View from the States: The U.S. Retail Landscape, Part 1
Just in time for the beginning of the all-important holiday season in the United States, I'll be looking at the changing landscape of the retail marketplace. In this installment, I'll describe the changing realities and define some key issues. In upcoming articles, I'll discuss topics such as identifying entry points, determining distribution strategies, and understanding market forces.
The Decade That Was
Mark Dollinger, president of Trendlines America,
offers his perspective on aspects of doing business in
the United States. Mark often participates in trade shows, accompanies clients
on road shows and trips, and represents clients at meetings.
Let's say you woke up today from a 10-year nap. Visiting retailers
in any U.S. market, you would be astonished by the changes. Many well-known,
seemingly stable regional and national retailers have simply disappeared due
to consolidation, mergers, acquisitions, and bankruptcies.
Tour America today and what you would notice, after visiting retailers in just
a few cities, is that the markets are very similar. Department stores in Chicago
are essentially the same as those in Dallas, supermarkets in Boston differ only
slightly from those in San Francisco. And the stores in the strip malls in Atlanta
are about the same as those in Seattle.
What has occurred in the past 10 years to produce this new
retail landscape in the United States?
In short: two new realities.
The New Realities
REALITY #1: Regional and independent retail chains have all but disappeared.
Some
of the most dynamic retailers of the 1980s and '90s were regional companies with
100 to 500 locations and $1 billion to $5 billion in turnover. These companies
brought a distinct regional flavor to the retail landscape that was a core element
of the U.S. retail experience. However, they could not compete with the efficiencies
(some say predatory practices) of dominant national retailers such as Wal-Mart,
Target or Home Depot. Independent retailers that were once the historic
backbone of the retail environment have been largely relegated to niche markets.
REALITY #2: There tend to be two strong retailers in each market sector. I
refer to this as "The Law of Two." I've selected some categories
to illustrate that the two companies listed below often account for 80% or more
of that sector's sales.
National Discounters (Wal-Mart, Target)
Home Centers (DIY) (Home Depot, Lowe's)
Wholesale Clubs (Costco, Sam's) (Sam's is a division
of Wal-Mart.)
Home Stores (Bed Bath & Beyond, Linens and Things)
What is so special about two companies in a given sector? I'll offer a
few observations about this phenomenon.
Two competitors in a sector allows for competitive balance. The
competitors push each other to get better, to be more efficient, and to be priced
right. Two players can easily differentiate within the sector and focus on core
constituencies. For example, Target and Wal-Mart are clearly differentiated retailers
with Target catering to a more fashion conscious consumer ("cheap chic"),
while Wal-Mart dominates in the price-conscious consumer sector.
A bigger piece of the pie for everyone. Three
or more players "carve
the pie" too
thinly, not allowing each company enough market share and profit on a national
scale to maximize performance. An interesting sector facing this
dilemma is office supplies where three companies (Staples,
Office Depot, Office Max) share the sector. None are too pleased with their performance.
Consolidation, Obsolescence, Playing
Solitaire
When there are more -- or less -- than two players, one of two
things will occur.
The sector will consolidate to two players. It is interesting
to note that the office supplies sector attempted to consolidate to two players
when Office Depot purchased Office Max only to have the U.S. Federal Trade
Commission deem the transaction as anti-competitive and disapprove the transaction.
(Note: Office Max was subsequently sold to a third company.)
The sector will disappear. Once vibrant catalog
showrooms consolidated in the early '90s to two dominant players (Best Products
and Service Merchandise). Within three years of the time Best Products
closed its doors, Service Merchandise also failed, and the category essentially
disappeared from the retail landscape.
What about those solitary players? Sectors with only one dominant
company deserve watching. In the toy section, it’s the one and only Toys
"R" Us. Its last two competitors Zany Brainy and KB Toys went out of
business in the past five years. Taken at face value, this might be a good
thing for Toys “R” Us, but remember the Law of Two. Without two strong players
a sector does not sustain itself. (It is interesting to note that TRS has
put itself up for sale after several years of disappointing performance and was acquired by an investment group in June.)
Another sector undergoing significant change is department stores. They are in
the process of consolidating to one core player with the recently completed acquisition
of May Company by Federated Department Stores (the owners of Macy's and
Bloomingdales). While one might think this will create a more dominant and efficient
entity, the Law of Two predicts a different outcome. We will all just have to
wait and see how it develops over the next few years.
The new realities that hvae brought about sweeping changes in the U.S. marketplace
have put in place new barriers to entry but also present
new opportunities for suppliers who understand the landscape. (November 2005)
