Top 10 Retail Predictions for 2010
Citigroup's Deborah Weinswig, Managing Director Retailing/Broadlines addresses key themes and predictions for 2010 that will impact the retailers.
"The top 10 predictions for 2010 are a bit more thematic in nature than the predictions were for 2009 and might take longer to be realized," says Weinswig. "In addition, they are more weighted to the food and drug retailers vs. the department stores in 2009."
The top 10 predictions according to Weinswig include:
Prediction #1: Brick-and-Mortar Stores Challenge Amazon and eBay
Brick-and-mortar stores are no longer eschewing online sales, but embracing mobile and online retail. The recession has accelerated the pace at which shoppers are abandoning bricks-and-mortar stores in favor of e-tailers due to the benefits of shopping online (i.e. ability to easily compare prices, local sales tax can sometimes be avoided, and shipping is often free). As a result, conventional retailers are intensifying their online efforts by promoting "multi-channel" shopping (where consumers can purchase the same items from the same retailer online, via their mobile phones, or in the store). In 2010, we believe conventional retailers will challenge dominant etailers as they continue to integrate online sales and drive gains in mind and market share online.
Prediction #2: CVS Patches Up Caremark
CVS is in the process of changing its marketing message for Caremark to focus more on core PBM fundamentals vs. the retail/PBM combination previously. We believe we are already seeing improved execution in the PBM business, as evidenced by the recent renewal of the Texas Teacher Retirement System contract. Additionally, CVS's PBM has significantly fewer contracts up for renewal in 2010 vs. the contracts that were up for renewal in 2009, which should lead to fewer contract losses in 2010.
Prediction #3: Deflation Haunts Food Retailers Throughout 2010
We do not expect food at home inflation to return anytime soon due to weak consumer demand, and it will likely haunt the food retailers throughout 2010. As a result, we expect pressure on the food retailers from deflation to continue throughout 2010.
Prediction #4: Old Time Price War Breaks Out in Food Retail
With the heavy IT spending related to WMT's transformation project behind us, we expect the company to lower prices on food and consumables to drive traffic. We view this move as a game-changer in the food retail industry in 2010. As a result, there will likely be further price investments from food retailers and gross margin pressure as they scramble to match WMT's aggressive pricing in 2010. We believe that what the food retailers experienced in 2009 was the result of a Modern Day Price War, and we expect an "Old Time" Price War to break out in 2010.
Prediction #5: Private Label and Exclusives See Another Growth Spurt
Retailers are focused on increasing the penetration of private label and exclusive products due to the potential associated gross margin benefits and to differentiate from competitors. The recession has helped to accelerate this penetration since these products are also typically less expensive for consumers than branded products. We believe that there will be another growth spurt in 2010 for private label and exclusive products as retailers cater to the growing demand for these products and better merchandise these products in-store to appeal to the consumer. In addition, we believe that retailers are also learning that having control over their own destiny can reap rewards with the branded vendors in terms of lower prices and improved relationships. As a result, we expect 2010 to be breakout year for private and exclusive label growth.
Prediction #6: Specialty and Department Stores Tie the Knot
In 2010, we expect to see more specialty stores within a department store. JCP already has Sephora stores in 155 of its stores and will launch the MNG Mango store-within-a-store concept in 75 stores in Fall 2010. In NYC, SKS has dedicated an entire designer floor to 49 collections, including 20 storewithin-a-store boutiques from big fashion names such as Chanel, Dior, Gucci, Yves Saint Laurent, Giorgio Armani, and Louis Vuitton. We expect other department stores to follow suit and find a specialty store to tie the knot with in 2010.
Prediction #7: A White Knight Seizes Target's Credit Portfolio
We believe TGT would be willing to sell its credit card receivables portfolio if it could find a buyer that would agree to assume the economic and accounting risks of the portfolio (i.e. taking the receivables off TGT's balance sheet) and maintain the key operational features of the business. While the current credit environment has kept potential buyers away, improving credit trends and a strong underlying portfolio could generate outside interest in the portfolio in 2010. We believe that TGT is realistic about a fair price for the portfolio at this point in the cycle.
Prediction #8: The Re-emergence of the Hourglass Drives Topline for SKS and FDO
As the hourglass theory materializes in 2010, the gap in the financial wellbeing of high- and low-income consumers is expected to widen. Highincome consumers will benefit from the positive wealth effect, while lowincome consumers will face uncertain employment and struggle with rising gas prices and energy costs. As such, we believe consumer spending will be concentrated at the top and bottom of the hourglass, which favors SKS and FDO in our coverage universe.
Prediction #9: Safeway Ultimately Spins Off Blackhawk
It has long been speculated that SWY would spin off its Blackhawk gift card business. We believe the recession delayed this event due to a slowdown in discretionary spending and a decline in the valuation of the business. Steve Burd, Chairmen, President, and CEO of Safeway, continues to reiterate that he will wait for full value. We believe 2010 could be the year that he will have some attractive offers as M&A and IPO activity picks up.
Prediction #10: Positive Housing Turnover Drives Home Improvement and Home Category Comps into Positive Territory
Total housing turnover has been positive now for the past four months (beginning in July and continuing through October, which is the latest available data). Housing turnover typically leads home improvement comps by around two quarters, so we would expect home improvement comps to turn positive in 2010. Additionally, housing turnover leads sales of domestics, housewares, and furniture by about three quarters, so we would also expect the department stores who are heavily exposed to home products to benefit from positive comps in home categories in 2010.
"The top 10 predictions for 2010 are a bit more thematic in nature than the predictions were for 2009 and might take longer to be realized," says Weinswig. "In addition, they are more weighted to the food and drug retailers vs. the department stores in 2009."
The top 10 predictions according to Weinswig include:
Prediction #1: Brick-and-Mortar Stores Challenge Amazon and eBay
Brick-and-mortar stores are no longer eschewing online sales, but embracing mobile and online retail. The recession has accelerated the pace at which shoppers are abandoning bricks-and-mortar stores in favor of e-tailers due to the benefits of shopping online (i.e. ability to easily compare prices, local sales tax can sometimes be avoided, and shipping is often free). As a result, conventional retailers are intensifying their online efforts by promoting "multi-channel" shopping (where consumers can purchase the same items from the same retailer online, via their mobile phones, or in the store). In 2010, we believe conventional retailers will challenge dominant etailers as they continue to integrate online sales and drive gains in mind and market share online.
Prediction #2: CVS Patches Up Caremark
CVS is in the process of changing its marketing message for Caremark to focus more on core PBM fundamentals vs. the retail/PBM combination previously. We believe we are already seeing improved execution in the PBM business, as evidenced by the recent renewal of the Texas Teacher Retirement System contract. Additionally, CVS's PBM has significantly fewer contracts up for renewal in 2010 vs. the contracts that were up for renewal in 2009, which should lead to fewer contract losses in 2010.
Prediction #3: Deflation Haunts Food Retailers Throughout 2010
We do not expect food at home inflation to return anytime soon due to weak consumer demand, and it will likely haunt the food retailers throughout 2010. As a result, we expect pressure on the food retailers from deflation to continue throughout 2010.
Prediction #4: Old Time Price War Breaks Out in Food Retail
With the heavy IT spending related to WMT's transformation project behind us, we expect the company to lower prices on food and consumables to drive traffic. We view this move as a game-changer in the food retail industry in 2010. As a result, there will likely be further price investments from food retailers and gross margin pressure as they scramble to match WMT's aggressive pricing in 2010. We believe that what the food retailers experienced in 2009 was the result of a Modern Day Price War, and we expect an "Old Time" Price War to break out in 2010.
Prediction #5: Private Label and Exclusives See Another Growth Spurt
Retailers are focused on increasing the penetration of private label and exclusive products due to the potential associated gross margin benefits and to differentiate from competitors. The recession has helped to accelerate this penetration since these products are also typically less expensive for consumers than branded products. We believe that there will be another growth spurt in 2010 for private label and exclusive products as retailers cater to the growing demand for these products and better merchandise these products in-store to appeal to the consumer. In addition, we believe that retailers are also learning that having control over their own destiny can reap rewards with the branded vendors in terms of lower prices and improved relationships. As a result, we expect 2010 to be breakout year for private and exclusive label growth.
Prediction #6: Specialty and Department Stores Tie the Knot
In 2010, we expect to see more specialty stores within a department store. JCP already has Sephora stores in 155 of its stores and will launch the MNG Mango store-within-a-store concept in 75 stores in Fall 2010. In NYC, SKS has dedicated an entire designer floor to 49 collections, including 20 storewithin-a-store boutiques from big fashion names such as Chanel, Dior, Gucci, Yves Saint Laurent, Giorgio Armani, and Louis Vuitton. We expect other department stores to follow suit and find a specialty store to tie the knot with in 2010.
Prediction #7: A White Knight Seizes Target's Credit Portfolio
We believe TGT would be willing to sell its credit card receivables portfolio if it could find a buyer that would agree to assume the economic and accounting risks of the portfolio (i.e. taking the receivables off TGT's balance sheet) and maintain the key operational features of the business. While the current credit environment has kept potential buyers away, improving credit trends and a strong underlying portfolio could generate outside interest in the portfolio in 2010. We believe that TGT is realistic about a fair price for the portfolio at this point in the cycle.
Prediction #8: The Re-emergence of the Hourglass Drives Topline for SKS and FDO
As the hourglass theory materializes in 2010, the gap in the financial wellbeing of high- and low-income consumers is expected to widen. Highincome consumers will benefit from the positive wealth effect, while lowincome consumers will face uncertain employment and struggle with rising gas prices and energy costs. As such, we believe consumer spending will be concentrated at the top and bottom of the hourglass, which favors SKS and FDO in our coverage universe.
Prediction #9: Safeway Ultimately Spins Off Blackhawk
It has long been speculated that SWY would spin off its Blackhawk gift card business. We believe the recession delayed this event due to a slowdown in discretionary spending and a decline in the valuation of the business. Steve Burd, Chairmen, President, and CEO of Safeway, continues to reiterate that he will wait for full value. We believe 2010 could be the year that he will have some attractive offers as M&A and IPO activity picks up.
Prediction #10: Positive Housing Turnover Drives Home Improvement and Home Category Comps into Positive Territory
Total housing turnover has been positive now for the past four months (beginning in July and continuing through October, which is the latest available data). Housing turnover typically leads home improvement comps by around two quarters, so we would expect home improvement comps to turn positive in 2010. Additionally, housing turnover leads sales of domestics, housewares, and furniture by about three quarters, so we would also expect the department stores who are heavily exposed to home products to benefit from positive comps in home categories in 2010.