as pharmacy receipts grew 3.1 percent and the number of prescriptions filled rose 3.2 percent compared with last year’s figures.

Electronics & Entertainment

Even the passing of co-founder and visionary leader Steve Jobs couldn’t slow Apple. The company’s financials have continued on their upward trajectory in the first half of the current fiscal year, with earnings nearly doubling in the second quarter. iPhone and iPad sales have softened in domestic markets, but as investor Jack Ablin, chief investment officer of Harris Private Bank in Chicago, said of the company’s second-quarter performance, “This report should erase any doubt in investors’ minds that this company can’t continue to deliver.”

Both Apple and Amazon.com, the second-largest Electronics & Entertainment Power Player retailer by sales, ring up considerable volume selling online. Apple, however, not only operates its own network of bricks-and-mortar stores; it also works with fellow Power Players like Target. In contrast, Amazon seems to be on a mission to rid the world of physical store retailing. Another non-store Power Player, QVC, also seems content to stick to its business model and co-exist with physical stores.

Radio Shack isn’t turning its back on the electronics world, but it certainly wants to avoid waging toe-to-toe battle with the likes of Apple and Amazon. Instead, the company is revisiting its roots, coaxing back the tinkerers, DIY-ers and inventors who helped build its parts-and-tools business into the country’s largest electronics chain by store count.

“I think it makes sense for them to go back and attract that customer,” says Doug Fleener, who follows the company for Dynamic Experiences Group. Still, Fleener wonders just how viable the hobby market is. “The upcoming generation has lived online all their life,” he says. “Are they going to be that” committed to the hobby?

Home Improvement

Ace Hardware has been burnishing its credentials as a neighborhood DIY destination with its first-ever fully integrated paint advertising campaign, while Menard is working out of ever-larger locations, expanding to as much as 250,000 sq. ft. in one location and building a new 235,000-sq.-ft. store.

That said, Home Depot and chief rival Lowe’s continue to dominate the national home improvement field. Warm temperatures and light winter snowfall precipitated a strong start to 2012: Consumers got an early jump on spring cleanup projects and lawn and garden chores, offsetting the reduced demand for de-icers and snow removal equipment. The momentum was such that Home Depot raised its forecast for year-end results for the current fiscal year.

“We remain positive on the sector and continue to look favorably toward prospects for Home Depot and Lowe’s,” notes Brian Nagel, who follows the industry for Oppenheimer & Co. Home Depot “represents our preferred near-term pick within home improvement retail,” he says. “With support of improving demand dynamics and given continued solid financial controls at the chains, we expect [them] to make for two of the better performing large-cap hardlines stocks over the next several quarters.”

Recent housing data including existing and new home sales, builders’ confidence and housing starts point to a strengthening housing recovery: Couple that with a continued declined in mortgage rates and the trends bode well for home improvement retailers, Nagel says.

If there is anything negative on the horizon, it could be a slower pace to the merchandising turnaround at Lowe’s. Lowe’s trimmed its year-end forecast and said it is slowing expansion plans after making a major move on the West Coast over the past couple of years. Any weakness in sales and margins at Lowe’s likely reflects “the increasingly aggressive efforts on the part of management to re-merchandise stores,” Nagel says.

Large-format value

Target is taking its fashion-powered approach to Canada, where Walmart is tweaking its everyday low-price model in anticipation of a north-of-the-border battle royale. At home, Target is playing the grocery card just about every place it can, continuing a multi-year campaign to remodel stores with expanded supermarket offerings.

Installation of the PFresh format will be completed in about two-thirds of the chain’s nearly 1,770 stores by the end of 2012; Target also unveiled 90 retrofitted locations in June. “By remodeling these stores, we bring an expanded offering of fresh food and added convenience to our guests,” says Target senior vice president of grocery Annette Miller.

Target’s food offerings are a limited assortment of what can be found in a full-service supermarket — no bulk produce, butcher or deli counter, for example — but it does get good marks for its private brands, notably those carrying the Archer Farms label. In addition, the PFresh format seems to be gaining traction with consumers, though not all industry observers are convinced Target will succeed with groceries.

“Too many consumers do not realize Target sells groceries,” says supermarket industry consultant David J. Livingston, noting that food is roughly 19 percent of store sales. “When you add in drug and pharmacy, it may be about 30 percent,” he says. “A $40 million-a-year Target is like having a $230,000-per-week grocery store.” This is well below what comparable Walmart supercenters do in this area, he says.

Taking a more optimistic stance, Carol Spieckerman of consulting firm newmarketbuilders says, “Target’s biggest opportunity for improvement is to create a more intimate shopping experience in grocery, and across the store for that matter. … If Target is to get the full benefit of those ... more frequent food-driven trips, it needs to tighten things up or forfeit its cross-the-aisle opportunity.”

Office Supply

Fifteen years ago, the Federal Trade Commission opposed Staples’ bid to acquire Office Depot, even after Staples offered to sell 63 locations to Office Max to alleviate anti-trust concerns. The FTC said at the time that the acquisition “would allow the combined firm, [with some] 1,000 superstores, to control prices for the sale of office supplies in more than 40 markets” around the United States.

By last summer, however, securities analysts were clamoring for consolidation in a retail sector battered by the recession.

“While I believe there should be consolidation, the real question is how the FTC views it, and my understanding today is that their mentality hasn’t changed at all,” Office Depot CEO Neil Austrian said at that time. “They still define the market in a very narrow way.”

A recent research note from Brian Nagel at Oppenheimer & Co. says “sales remain sluggish in all segments” of Staples’ business; North American same-store sales remain flat, and gross margins have declined. As for the three chains, Nagel writes, sales trends are “increasingly unlikely to rebound any time soon, with expectations for muted economic improvement.”

Contrary to the FTC’s view, IBISWorld research writes that competition for the home and small office supply dollar “remains high from online retailers, supercenters and warehouse clubs, forcing some operators to leave the industry in the midst of recovery.”

The segment “is in the mature stage of its lifecycle,” IBISWorld says. Through 2017, industry value added (which measures the industry’s contribution to the GDP) “is expected to decline at an average annual rate of 0.3 percent” — slower than the rate of growth for the broader U.S. economy.

Restaurants

In the quick-serve universe, it’s still McDonald’s and everybody else. The rest are not insignificant — Subway has more restaurants than does McDonald’s — but McDonald’s share of the quick-service market is about 17 percent — roughly equal to those of Subway, Starbucks, Burger King and Wendy’s combined, according to restaurant industry research firm Technomic.

McDonald’s has budgeted nearly $3 billion for expansion this year, including opening some 1,325 new locations and remodeling others as the company strives to grow sales 3 to 5 percent and achieve operating income gains of 6 to 7 percent.

Five years ago, McDonald’s owned and operated nearly a quarter of the restaurants flying its banner. But like most large franchising operators these days, McDonald’s has reduced ownership to about 19 percent of its stores. The average franchisee owns five or six units.

According to FRANdata, a service of Franchise Information Services, there are 38,390 single-unit food franchisees in the country operating 23.8 percent of franchised restaurants.

Wendy’s passed Burger King as the country’s second-largest burger chain even as it sold off Arby’s. Carrols Restaurant Group spun off Pollo Tropical and other brands in order to acquire another 278 Burger King locations. Subway plans to open another 1,200 North American locations this year; YUM! Brands’ largest Pizza Hut franchisee, publicly held NPC, acquired another 36 units and now operates nearly 1,200 across the country.

Small-format value

Dollar stores have rapidly become a real force in value retailing. Big Lots, more of a true closeout retailer than the current incarnation of dollar stores, may be starting to turn things around after acquiring the Liquidation World chain in Canada. Ironically, the recession — and the slow-paced recovery — gave 99 Cents Only Stores a new lease on life.

Fred’s has been format-fixing, trying to decide whether it is a general merchandise retailer with some pharmacy counters or a drug store with a lot of front-end merchandise. Either way, the company reported a 10.5 percent jump in earnings on a 3 percent sales rise in this year’s first quarter.

Dollar store is a misnomer for the likes of Dollar General, Family Dollar and Dollar Tree. A better description is convenience discounters, since the low unit prices are attractive enough to steal consumer shopping trips from big-box discounters. Dollar General passed the 10,000-store milestone en route to its goal of opening 625 new units this year. Chief competitor Family Dollar is cutting the ribbon on 500 new stores this year, which will give it more than 7,500 by year’s end. Dollar Tree, punctuating a report by Colliers International that there are now more dollar stores than chain drug stores in the United States, is testing a pharmacy counter at one of its Deal$ stores in South Florida.

Food has been a major factor in dollar stores’ ability to lure shoppers, as both Dollar General and Family Dollar re-tool their merchandise mixes to find more room for groceries. Both chains strive to address the so-called “food desert” issue in urban areas while repositioning themselves as “the new general store,” as Dollar General chief executive Rick Dreiling put it.

Supermarkets

The United States has entered the era of the national supermarket chain, as Safeway, Kroger and SUPERVALU have expanded into multi-regional operators while maintaining locally recognized banners.

Emerging from the pack, however, are three retailers who use the same name in every market: Whole Foods Market, Aldi and Trader Joe’s, the last just missing the power player chart because its $7.3 billion estimated sales aren’t quite 10 percent of category leader Kroger’s $77 billion. Whole Foods may not have a presence in every major market and Aldi hasn’t moved all the way west, but they do continue to grow in the face of increased competition from alternative food retailers ranging from Walmart and Costco to dollar, drug and convenience stores.

Operating in an inflationary environment where year-over-year food prices rose 6 percent, according to The Food Institute, Whole Foods and Aldi took entirely different paths in achieving double-digit sales gains. Whole Foods, which caters to affluent shoppers with its array of natural and organic offerings, did so well in the first half of its current fiscal year that gross margin increased from 35.6 percent to 36.3 percent and identical store sales increased 9 percent, the ninth consecutive quarter in which comps improved.

Aldi, the American arm of a German conglomerate that also controls Trader Joe’s, now has a presence in 31 states, operating stores much smaller than Whole Foods’ with a very limited assortment of groceries, not including the occasional television, air conditioner or other seasonal item.

 

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