With all-too-frequent news of store closings and bankruptcies for physical retail chains like Wet Seal and Sports Authority, it can be easy to buy into the myth that e-commerce is replacing physical retail — but that’s far from the whole story.

On this Consumer Goods episode of Industry Focus, analyst Sarah Priestley and contributor Daniel Kline explain how the physical retail industry is still very much alive and kicking, and what investors need to know about the space. Find out why some retail stores are failing while others are growing, which retailers to watch, what investors should look for to see how well they’re handling the transition into the post-Amazon (NASDAQ:AMZN) retail world, and more.

A full transcript follows the video.

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This video was recorded on April 25, 2017.

Sarah Priestley: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. It’s Tuesday, April 25, and we’re talking consumer goods and exploring the supposed death of the retail industry. For today only, I’m your host, Sarah Priestley, and joining me in the studio all the way from sunny Florida is our Motley Fool contributor Dan Kline.

Daniel Kline:
Hey, Sarah! We’ve been talking about doing this for over a year.

We finally made it, but you have the B-list presenter today. I’m really sorry about that, but Vince is on vacation.

It’s funny. For our audience, I should probably point out that presenter means host. [laughs]

Host, sorry.

Normally Vince is the host, and Sarah is sitting as the host today.

Priestley: Fantastic, thank you for the clarification that we are not on a chat show. I’ll dive straight into what are topic for today is: the supposed death of the retail industry. Retail spending as a whole, according to the Census Bureau, is up 5% year over year, and up 17% in the last five years. But the conventional wisdom as you described it in one of your recent articles, is that the retail industry is kind of dead, it’s dying. And there’s a lot of enthusiasm for that, and I’ll play devil’s advocate here for just a minute and go into that. On the surface, there’s a lot of evidence that backs up that point. In the past year or two, we’ve had bankruptcies from Payless, The Limited, Wet Seal, Gander Mountain, Sports Authority, and recently we’re seeing a lot of news about store closures. Macy’s (NYSE:M) is closing 100 stores, J. C. Penney (NYSE:JCP) over 100, Sears (NASDAQ:SHLD) — 78 Kmarts, 26 Sears locations, and they’ve even admitted substantial doubt in their ability to keep the doors open.

It’s one of those things where what you see isn’t what’s actually happening. You walk around the mall — we were talking about this upstairs — the mall near me, the lower-grade mall, about a third of it has become the fake edifices where they put a vending machine and a “Coming Soon” sign, and there’s nothing there, because a lot of stores have gone out. RadioShack is one you didn’t mention, they’ve closed 1,000 or 1,100 on their way to complete oblivion, their second bankruptcy. You look and go, “Oh my god, mall retailers are closing.” My Macy’s closed, the Macy’s I could walk to from my house literally closed. And it would seem like that makes sense. The narrative is, the internet is killing physical retailers.

Yeah. The Amazon effect, as people call it.

And I believed it as well. And then I went to the Shoptalk conference. I mention this because this research came from a gentleman named Kasey Lobaugh from Deloitte. What he pointed out, and he only showed one quarter’s worth of data, and the people who track retail data, National Retail Federation and others, they don’t break out internet versus physical retailer sales. So, this is a bit elusive. But, what he said is, during the fourth quarter, the holiday season, the overall dollar growth of physical and online was about the same, it was $12 billion each. In terms of physical retail, which is much bigger, that turned a 2%-3% gain. On the online side, it was 13%-15% gain. But, the reality is, what we’re seeing is, failing stores are closing, and there are plenty of chains that are taking their places. If you look in the discount space, Dollar General is opening 1,000 stores this year, and they opened 1,000 last year. Even chains that have a perception of struggling, like Target (NYSE:TGT), are opening and adding. Target is going into markets that Wal-Mart (NYSE:WMT) had decided to not go after, which is cities, and they’re putting in 20,000-30,000-square-foot stores, about 20% the size of their regular stores. You’re seeing fragmentation and a shift in retail. Today, there was a story that Warby Parker, they eyeglasses people who both of us would probably do well to visit, is opening more retail stores. So, you’re absolutely seeing the Amazon effect killing certain retailers, but it’s also creating opportunity for other retailers.

Absolutely. I think the retailers that are being rewarded are the ones that are actually listening to their customer and understanding what their customers want. As you quite rightly pointed out, retail as a whole is growing. E-commerce is growing at a faster rate, but e-commerce as a whole is growing. I think Moody’s estimates the discount environment to grow 7% this year. Obviously, people are still going to the stores. It’s not like we’re going to be telling our grandchildren what a shop was like and staying inside all the time. So, why do you really think that some of these stores have it right, and what do you think investors should be listening out for?

If you’re Dollar General, you’re competing on price, you’re basically going in and saying, “Amazon might be as cheap or even cheaper, but I have it now.” They have hit the sweet spot when it comes to pricing. But a lot of the chains that are working are ones that offer an experience. Best Buy has turned the corner, and part of the reason Best Buy succeeds when we just lost hhgregg is, when you walked into hhgregg, it was very 1980s retail experience. There were refrigerators over there, there were stereos over here, there were computers. There was nothing joyous or interactive about the store. When you walk into a Best Buy now, you can go play with a Nintendo Switch, you can go sit in a chair and try out different audio systems. There’s stores within a store, which is a concept J.C. Penney is using, too. We’ve talked, I have a background in retail, I ran a giant toy store for two years. If you give people a reason to come in, it could be as simple as there’s a coffee shop in my book store and people want coffee, if they have to walk by all your merchandise on the way to the coffee or on the way to play the Nintendo Switch or on the way to get a haircut at JCPenney or take their picture at Sears or wherever it happens to be, that’s a chance to capture them as a customer. So, retailers have to think smarter. I think that’s something that Macy’s missed out on, and Sears really missed out on. You go to Sears now and they’re struggling, and it’s still hard to find the merchandise you want. They have not made them. And I buy clothes at Sears sometimes, they have not made the shopping experience easy. The alternative is, I can go to Amazon and say, “I want pants, I want this size and color,” and in two days they show up, and if they don’t fit, I’m supposed to return them but I don’t, so Amazon just gets another pair of pants sales from me.

Absolutely. I was listening to a webinar that was done by the same guy from Deloitte, and one of the things he was mentioning was, the department store construct actually doesn’t work well for a holistic, natural kind of shopping experience. The example that he gave, which I’m going to paraphrase, is that when you go to the luggage section, you may want to buy luggage for your vacation, and what would be great to have with this is women’s summer dresses and bikinis and flip flops and all those kinds of things. But because they’re territorial about the space allocation, they’re incapable of being flexible to provide customers want.

But you are seeing more of that. We talked about Target before. The new Target setup that they’re starting to roll out, I think it’s about a third of their stores this year, is going to have one entrance for Grab & Go. So, you walk in, you want a snack, you want a drink, maybe they’ve found that toilet paper is something that people just want to buy and leave, they need toilet paper — that’s a terrible example. The second entrance is going to be clothing and seasonal items and things people take more time to buy. So, as a retailer, you have to align your store to your market. It’s very simple. If I walk into a liquor store, they’ve figured out a long time ago to put the gin next to the tonic, and that the olives should probably be somewhere close by. But when you walk into a Macy’s, shoes and socks are not necessarily in the same place, or pants and belts, or to take it, as you did, to another level, where you go to these more esoteric connections. You need to see more dynamically changing stores, where they’re seasonally really making…