Top 10 Retail Industry Predictions for 2011

While holiday sales were strong in 2010, no one believes retailers can simply start singing "Happy Days are Here Again." In the coming year, retailers will need to deal with a number of vexing issues. For example, rising product costs will force retailers to decide whether they can increase prices without chasing away still-cautious customers. These pricing decisions will be made more complicated by the growth of smart devices that let customers effectively "pull back the curtain" on price.

But not all is doom and gloom among the 10 retail industry predictions for 2011 from consulting firm AlixPartners. The coming year presents many opportunities for growth, although retailers will have to move quickly, leverage inventory effectively and hone their loyalty programs to take advantage of them.

Here are AlixPartners' Top 10 Predictions for Retail in 2011:

1. Cost increases may reduce profits more than expected
Some retailers are claiming cost increases in some areas of 15% to 25%. Will retailers pass along huge material cost increases and labor costs or will they go for share and risk losing gross margin dollars? Many retailers are predicting that they will pass along price increases, but consumers have not shown a willingness to spend at increased levels. We predict that retailers will be faced with protecting price points of key programs and balancing that profit hit with price increases on fashion merchandise. The margin impacts could be larger than expected as consumers will remain in the driver's seat; mid-tier and value players will face the greatest challenges.

2. "Speed to Market" accelerates to new levels
Winners in 2011 will have the fastest and most responsive supply chains. They will place smaller initial buys and be able to get a winning style back into the store in three to four weeks, not three to four months. We will see companies begin to move toward vertical models once again through acquisitions and "true partnerships" in the supply chain. Speed will become the name of the game, and only the fast will survive.

3. Inventory leverage separates winners and losers
In 2010, retailers went back to basics and reinforced "blocking and tackling" in areas such as sell-through and open-to-buy management to put them into an improved inventory and margin position. In 2011, winning retailers will be those that carefully monitor and mange inventory leanly to reduce costs and avoid unnecessary product transfers and discounting. Those that dipped their toes into the water and then decided to wade into deeper waters too quickly will struggle with bloated inventories in Q3/Q4 2011 and suffer from margin impacts due to another round of unnecessary discounting. And for some in this space, there may not be a second chance.

4. Department stores consolidate and channels blur further
While many were predicting the demise of department stores only a few years ago, many department stores have gained traction with the younger shopper—a critical element of future success. For the past three quarters, department store comps have outpaced those of specialty stores by a margin that has grown progressively wider each quarter. As department stores gain share, the competitive landscape will intensify. Larger players will be more capable of maintaining strength during the turbulent times ahead. Regionals will be faced with strategic decisions that look more appealing than they did over the past decade. As these regional stores consider capital infusions, strategic buyers and other alternatives, we expect at least one regional department store to consolidate and others to change ownership structures.

5. Private equity firms go on acquisition spree
The Wall Street Journal reports that buyout firms are heading into 2011 with some $450 billion in uncommitted funds, and as private equity (PE) deal flow continues to pick up, we expect to see a lot of retail acquisitions. The end of 2010 brought deals and interest in many companies such as Gymboree, Jo-Ann Stores, Dots and J. Crew, and we enter 2011 with transactions on Rafaella Apparel and Rebecca Taylor in the first week and continued chatter about potential PE interest in other retailers. This increased activity would drive a lot of change in the retail landscape. Boards will be forced to consider management changes; management will be forced to find incremental EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization); and consolidation will be inevitable. Consequently, retailers must be prepared for continuous improvement and continuous change.

6. Loyalty programs become "richer"
We expect a continued rise and increased effectiveness of loyalty programs to drive customer attraction and retention. Retailers will become more effective in their analysis and use of loyalty program data and will become more creative in developing the programs themselves. Many will continue to expand their loyalty programs into mobile devices and location-based marketing, social media applications, or increased partnerships with other companies. New metrics will appear on reports in retail boardrooms focused on conversion and trends in our "most profitable consumers." In 2011, these programs are expected to drive gains in market share; winners and losers will be separated by the rate of growth of Facebook fans and loyalty programs.

7. "Flash" sites migrate toward traditional retail
This is a channel that is here to stay and these sites are anticipated to expand their reach even further. Retail sites such as Gilt and Rue La La will look to take advantage of their loyal customer base by migrating more toward traditional online retail and selling merchandise like any other online retailer; at the same time, traditional retailers will begin employing more flash sales to motivate hesitant consumers. We see this becoming a permanent channel of growth similar to the expansion of outlets a few decades ago.

8. Walmart eliminates more grocers
AlixPartners' Consumer Sentiment Index study shows that more than 50% of U.S. consumers list Walmart in their top three grocery stores, and that two-thirds of that group buy "all" of their groceries at Walmart. If this trend continues, national and regional grocers, already operating under razor-thin margins, will face more pressure than at any time in history. Non-traditional channels such as mass, drug, convenience and the Internet are moving at light speed into carrying deeper assortments of commodity, fresh and frozen products—and at prices that are extremely competitive (and driven by more prominence in private label). We predict that retail winners will be those who double-down now to reduce operating costs and to employ tactics derived from strategic market level analytics around largely untapped areas, such as increasing advertiser effectiveness as the consumer shifts away from paper and into social media at breathtaking speed. Retailers must move quickly: In 2011, we expect to see increased mergers and buyouts or the complete elimination of players that are unable to meet the new bar.

9. Smartphones pull back the curtain on price, dial up "return on invested labor"
Today, over 20% of all phones sold are smartphones, and new apps enable consumers to easily compare prices. Apps are becoming more "active" in prompting consumers to find the best price before buying. With price becoming more transparent, retailers will be forced to compete in new ways. "Experience and service" will become dominant competitive levers, but they come with a cost. Retailers will compete based on "return on invested labor"—a new metric that measures incremental margin lift per dollar of invested labor. Retail winners of 2011 will become intensely focused on store labor effectiveness.

10. Buckle up—we expect to hit some turbulence
As we look at the fundamentals, we remain faced with many headwinds—high unemployment, rising gas prices, limited credit and home equity, and a low overall consumer confidence rating. While government tax cut extensions provide some relief, these programs are not significant enough to turbo-charge the consumer. Retailers are facing serious pressure. In 2011, be prepared for turbulence—buckle up!
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