2020 outlook: Consumer discretionary

Retailers investing in consumer-facing technologies will likely leave their competition behind.

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Key takeaways

  • As consumer expectations have risen, companies making investments in technology have been rewarded with better sales margins.
  • Retailers are using technology to drive better inventory management, personalized in-store consumer experiences, and more.
  • Technology spending should remain a major driver of stock performance in the sector in coming years.

There is significant divergence in the retail industry between the "haves" and "have nots" as it relates to technology—and the gap between the 2 is widening. Consumer demands and expectations continue to rise—sometimes at warp speed—and companies need to respond rapidly. This means the cost of doing business is also rising (including both hard costs and the associated labor and other expenses related to technology, logistics, and other capabilities). This trend is particularly striking in retailing, where the overall ratio of capital spending (capex) to sales has increased over the past few years, underscoring companies' need to spend in order to grow their margins. While not all retailers are keeping pace, companies making the necessary investment in technology have been rewarded with better sales margins.

Select industries stand to benefit disproportionately from the trend

As the popularity of the buy-online-pick-up-in-store model grows, so too does the need for more sophisticated and expensive technology for inventory management in order to match online orders with products available across a retailer's fleet of locations—all in real time. Radio-frequency identification (RFID) technology using radio waves to track tags or smart labels allows retailers to improve the accuracy of their inventory and meet demand for an item. It can also capture in-store traffic patterns, giving retailers the ability to generate data from how people, products, and equipment move about the store. For example, the RFID technology could pick up on an item that shoppers repeatedly take into the fitting room but rarely buy, revealing a possible garment flaw. The technology can also assist at the checkout by automatically recognizing items in a cart, improving checkout speed and minimizing theft.

Personalization is another key consumer expectation, and some retailers have met this demand with mobile apps featuring customized and location-based offers and suggestions.

Elsewhere, some retailers have turned to automation to fill high-turnover positions and cut costs amid rising wages. Robots can unload trucks, clean floors, and check for out-of-stock items. Smart technology on store and warehouse shelves can keep track of inventory by weight.

In my view, technology spending will remain a major driver of stock performance in the consumer discretionary sector in the coming years. My team remains laser-focused on those companies with what we consider significant opportunities, and we also are working to identify the technology laggards we plan to avoid.

Next steps to consider

Research the Fidelity® Select Consumer Discretionary Portfolio (FSCPX)

Get the details on the lineup of mutual funds.

Go back to the full 2020 sector outlook.

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