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Feast or Famine: The Evolving Model for Retail Discounting and eDelivery


Second Quarter 2015

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by Andrew Masini, CPA, CIRA and Roberta Probber, CPA, CIRA

The Internet, innovation in business models, increased competition, and a challenging economy have brought on changes both seismic and subtle. We noted the latest challenges in the apparel industry and considered what other retailers might face similar risks. Grocers seemed particularly vulnerable.

The apparel industry, particularly retailers of apparel for young women, has seen a recent wave of high-profile bankruptcies. In 2014, apparel companies including Dots, Coldwater Creek, Ashley Stewart, Delia’s and Love Culture each filed for bankruptcy. The trend appears to be continuing into 2015. Wet Seal filed in January and Karmaloop filed in March, indicating that apparel retailers continue to find their profitability challenged. In September 2014, American Apparel hired a turnaround expert as managing director after four years of operating losses.

To be sure, these developments are not signaling a complete collapse of the industry. According to Richard W. Schurig, a partner in CohnReznick’s Retail and Consumer Products Practice:

“Retailers combining a strong brand with physical store locations appear poised to remain competitive as the teen segment still prefers to shop in-store for their fashion needs. Further, millennials desire individuality over logos – companies that promote a variety of styles and can deliver an ever-changing roster of products will continue to lure teens into stores and websites.”

So, exactly what has been separating the strong from the weak in the apparel business? The industry has been exposed to the same stresses that have afflicted the broader economy. Unemployment, uncertainty, and less disposable income have taken their collective toll on a wide array of sectors. However, for the apparel industry, these conditions have created a widespread appeal for the price points that discount department stores offer, expanding their market share in that space. Simultaneously, young consumers have become increasingly frugal. They are getting more use out of the clothes already in their closets, buying fewer additional and replacement items, and exploring consignment shops. Brick and mortar stores catering to young consumers have also lost market share to internet-based retailers. These e-tailers have the ability to offer reduced pricing and added convenience to a younger generation of buyers who grew up shopping on-line.

The incursion of ecommerce and discount department stores is not surprising. Given the stymied economy and the frenetic lifestyle of its clientele, the apparel industry was an easy target. Disruptive technologies - such as Zeekit, which will allow the consumer to try on clothes virtually, and Clothes Horse, Verisize, and TrueFit, all of which provide sizing guidance - will make the competition even fiercer. This raises the question – which other industries are likely to lose market share to discount department stores and ecommerce?

Will Grocery Check Out Next?

Grocers are a likely target. The space allotted to grocery products on the shelves of low-cost retailers such as Walmart, Target, and Kmart, and pharmacy chains such as CVS and Walgreens, has increased over the last several years. Discounters traditionally offer fewer brands and variations of dry goods and commodity drinks, such as milk and juices. However, since these are commoditized items, the limited variety matters little. Discounters have a distinct advantage in marketing their lower prices for the long-term and, consequently, getting shoppers to seek out these groceries in their aisles. With regard to fresh produce, meats, and fish, discounters such as Walmart and Target have been working to establish a reputation for consistent quality. As this reputation is realized, commoditization and price discounting will work in their favor.

Online grocery shopping is also making inroads. Peapod, Amazon, and Walmart are all competing for online, same day food delivery customers. Instacart, founded in 2012, offers same-day grocery delivery from local stores and was the number one company on Forbes’ America’s Most Promising Companies 2015 list. In January 2015, the company announced a $220 million Series C funding round that valued the company at more than $2 billion. Six months ago, they raised $44 million.

Traditional grocery chains that delve into and dominate these online offerings do much to defend their total market share against purely internet players such as Amazon. Instacart recently launched an agreement with A&P to deliver the SuperFresh, a full product line, to consumers throughout the Philadelphia and Montgomery County area in Pennsylvania. Peapod has partnered with Stop & Shop and Giant Food. ShopRite identifies its ShopRite from Home service with specific stores so the local sourcing of produce for your order is highlighted.

Brick-and-mortar grocers can offer “click-and-collect” capabilities as well as home delivery services to emphasize local freshness and local accountability as components of their value proposition, whereas, Amazon.com, which offers e-grocery services, cannot easily establish itself as having local accountability. The eGrocery model, built on the perception of freshness and accountability, demands an affiliation with a local grocer and therefore favors traditional grocers. To the extent that traditional grocers can continue to dominate offerings such as Instacart, Peapod and ShopRite from Home, they will stave off losses attributed to ecommerce channels.

Traditional grocers appear to be vulnerable to a strong incursion by discount retailers. The threatened e-commerce incursion has been somewhat slower to develop. In fact, online delivery services’ reliance on traditional grocery stores may boost sales in the short run. Traditional grocers only stand to lose the in-store impulse purchase which may have a higher margin than commodity groceries. All-in-all, traditional grocers may have some time before they experience the dual incursion that has hit the apparel industry. Nevertheless, due to the discount department store threat, we would not be surprised to see consolidation among the traditional grocers.

Main Dish or Leftover – A Grocer’s Guide to Surviving Consolidation

With a business to run and razor thin margins, grocers often overlook a few simple measurements and indicators that can be the difference between thriving and bankruptcy. Identifying and responding to early signals is essential – grocers should always be cognizant of cost of capital and debt coverage ratios with respect to competitors. Further, an increase in the cost of acquiring shoppers may signal that a market is saturated and that the location or channel has reached the point of diminishing returns.

Access A New Grocery List: Checking Off Items in the Win Column to see how well-positioned your stores are in light of today’s turbulent market.

Contact

For more information, please contact Andrew Masini, senior manager, at andrew.masini@cohnreznick.com or 732-635-3137, or Roberta Probber, manager, at roberta.probber@cohnreznick.com or 732-635-3214.


This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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