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Have you been to the mall lately?

Foot traffic is declining. Consider retail companies finding ways to attract shoppers.

  • By Peter Dixon, Sector Portfolio Manager,
  • Fidelity Asset Management
  • – 03/13/2014
  • Consumer Discretionary Sector
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During the past few years, foot traffic in retail shopping malls has been declining (see graphic, below right), even though overall retail sales have increased1 likely as a result of rising residential home prices, a recovery in the financial markets, steady gains in employment, and modest wage growth. What is driving this contradiction, and why haven’t shopping malls been bustling with activity?

There are a variety of factors. Some argue that inclement or unseasonable weather patterns have deterred shoppers. Others point to macroeconomic uncertainties. And 2013’s abbreviated holiday shopping season, with fewer calendar days falling between Thanksgiving and New Year’s Day, provides another explanation.

In my view, although these may all be contributing factors, another phenomenon—a significant shift in consumer behavior—is likely the most significant factor. More American consumers are busier than ever and have less free time to shop in stores. Smartphones, tablets, conference calls, email, social networking, and video streaming all help to provide more efficient communication, but at the same time contribute to the limited capacity of the U.S. consumer for other endeavors. More and more, consumer preferences are shifting toward what can be done quickly and efficiently, and, ideally, what can be done from home or on the road when it comes to shopping.

The growth of mobile devices and the increased accessibility of online pricing have helped fuel increased Web sales. Through the first three quarters of 2013, e-commerce sales increased by 17.4% over the same period in 2012.2 Today, consumers increasingly turn to their smartphones and tablets to comparison shop on multiple sites simultaneously, rather than travel from store to store for the lowest prices. Purchases can often be delivered within a day or two, at either a nominal shipping expense or free of charge. Further, merchandise returns have been streamlined, as many e-commerce retailers send prepaid return shipping labels to customers with their purchases, removing yet another obstacle to shopping online.

For traditional brick-and-mortar retailers, declining mall traffic poses a significant obstacle. During the past several months, more retailers have reported declines in customer visits, while fewer have boasted gains. Despite this headwind, some retailers—or retail categories—have been able to successfully motivate consumers to visit their stores. For example:

  • Retail destinations catering to a healthy lifestyle. This segment includes grocery stores with a focus on organic/ whole food offerings, vitamin and supplement mall and off-mall specialty stores, and sporting goods retailers specializing in athletics and fitness.
  • Housing-related retailers. Amid a sustained recovery in U.S. housing, many consumers have been shopping at retail destinations for products to furnish new homes, while others are spending more to renovate and update existing homes.3
  • Warehouse clubs with a varying general merchandise offering. Certain members-only warehouse clubs have effectively driven customers to their stores with a strong value proposition as well as an exciting and consistently evolving assortment of goods. This approach encourages consumers to make repeat trips, eager to explore new products.
  • Fast casual restaurants. Typically offering counter service, these restaurants allow people with limited leisure time to obtain quality food quickly. Many busy consumers prefer to “grab and go” rather than sit down for a lengthy meal.
  • Dollar stores and off-price retailers. Emphasizing value, more consumers have attended these stores for convenience purchases and savings opportunities spanning an everchanging product assortment.4
  • “Fast-fashion” retailers. With frequent shipments of new fashion styles in small quantities, these apparel-store chains appear to have succeeded in encouraging customers to visit often to obtain the latest styles featured on runways and in popular magazines.5

Investment implications

State of the consumer sector

Consumer discretionary stocks may be positioned to benefit from several market dynamics. Read the article.

I believe that among consumers there has been an accelerating movement toward convenience, and I think this is more of a permanent structural shift than a temporary phenomenon. Many brick-and-mortar retailers face the challenge of a recent decline in store traffic and acceleration in online purchases by consumers. In response, some store chains have advanced their e-commerce capabilities in order to offset declining store traffic by driving online and mobile sales. Other retailers have been positioned well to capitalize on cyclical improvement in certain industries (e.g., housing, etc.) or lifestyle preferences (organic food chains, fast-fashion retailers), where more consumers are likely to make in-store purchases.

Going forward, retailers that remain focused on changes in consumer preferences, and that inspire and excite customers to visit their stores may be well positioned to generate compelling sales and earnings in the coming year, and their stocks may perform accordingly.

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Endnotes
1. Total U.S. retail sales increased by 4.0% during Q4 2013 over the same period in 2012. U.S. retail sales have not posted a quarterly decline since Q3 2009. Source: U.S. Census Bureau.
2. Source: U.S. Census Bureau.
3. U.S. retail sales of furniture, furnishings, electronics, appliances, building materials, and garden equipment and supply dealers and stores increased by 4.4% in 2013, following positive year-over-year growth in 2012, 2011, and 2010. Source: Bureau of Economic Analysis.
4. U.S. retail sales of all other general merchandise stores (which captures dollar stores and off-price retailers) increased by 3.3% year over year through November 2013. Source: U.S. Census Bureau.
5. U.S. retail sales of fast fashion retailers increased by 4.8% in 2013 over 2012. Source: Euromonitor, through December 2013.
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