Wave of Changes in Retail

One would think that the retail industry is one of the most mature markets with retailers having found sucessful formulas and that any changes would be infrequent and minor. But the business of retail changes fast and furiously because of many factors: the economy, online retailing, changing customer buying patterns / perceptions, new competition, closing competitors, manufacturer changes and many, many other reasons.

The last few months in retail news have highlighted how fast the retail landscape can change. Here are 3 developing stories that highlight this.

Changing Strategy of Best Buy

Best Buy is changing gears. They are implementing and testing a variety of new strategies to combat competition they are facing from online, and the new customer behavior that comes with them:  “showrooming.” (for more information on showrooming, here is a Wall Street Journal article). Best Buy is doubling down on some of their star departments: mobile phones and appliances.

In competing in this new competitive environment, departments that remain profitable will increase in footprint and visibility. The most profitable of departments is Mobile Phones. The phone department accounts for 40% of revenue and has enjoyed same store growth of 7.6% monthly (as of Q4 2011 financials.) Best Buy also has a growing number of Best Buy Mobile stores in malls. Most people buy their mobile phones from their carrier’s (Bell, Rogers, Telus, ect.) kiosks, but phone manufacturers like Apple, Microsoft and now Samsung want to sell directly to consumers with their retail storefronts. In this environment, Best Buy has a strategic advantage of consumer perception that they are impartial to carrier and manufacturer, and can provide the solution that is best for the them, the customer. Their existing brand built on no pressure sales and technological expertise give them amazingly credibility in the space.

Best Buy Mobile

The other department getting special treatment is appliances. Appliance sales are growing in this “showrooming” environment, and Best Buy is doubling down on the department. Best Buy is adding small and home appliances sections to their stores, nation wide. The new sections will include:

  • heating
  • cooling and air supply systems (available seasonally)
  • microwaves
  • blenders and juicers
  • coffee and cappuccino machines
  • grills and panini presses
  • kitchen tools and gadgets
  • toasters and ovens
  • shavers

matrix experienced this section first hand as our local Best Buy was one of the first stores to be renovated with the new section (picture below.) The section is a design departure from the rest of the stores with more emphasis on touch and learn units, and proper lighting to make them most effective. The flooring is also a laminate to evoke feelings of the modern kitchen. The kitchen is a room in the home they are newly targeting; “… we want to make Best Buy a one-stop-shop for all consumer electronics needs – in the office, den, family room or kitchen” said Martin Vander Velden, VP merchandising, Best Buy Canada.

Best Buy Small Applaince section

Best Buy new Small Appliance Section

Recently, founder of Best Buy, Richard Schulze, has made public his bid to buy the remaining shares of Best Buy and take it private once again. This is because he believes the only way to revitalize Best Buy is to cut costs while trying to upgrade the in store experience for customers, in the vein as what Apple has done with their retail stores. It remains to be seen if Mr. Schulze will be able to move forward with his vision, but the experience they are creating in mobile phones and the design in the new small appliance section are investments that move them to even better customer experience.

Zellers to Target Conversion

The invasion is upon us! Canada is primed for an influx of US retailers, because of our low retail sq. foot / capita statistics, low retail lease rates in key locations and our higher post recession disposable income. Target is first of the new wave of US retailers.

In May 2011, Minneapolis based Target bought the leaseholds of 179 of the 253 Zellers locations from the Hudson’s Bay Company. Target had been looking at this expansion for a long time, but was forced to bump up timelines in November 2010 when other US retaillers started showing interest in Zellers. What we now know is that Target plans to spend $1 billion converting over the 179 locations, but the remaining 64 locations are likely to close down.

“After a lengthy review and numerous discussions with various parties, it became apparent that continuing to operate the Zellers banner in its current form was not viable, particularly given the geographic footprint of the remaining locations,” the The Hudson’s Bay Company said. There is no scheduled closing date for the remaining stores, but they say “most” of them will close because of their undesirable location and performance.

Target should reinvigorate competition in the mass merchandiser market. As Zellers stores deteriorated and became out of date, Walmart has grown with almost no competition in Canada. Target is the second largest retailer in the US behind Walmart. It has a revenue of $70 billion and is 33 on the Fortune 500 list. Target already has brand recall penetration in Canada even before it came here: 10% of Canadians report to have gone to a Target location in the states in the last year. Target also is introducing the smaller footprint, urban concept stores called CityTarget. A concept that urban centers of Vancouver, Toronto and Montreal would welcome to lower their cost of living.

Sears potentially going the way of Target

As mentioned before, their are many US retailers looking to expand into Canada. Target was forced to hasten it’s deal with Hudson’s Bay Co. because other US retailers started showing interest. Like Zellers, Sears also has real estate, in the form of leaseholds, that US retailer sharks are hungry for.

Blood got into the water when Sears Holding Company (US) divested from Sears Canada Inc. The US parent company took it’s stake down from 95% to 51%. This is in response to the Canadian locations ailing performance numbers. But this move makes Sears Canada or it’s land more desirable for takeover. Three locations were already sold before the divestment to bolster weak profits. US Sears locations also have shrinking sales, but Canadian stores outpace them with -6.7% growth versus -1.1% in the US. This comes when rival The Bay is showing signs of revival, and Target will introduce new competitive energy to the market.

High end US retailer Nordstrom’s is first in line, having already negotiated taking a Vancouver location off of Sears’ hands. But Calvin Macdonald, Sears Canada CEO, is working their 3 year revival plan as if they are not going to be purchased. Like Best Buy, appliances are a key component in their recovery; they plan to be Canadian’s first choice in appliances and mattresses.

Stay tuned as the landscape is destined to be ever-changing.

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