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August 18, 2015

Millennials Wielding Smartphones Are Changing The Retail Landscape

by Jharonne Martis.

Retail sales and earnings surprises have made Wall Street wonder about changes in consumer spending behavior. Technology and millennials have teamed up to cause a shift in consumer behavior and prompt retailers to find new ways of growth.

Currently, millennials make up the largest share of the U.S. population and mobile phones are a big priority for them – underlying the importance for retailers to invest in e-commerce and omnichannel initiatives (Exhibit 1).

This is also a reason why more store closures are actually a good move for retailers. Today, closing stores means reducing expenses, freeing capital for investment, offering a smarter omnichannel and managing inventory better for improved efficiency. Other causes for the change in consumer spending patterns include lack of positive economic and financial news, rise of healthy lifestyle pursuits and improvement in the housing market.

Exhibit 1: Age of the Millennials
chart 1
Source: Agency Blog

Everyone has a smartphone

Technology and smartphones have made consumers accustomed to instant gratification — having items they want delivered just in time and in place. This has decreased the need for shoppers to drive to brick-and-mortar stores to purchase items, and caused retailers to find better solutions to manage inventory.

In a recent earnings call, Apple CEO Tim Cook said, “We had another stellar quarter for iPhone, establishing a new June quarter record. iPhone unit sales grew 35%, which is almost three times the rate of growth of the smart phone market overall, and we gained share in all of our geographic segments. iPhone revenue grew even more strongly,up 59%, but strong iPhone results were broad-based in both developed and emerging markets, and we experienced the highest switcher rate from Android that we’ve ever measured (Source: StreetEvents – July 21, 2015).

With more consumers owning Apple iPhones, multi-brand fashion house I.T Ltd. (0999.HK) is taking advantage of the pre-installed Apple Pay digital wallet application to text shoppers with promotional offers when they are in the vicinity of a brick-and-mortar store. I.T is also one of the first fashion houses to offer the digital wallet experience in Hong Kong – offering another payment option and thus changing the way consumers pay and shop.

Exhibit 2: Apple’s iPhone Unit Sales
chart 2
Source: Eikon

Social media has changed demand

Millennials can’t live without a smartphone and that also means staying on top of trends. Social media tools — Facebook, Twitter, Instagram and SnapChat — instantly bring the latest styles to fans around the world, even giving customers the chance to purchase them immediately.

Using our Eikon Social Media Monitor App we are able to track investors’ opinion tweets when a company ticker is mentioned. Take Amazon.com Inc. (AMZN.O), for instance. During the inaugural New York Fashion Week: Men’s (July 13-16), sponsored by Amazon, the retailer’s Amazon Fashion division sold an exclusive collection of clothes featuring iconic characters such as Underdog and Felix the Cat. Amazon’s Twitter presence jumped during fashion week, ranging from 660 to 1600 tweets a day. Additionally, Amazon’s sentiment leaned positive. The number of tweets spiked to more than 6400 when it reported earnings on July 23.

Exhibit 3: Amazon Investor Sentiment
chart 3
Source: Eikon

What makes millennials open their wallets

Lululemon has led the transition of yoga clothing from the exercise studio to everyday outerwear. Millennials love the multi-purpose aspect of this look and have made it popular. The activewear category is dubbed “athleisure” in the fashion world. Since the recession, Lululemon has been outperforming the apparel industry for the most part (except during a clothing recall incident in 2013). The rise of the “seen and be seen” in fitness gear has also created the birth of new boutique exercise classes such as SoulCycle and barre classes. What’s more, it’s created a whole new healthy lifestyle. Consumers don’t only want to feel good but want to look good, too.

The strong demand for Athleisure apparel benefits fitness shoes as well. Overall, department stores saw weak mall traffic during the first half of the year. However, despite missing second quarter earnings results, Kohl’s said that its strongest segment continues to be athletic gear and casual shoes. (Source: StreetEvents, KSS, Corp Earnings Call, 8/13/15).

Exhibit 4: Lululemon Outperforms Apparel Sector Same Store Sales
chart 4
Source: I/B/E/S data

Changing what you eat

The new healthy lifestyle movement has also caused consumers to change their dining-out habits. Once upon a time, Mc Donald’s Corp. (MCD.N) was the restaurant of choice when stopping for a quick bite. Today, however, Chipotle Mexican Grill INc. (CMG.N) is the popular eatery .

The use of healthy ingredients at good value is definitely driving traffic at Chipotle vs. MCD, which recently posted a -2.0% decline in stores open for at least one year. In our retail universe, Chipotle has one of the strongest Q2 Same Store Sales result at 4.3%, on top of facing difficult sales comparisons from a year ago at 17.3%. Chipotle succeeded in keeping sales healthy, while providing healthy organic menu choices during the quarter.

Exhibit 5: Chipotle Mexican Grill Outperforms Mc Donald’s Same Store Sales
chart 5
Source: I/B/E/S data

Home is where the heart is

The improvement in the housing market has increased home values, so consumers are investing in their homes through decoration and renovation. The home improvement and home furnishing sectors have been outperforming such sectors as apparel, where consumers used to spend their discretionary income, and even the overall retail sector. Several retailers continue to cite strength in their home categories when reporting earnings.

Macy’s CFO Karen Hoguet addressed this trend in an earnings call: “[In the] Home [department], we talked about the big-ticket areas being very strong, [such as] furniture and mattresses. And actually we have started a pilot of a new approach to soft home, which appears to have a lot of promise, so we feel good about the prospects for that business as we move forward into the fall season” (Source: StreetEvents – August 12, 2015).

Exhibit 6: Home Improvement, and Furnishing Sectors Outperform Apparel SSS
chart 6
Source: I/B/E/S data

Experiences over things

In terms of financial performance, Macy’s is the one department store that remained resilient through weak economic periods including the past recession and recuperated the strongest in the sector. However, the department store saw weakness in the second quarter and missed earnings, revenue and same store sales estimates. In its conference call, Hoguet cited continued challenges with the consumer. “The overall growth in the economy is modest at best and we are seeing customers gravitating to restaurants, recreational services, healthcare and electronics, rather than to traditional general merchandise, apparel, and furnishing categories” (Source: StreetEvents, Macy’s Earnings Conference Call 8/12/2015). This is in-line with our Same Store Sales data suggesting that the Restaurants SSS are outperforming the retailers (Exhibit 7)

Exhibit 7: Restaurant SSS Outperform Retail SSS
chart 7
Source: I/B/E/S data

Global consumer sentiment

Meanwhile, the latest reading on the Ipsos Consumer Index (Trip) peaked in January and has decreased since then. It looks like consumer confidence has remained stagnant during the first half of the year. A lack of positive news hasn’t motivated consumers to hit the malls — the latest readings suggest that mall traffic was weak during the first half of the year. Consumers still seem to be concerned about job security. Consistent and good financial news is needed in order to lift shoppers’ spirits and motivate them to fully open their wallets in all categories.

Exhibit 8: Ipsos Consumer Outlook Index
chart 8
Source: Eikon

Slowdown in China

Similarly, the China Primary Consumer Sentiment (“Consumer Confidence”) Index (“PCSI”) for August 2015 is down 4.4 percentage points over last month. The decline is derived from weakness in employment confidence, economic expectation, investment climate and current personal financial conditions. In times like these, shoppers gravitate towards affordable fashions, which underlines why the Macy’s/Alibaba collaboration might be a nice match. Chinese shoppers also appreciate American brands.

Despite weakness in the Chinese economy, Japanese retailer Fast Retailing Co. Ltd.’s (9983.T) Uniqlo division is one of the few that are not concerned. In fact, the company plans to continue its expansion in China – a market it believes is strongly attracted to affordable fashion. It also sees growth opportunity in its new partnership with Disney.

Exhibit 9: Ipsos China Primary Consumer Sentiment Index
chart 9
Source: Eikon

Changing consumer behavior hits Canada

The Canada Primary Consumer Sentiment (“Consumer Confidence”) Index (“PCSI”) as measured by the Ipsos PCSI for August 2015 is down 3.8 percentage points over the previous month.

The latest reading on consumer sentiment continues to slip further on worries of increasing debt, a weak housing market and slow economic growth. In Canada, perception –rather than reality – is taking a toll on consumer sentiment. There have been a handful of high-profile retail store closures, volatile employment data and lower economic forecasts as a result of the country’s reliance on the oil industry. However, reality is that the news isn’t all negative for Canada’s economy and needs to be put in context.

For starters, many of the recent retail store closures, such as Target, Future Shop and photography retailer Black’s, are driven more by changing consumer tastes than negative economic trends in the sector. The weaker Canadian dollar, on the back of lower oil prices, also has some Canadians worried about the economy. However, the weaker Canadian dollar and stronger U.S. dollar is a benefit for many sectors such as manufacturing and the movie production business, since it’s now more attractive for foreign investors to come to Canada and film movies.

Exhibit 10: Ipsos Canada Primary Consumer Sentiment Index

chart 0
Source: Eikon


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