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Holiday Sales Expose Losers in Changing Market

Image: Holiday Sales Expose Losers in Changing Market


By    |   Thursday, 05 Jan 2017 02:19 PM

Another holiday shopping season has passed, and though the rapid growth of online spending has been a well-told story for a number of years now, it’s worth highlighting the latest developments and what they mean for investors.

Internet sales rose an estimated 15 percent, to 19 percent, from a year earlier, while those at traditional stores fell 10 percent as the number of shopper visits plunged 15 percent. The appeal of online shopping is only getting stronger as people who came of age using computers and smart phones become a bigger factor in consumer spending.

At its core, the ease of comparison shopping online puts downward pressure on retail prices, especially prices of big-ticket items such as appliances and consumer electronics where service is a minor part of the transaction. That helps explain why inflation remains stubbornly below the Federal Reserve's desired levels. Gone are the days when a store could entice consumers with several low-cost offerings and be assured that they would also buy other items at full list price on that same trip.

E-commerce is exploding because consumers want it, not necessarily because retailers find it desirable or profitable. In many cases, they don’t and stockholders are punishing conventional retailers for sales declines. Almost any good can be purchased online, and often with free shipping and no sales tax. The S&P 500 Consumer Discretionary Index fell 0.11 percent in December, versus a 1.82 percent gain for the market overall.

That doesn’t mean the future for retailing is online. E-tailers and traditional brick-and-mortar retailers can lose -- and lose big -- in e-commerce. Retailing is a very competitive, low profit margin business, and the ease of entry for online sales guarantees that it, too, has similar characteristics.

As for shopping malls, it’s undeniable that consumers like to try out products in person and enjoy the social aspect of a trip to the shopping center with friends. Plus, it’s easier to return unwanted merchandise at a physical store rather than having to repackage undesired goods and arrange for UPS to pick-up. Stock prices of mall properties have risen twice as much as the S&P 500 since the beginning of 2009, thanks in part to historically low interest rates.

Yet, there's no denying that physical spaces are hurting, too. This year through September, some 14 major U.S. retailers from Macy’s to Men’s Wearhouse each closed 100 or more stores. Adding insult to injury, Macy's just yesterday said it plans to cut 6,200 jobs in early 2017, or about 4 percent of its workforce, after holiday sales came in at the low end of its forecast. The Bloomberg REIT Regional Mall Index dropped 0.31 percent in December.

When major retail locations disappear, smaller stores suffer, especially in major malls where jewelers, shoe stores, gift shops and bookstores depend on the big chains to generate traffic. Also, much of what the little guys sell is highly susceptible to online sales. Consider greeting cards that can be ordered and customized with ease online.

The loss of a major anchor may rapidly lead to the demise of an entire shopping mall as small stores fold. That will call into question the real estate values in that mall’s service area, and indeed, the economic vitality of the neighborhood, including employment, commercial and even residential construction. 

As noted earlier, online sales are highly deflationary. They cut out many middlemen. Bricks-and-mortar facilities are largely unnecessary. Head counts and employee costs are reduced as many retail employees and their benefits costs are replaced by fewer, lower-cost on-demand workers. Small sellers can operate out of their kitchens without office and commuting costs.

The way to think about these trends is to remember the California Gold Rush. Back then, it wasn’t the prospectors who got rich, but rather it was the purveyors of picks and shovels. Today’s equivalent include United Parcel Service In, and FedEx Corp. -- the companies that delivery the bulk of merchandise to homes and offices. The S&P 500 is up 119 percent since the end of 2008 while FedEx has gained 134 percent and UPS 78 percent. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.


A. Gary Shilling is president of A. Gary Shilling & Co., a New Jersey consultancy, and author of “The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation.” Some portfolios he manages invest in currencies and commodities. Shilling earned his master’s degree and doctorate in economics at Stanford University. While on the West Coast, he served on the staffs of the Federal Reserve Bank of San Francisco and Bank of America. Before establishing his own firm in 1978, Shilling was senior vice president and chief economist of White, Weld & Co. Earlier, he set up the economics department at Merrill Lynch, Pierce, Fenner & Smith at age 29, and served as the firm’s first chief economist. He has been cited repeatedly by the Wall Street Journal as one of the top bond-market analysts and stock forecasters. Twice, a poll of financial institutions conducted by Institutional Investor magazine ranked Shilling as Wall Street’s top economist. Futures magazine also ranked him the country’s No. 1 commodity trading adviser. And in 2003, MoneySense ranked him as the third best stock market forecaster, behind Warren Buffett.


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Another holiday shopping season has passed, and though the rapid growth of online spending has been a well-told story for a number of years now, it's worth highlighting the latest developments and what they mean for investors. Internet sales rose an estimated 15 percent, to...
holiday, sales, losers, retail
Thursday, 05 Jan 2017 02:19 PM
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