Marketing

Tough times may force retailers to grow online in 2009

he retail outlook for 2009 has, for the most part, been shaped by the battle for market share that has dominated the industry for several years.

There were few real winners, and the battlefield is littered with the carcasses of the retailers that were either a casualty of their own greed or the brutal economic downturn.

Two retailers that expanded to Las Vegas in 2008 in an attempt to increase market share instead declared bankruptcy before the year was out. Wickes Furniture is already out of business, and Steve & Barry's, a discount clothing chain, has begun liquidating assets and will soon follow suit. A host of other retailers, including Mervyn's, Levitz Furniture and Sharper Image all suffered a similar fate.

The outlook for 2009 is just as bleak for some, such as Tennessee-based Goody's Family Clothing, which filed for bankruptcy in June and may be the first post-holiday casualty.

Circuit City is also hanging on by a microchip and looking for a competitor to bail it out.

Retail wreck Customers enter and exit a Mervyn's store in Orem, Utah, on Nov. 26. After 69 years in business, Mervyn's is closing its 169 stores nationally.

BLOOMBERG NEWS FILE PHOTO

Analysts say the economic collapse and the tightening of the capital markets is partly to blame, but some retailers either failed to adapt their business model to changing consumer demands or employed a flawed business strategy that finally caught up with them.

"Some retailers simply expand so rapidly they were actually competing with themselves for market share," said Pamela Ring, a local retail consultant.

In a strategy that some are calling the Starbucks model because the coffee giant is a prime example of this business model, some niche retailers simply oversaturated the market.

Between the competition from lower-priced retailers and the store-on-every-block philosophy adopted by Starbucks, there was not enough market share to go around, even in a good economy.

When things turned sour, however, and purchases such as $4 lattes were considered a luxury many could no longer afford, the market dried up.

Starbucks announced plans to close 600 stores nationwide last summer and retailers learned - or relearned - a valuable lesson.

Niche retailers can make a lot of money in a good economy, while the market share for those selling basic consumer goods is fairly consistent.

Even in lean times, people still need staple items, so those retailers are less affected by a down economic cycle.

Niche retailers must pay closer attention to market trends and include as part of their strategy a response plan for lean economic times.

Niche does not necessarily mean small, as some of the companies that are struggling have hundreds of stores and thousands of employees. The failure to include a so-called doomsday strategy has affected retail giants, smaller niche retailers and real estate investment trusts that own or manage shopping centers and malls throughout the country.

The ripple effect of retailers going bankrupt and shopping centers losing tenants will affect everything from property values to unemployment rates and will likely completely redefine the retail business models at every level.

A major factor in the growth of the retail industry has been spurred by the large real estate investment trusts buying additional properties and offering packages to clients in major markets across the country. Included in this strategy is a plan to continually refinance debt as it comes due and accumulate more debt to fund even more expansion. The collapse of the credit markets, however, have made it difficult if not impossible to refinance the debt, and the domino effect has some real estate investment trusts looking to sell key assets to survive.

In Las Vegas, several retail properties, including Fashion Show mall, the Shoppes at Palazzo and the Grand Canal Shoppes at the Venetian, all on the Strip, will likely have new owners this year. Chicago-based General Growth Properties, which owns these properties, is among those struggling for survival and has put these and other assets up for sale.

Those in the retail industry that do survive will emerge leaner and better equipped to respond when the capital markets do loosen up, possibly later this year.

There will also be some new players in the industry, including more foreign investors and participation from domestic companies without retail experience. Many consider retail properties a good investment now because the current owners must sell prime assets at a reduced rate to survive.

Internet sales have not been hit as hard by the economic slowdown because that industry is still emerging. Growth has slowed and will probably continue to do so this year, but as the online retailers refine their business model and improve service, consumers continue to have more faith in online purchasing.

Because of this, two trends should emerge this year. Online retailers will shy away from adding or increasing their brick-and-mortar components and traditional retailers will greatly increase online integration.

"Integration is the key for brick-and-mortar retailers," Ring says. "Those that can't find a way to bring online customers into the stores may not survive."

In the coming year, many brick-and mortar retailers will likely add perks to entice online customers into stores.

Discounts for online purchases picked up at the retail stores, for example, should become very common.

Many retailers began offering so-called free delivery on major purchases when the economy was good and competition was fierce. In most cases, the increase was actually added onto the listed purchase price beforehand.

By waiving that increase and marketing it as a discount, the retailers will decrease delivery costs and draw online customers back to the stores.

The struggles in the retail industry could result in reduced marketing efforts, at least early in the year.

Patrick Done, executive vice president of Tivoli Village at Queensridge, a mixed-use project under construction near Summerlin, says many retailers are just trying to survive right now.

"These companies have a responsibility to the bottom line, so it might not be prudent to spend a lot of money on marketing right now," Done said. "They have to answer to their shareholders."

Still, some companies will continue to be aggressive, figuring that while the pie is smaller, there are likely to be fewer companies fighting for a share of it.

"Don't think just because the forecast is gloom and doom that all of retail is in trouble," Ring said. "What connects all retail is the consumer and what feeds a recovery is the balance sheet, cash reserves and access to lines of credit. Companies that are still fairly strong can invest assets, develop sales channels and expand, as long as they are careful not to overexpand."

The bottom line seems to be that the same problems that caused the retail struggles will also be the fix.

If the credit markets loosen up and people have money to make purchases, late in 2009 a recovery could begin to occur, albeit with some different players.

Mark Hansel covers retail and real estate for In Business Las Vegas and its sister publication, the Las Vegas Sun. He can be reached at 259-4069 or at hansel@lasvegassun.com.

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