Enough With The Excuses!

As an investor, few tactics employed by company management teams annoy me more than making excuses for their failures. Unfortunately, this seems to be the norm rather than the exception in retailing these days. 

If you were to listen to some of the CEOs of major retailers out there, you would think that we were still stuck in a horrific recession where consumers are stashing their cash away and refusing to spend a dime. This type of rhetoric has been going on since the financial crisis, but the problem is that consumer data has done nothing but improve slowly over time. In many ways, consumers are better off today than before the crisis hit, which is a big deal for our economy since its health is dominated by consumer spending.

Bloomberg ran a great article yesterday on this very subject and pointed to a number of companies who continually cite a “weak consumer” as the reason why they continue to miss their numbers. Here is an excerpt that quotes several CEOs from leading brick and mortar retailers:

For Target Chief Executive Officer Brian Cornell, it was the “challenges we are facing in a difficult retail environment.” Gap sees it the environment as “tough,” said CEO Art Peck, while Abercrombie & Fitch Chairman Arthur Martinez has experienced the same conditions as “challenging.” The phrase has been adopted by dollar-store chains (Dollar Tree CEO Bob Sasser: “It is a fairly challenging retail environment”) and the parent company of Men’s Wearhouse (Tailored Brands CEO Doug Ewert: “The increasingly uncertain consumer and retail environment”). Barnes & Noble CEO Len Riggio has minced no words. “The retail environment is not good at this moment,” he said. “In fact, it’s terrible.”

When consumer confidence sits at all-time highs and unemployment sits at all-time lows with wage inflation creeping up, commentary like this is laughable. Just look at the data out there. Consumers are spending. There’s no question they are spending. The problem for these CEOs is that they just are not spending in their stores.

To me, it seems pretty obvious that many retailers out there are poorly positioned to compete in this new world of online shopping, which has exploded over the years (per the chart below).

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I believe this shift to online shopping has been so dramatic for three primary reasons.

  1. Price: Online merchants don’t have to pay insane rents and hire expensive labor, so they do not have to charge as much for the same good to be profitable. For example, warehouse space costs a tiny fraction of those fancy stores on 5th Avenue in New York City who pay an average $3,500 per square foot in rent.
  2. Convenience: Why lug heavy items from a store to your home when it can be shipped? Being a New Yorker who does not own a car, I will ship anything and everything I can to avoid carrying heavy bags all over the city.
  3. Comfort: The move to online spending was a slow start because it took consumers some time to become comfortable with the idea of buying from a web browser. Theft, fraud, and other concerns have gone away over the years as large online retailers have gained the credibility necessary to compete with traditional brick and mortar.

Case in point: My wife is remodeling our kitchen at the moment. We desperately needed a new sink and searched all over the city for a replacement that did not cost a fortune. After wasting an entire Saturday, we finally found one that fit our budget and time constraints. The problem is the store then wanted to charge us tax and over $200 to ship the sink to our apartment. In fact, each store we visited had a near similar policy.

Being incredibly cheap, I could not fathom wasting money like that so I pulled up the web browser on my iPhone (in the store) and found the exact same sink online for 30% cheaper with no tax, free shipping, and a return policy. Best of all it could be delivered in 3 business days versus this store’s shipping time of 2 weeks and no returns accepted. Before we even left the store, I clicked a single button on the website and confirmed that it would be there by Wednesday of the following week.

That’s not to say that traditional retail is doomed. Malls will continue to be a destination for families and friends, but the winners and losers will be defined by how well they can compete against the online shopping threat. For example, buying batteries online is easy whereas custom jewelry is tough to sell over the internet.

So when I hear CEOs whining about a weak consumer environment, I must assume that they are either (1) blind or ignorant to the economic data that is being released weekly, or (2) lazy and unwilling to accept the fact that they need to adapt to survive.

The bottom line is that the consumer is strong and spending is robust, but the way the consumer is spending money is changing dramatically. Don’t let these CEO excuses make you think otherwise.

Take five minutes to read the full article from Bloomberg. It’s worth it.

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