Retail Monsters of the Past 100 Years
Countless experts, bloggers, and pundits have written over the past year on the Doom and Gloom of retail and the demise of Bricks and Mortar as we know it. My partners and I at The Palomar Group talk about this almost daily and debate it’s legitimacy amongst ourselves and between our clients and friends. We’ve seen arguments from the other side as well pointing to the fraction of retail sales that come from online and the overreaction of the market to online competitors in sectors like grocery.
The perceived threats to traditional retail that we are seeing today are not much different from the retail "monsters" that we have seen over the past 100 years. The advent of the mass produced automobile, the vast selection of the Sears catalog, and the rise of one-stop-shopping at Walmart Supercenters all acted as threats to retail as it was known and helped shape retailing in America today. These monsters, much like Amazon and the other e-retailers of today, shifted the retail landscape, but brick and mortar retail withstood those test. Today we have seen the changes that many of these monsters brought with them, come full circle.
The Automobile Age
In 1914, Henry Ford was able to begin mass production of the automobile. Although the high tech invention of its day had been around for years, it wasn’t until the turn of the century that through Ford’s assembly line production, the automobile became accessible to nearly all Americans and a staple in their daily lives. The access to affordable cars changed the world more than the advent of any other single force before or since. It affected industries by the need to build roads and highways, motels and gas stations. It allowed society to become mobile and the need for numerous small boutiques that were around the corner to fall out of demand. Many local retailers went out of business as larger regional competitors were able to scale their businesses offering wider selections at lower prices. You also saw the advent of experiential retailing with the rise of the automobile as stores vied for customer attention and their pocketbooks knowing that customers would travel the extra mile for a better experience.
“The Great Price Maker”
The second retail monster of the last 100 years was the Amazon of it’s day. 130 years ago Sears started as a mail order watch company and over the years to follow grew into a mail order company selling saddles, sewing machines, and buggies to a still largely rural American nation. Prices were low and selection was vast. The selection was unlike anything that your local retailer could carry in their shop. Sears was able to piggyback on the rise of the automobile and its ease of access to transportation to tap into rural markets from coast to coast. The catalog which became known as “The Great Price Maker” and “The Book of Bargains” quickly rose to print and distribute over 315 million catalogs a year making it the nation's largest publisher for a time. Sears taught Americans how to shop. They sold cars, and even houses through their catalog for a time. Cutting costs and controlling distribution allowed Sears to grow and grow, building massive distribution centers and employing people by the thousands. By the 1970s, 1 out of every 204 working Americans was employed by Sears. They eventually started dotting the landscape with massive stores and got into a wide spectrum of different businesses from insurance to credit cards and everything in between. Today, Sears seems to be taking its dying breaths. By continuing to focus on growth and not adapting with the changing times, sticking to their models of cataloging and big box retailing with a lack of experiential retail have caused the retailer to slowly give away market share in every sector that it had dominated not so long ago.
Sam Walton and the Supercenter
While Sears was rising to global dominance, the bifurcation of the American market split shoppers with the higher net worth families going to luxury retailers and the middle class going to more discount chains. In 1945, Sam Walton opened his first Walton’s Five & Dime to appeal to those middle class shoppers. Walton focused on small rural markets where he knew his customers, their ability to spend, and their desire to save. He did away with intermittent sales which were the flavor of the day and focused on pricing lower than competitors on everyday items like toothpaste and toilet paper. By doing this, Walton was able to prove the model that you could lower your mark up but earn more because of increased volume. By the 1980’s, Walmart was taking the country’s retail market by storm. Boutique retailers, hardware stores, and more were shutting their doors amid the increased competition and unbelievably low prices. In 1988, Walmart opened its first Supercenter and now no one was safe. While they had been putting soft goods retailers out of business for years, the Supercenter allowed them to go head to head with the grocery magnates of the day driving margins down across the board and giving shoppers a place to get everything they needed in one stop. Walmart’s rise to power spawned the formation of other big box retailers that we know well today in the hardware, crafts, and sporting goods businesses. As more big box retailers continued to open, more and more mom and pops closed their doors unable to compete on selection and pricing. By 1991, Walmart had overtaken Sears as the country’s largest retailer. Today, only the Chinese and United States Militaries employ more people. Walmart sales in 2016 totaled a staggering $485 Billion making it the 10th biggest economic entity with only countries including the US, China, Germany, and a few others in front of it.
Amazon and the Rise of Millennials
In July of 1995, Jeff Bezos opened Amazon as an online book retailer. Who would have thought back then, that they would grow into the $136 Billion behemoth that they are 20 years later. As did the great retail monsters that predated them, Amazon quickly diversified from books and within three short years, Bezos started selling CDs and DVDs. Over the next 20 years, Amazon continued to diversify and increase selection while lowering prices. In 2005 Amazon launched Amazon Prime giving its members the unheard of access to free shipping. Amazon Prime was a wave that allowed Amazon to compete with local providers of goods by beating them on price while maintaining that price to the last mile and delivering it to the customer's doorstep. With its most recent acquisition of Whole Foods, Amazon continues to be the biggest retail monster of our day. While still accounting for only a fraction of overall retail sales, Amazon is the topic of every other conversation on retail today, wondering how large they will grow and how much they will change. Alongside the rise of Amazon and e-retailers like them rose the Millennial generation. Over the past year, Millennials have passed Baby Boomers as the nation's largest living generation. This generation was raised on the backs of computing. They have always been accustomed to speed and ease. They like nice things and they want to know how to get them with the least amount of obstacles in their way. They have given way to the resurgence of specialty retailers, boutiques, and the mom and pop stores of old with access to the world through their online platforms.
Light in the Darkness
Amazon and the rise of online retailing is not to be feared as many would have us think. It is not going to sink the world of brick and mortar retailing, it is only the most recent living monster in the evolution of retail. I am not sure what the future holds for retail but I am excited by what I see through our work at The Palomar Group. Our clients remain excited about the assets we are bringing to market and their chances to remain a stable of source of returns for them and their investors. I wouldn’t have guessed that a catalog or a small town retailer from rural Arkansas could have changed the retail world and I won’t try and guess where we will be 30 years from now. That being said, I personally can not wait to see what the retail landscape will look like in the future. One affect that I know that these monsters have had on retailing is that they have allowed the customer to continue to win. Whether it is by selection, access, or pricing, the customers experience has gotten undoubtedly better with each and every monster that has come to its shores and I am sure that our current monsters will only continue to better that experience. As the customer experience continues to improve, so will their appetite to spend money at those retailers. Strong real estate will continue to attract the best and most innovative retailers and thus provide their landlords with with some of the strongest and most stable returns in the market for years to come.