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Sector Scan: The Future of Retail and Other Existential Thoughts from the Mall

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I’ve been enjoying life as a new father since my son was born in April, but was shocked by one experience this week: our first visit to the mall for a photo with Santa Claus.

Excited to take part in this fun tradition, I hadn’t expected the crowds. Hundreds of parents and fidgety kids were packed to the rafters of Ottawa’s Bayshore Shopping Centre for their turn to sit with Old Saint Nick.

An hour’s wait for Santa gave me plenty of time to take in my surroundings. Seeing how busy the mall was made me think about winners and losers in today’s retail sector. The question going forward is where to invest in an industry going through huge disruptions in how it stocks, sells and delivers goods to customers?

Riding the retail rebound

Retail can be fickle, particularly in areas of consumer discretionary spending moved by fads and sentimental whims. You may recall, a year ago, one of my colleagues recounted his hunt for a Hatchimal, a hot item on the 2016 Santa list.

While failing general merchandise retailers, such as Sears, have shown symptoms of decline over many years, other businesses have capitalized on industry and consumer trends very successfully.

In the eight years since the end of the global financial crisis, retail spending has seen a strong rebound, especially over the last couple of years. 

A good run for many of our retail holdings

In the U.S., the University of Michigan’s Consumer Sentiment Index recently reported what it called the best run up to the holiday shopping season in a decade. Even with a slight dip in November, the Index still measures consumer sentiment at its second-highest level since 2004. The Conference Board of Canada’s Index of Consumer Confidence is, so far this year, averaging 17% higher in 2017 than 2016.

Given this, it didn’t really surprise me to see the Bayshore Centre packed with shoppers (just the crazy lineup for Santa!). Similarly, I am not surprised by the strength of certain retail stocks in Canada over the past five years.

MD has been overweight both specialty retailers and food retailers in our MDPIM Canadian Equity Pool, which has added value relative to the benchmark.

Multiline retail stores such as Dollarama Inc. and Canadian Tire Corporation have experienced annualized stock gains of almost 39% and 22% respectively over the five years ending November 30, 2017, while food retailer Alimentation Couche-Tard Inc. is up over 32% annualized over the same time period.

Clearly, brick and mortar retailing still provides solid returns, yet we do need to try and understand trends that will drive success for retailers in the future.

Forgetting the retail ghosts of Christmas past

To me, it really doesn’t matter whether a good retailer has a physical space, a great online site or if the “store” is my front porch, as I’ve previously written.

While the press covers how retailers are changing, long-term investors think about how consumers will change in the future, to help us identify the best in the industry. How will we be shopping in ten years?

Given our steady migration to mobile and convenience, we expect the retail experience to rapidly continue in that direction. 

Never mind same-day delivery, we expect to see ultra-fast delivery – 30 minutes to your door is the current goal for retailers. Many innovators already use sophisticated automation to stock and distribute inventory; it’s not that far of a stretch for retailers to receive orders automatically sent from our pantries and refrigerators. From mobile “in stock” assistants to self-serve store experiences, innovation is being adopted at a meteoric pace in the retail sector. Companies that are not quick in their ability to adapt to these new realities are being quickly left behind. 

For now, shopping centres can still count on effective marketing props such as Santa (sorry kids!) to lure folks like me into its stores. But how long until virtual reality Santa pops into my house for that cute family photo – and I can then avoid the line-up?


About the Author

Edward Golding, CFA, MBA, was an Assistant Vice President with the Multi-Asset Management team at MD Financial Management. He oversees the Canadian, Dividend and U.S. equity mutual funds and investment pools at the firm.

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