The Changing Retail Landscape

In today’s changing retail landscape, an increasing number of consumers are purchasing products online. Baird sat down with Maria Watts, who leads Baird’s Retail Investment Banking effort, to discuss the challenges and opportunities companies are facing as the market shifts. She also shares her perspective on how companies have successfully balanced both an online and brick-and-mortar presence, and how this evolution is impacting valuations.

The ongoing shift to online in the retail landscape continues. Which companies are best positioned for long-term success, and which are at risk?

Businesses that are well-positioned for success have a number of different factors, starting with a strong value proposition and a clear brand image and message that resonate with consumers. From an experience standpoint, they have a great customer service model and a unique in-store or online experience that feels holistic and natural across channels.

Businesses that have a “me too” product, or that are feeling promotional pressure to the point that the brand is no longer seen as of-value are at risk. Some businesses may continue to see the vast majority of their transactions occur in a store because of the unique characteristics of the product offering. That said, businesses that haven’t contemplated or invested in any online presence are at risk because consumers now begin their search online. If there isn’t a functioning, easy-to-use website that’s accessible via desktop and mobile, the customer may not find the company or brand because of how the discovery of brands and the overall search process has changed.

What is the impact on stores that have historically relied on their brick-and-mortar presence? How have retailers successfully leveraged their brick-and-mortar presence as a benefit or advantage?

A number of years ago, there was a concern that brick-and-mortar stores would go away completely. However, many proof points show that consumers shop in different ways and want to access products and brands through multiple channels. That’s why online players like Amazon are creating book stores and companies such as Warby Parker and Rent the Runway, which started as digital businesses, are adding stores. They see the value in a real life, brick-and-mortar setting as a way to augment the online experience.

Many retailers are stuck in long-term leases with the embedded overhead and are trying to make the best of the situation by providing an in-store experience that brings out the best of the brand. Many companies are investing in their stores with increased staffing, better customer service, improved interiors and tech-enabled aspects such as mobile checkouts and virtual dressing rooms. They want to provide the best possible in-store experience so customers return. Meanwhile, other retailers are using their brick-and-mortar stores as distribution hubs for their online business, allowing consumers to buy a product online and simply pick it up fully packaged in the store. It’s an approach that adds value for the consumer by eliminating the hassle and in-store hunt. Retailers doing it right are those that take that in-store pick up and convert it into a bigger sale. How the store associate engages with the customer at the pick up can result in add-on sales if done correctly. While some customers are looking to pop in and out of a store, consumers still value the attentive service. Sales associates need to be retrained so it doesn't turn into a processing role.

In some cases, companies have successfully melded these two approaches. For example, if a consumer can’t find their desired product in-stock online, companies like Batteries Plus Bulbs will cross-sell a product that addresses the same need. Or, if a customer needs eight of a certain product, but only seven are available online, the website will send information to the nearest store and direct the customer to call that store, preventing the customer from going to a different company for the product.

Why is the online channel an attractive route to market for brands, but a significant challenge for mid-priced, mass market retailers? How does the business model determine online importance?

If a company has enough brand power, people will seek out that brand’s product by going directly to their website rather than searching Amazon or elsewhere for something similar. For that reason, e-commerce is attractive for brands because it opens up a new channel for them to connect directly with the customer and show what their brand stands for and what’s important to the company. With mid-priced, mass market retailers, the customer doesn’t care where the product comes from, they just want it as cheap as possible and as fast as they can get it. On the flip side, luxury players are more insulated in the e-commerce space because customers usually want to touch and feel the product before making big ticket purchases, and again, value the customer service experience that usually comes with a luxury purchase.

What do valuations look like across softlines as the retail landscape continues to evolve?

Maria: There is a dichotomy in valuations based on where a business is on its maturity curve and how it is resonating with the customer. Thankfully, at Baird, we're able to pick our spots and only work with clients we believe have a reason to exist and powerful business model. Our typical investment banking client has a strong brand and a business that is growing across channels. Candidly, there is a real scarcity value for a company with that profile in today's retail environment. Valuations are reflective of that scarcity. On the other hand, we've seen valuations compress across public, mature retailers because of uncertainty - it's difficult to quantify so most investors are assuming the worst. Many mature companies are overstored and burdened by long-term leases, when trends suggest customers continue to shift their spend online and foot traffic is declining. That's a tough spot to be in right now.

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