DayBreaker

Earlier this year, S&P Global Ratings said adverse secular trends were far more likely to accelerate than abate. Our view, which we discussed in a February 2017 research entitled “Distressed U.S. Retailers: 2017 Is Shaping Up To Be A Tipping Point,” has proven to be accurate as measured by the number of downgrades, defaults, lowered earnings guidance and merger activities that have occurred since then.

As we head into 2018, here are the key trends we believe will drive the U.S. retail sector:

Consumers will continue to seek value. The strong performance and continued growth of discount retailers demonstrate that U.S. consumers remain focused on value a decade after the great recession. Retailers have also had to compete with larger-ticket items such as autos and housing (including higher rents), and other pressures on consumers’ wallets such as health care, student loans, technology and “experiences” (e.g. travel, dining out). With wage growth sluggish, shifting consumer preferences and competition for share of wallet have confounded the best efforts of many retailers. Rampant growth in online sales has created more price transparency and has made comparisons easier for a range of products. At the same time, in the U.S., the millennial generation’s evolving retail behavior is both an opportunity and risk for retailers.

Rapid e-commerce growth has created a severe strategic challenge. Many retailers across subsectors lack technological capabilities and are still in the early stages of addressing the shift to e-commerce. We are seeing strategic shifts with large investments in online commerce and delivery logistics and continued growth of successful retailers with world-class supply chains. Many retailers face difficulties in changing parts of their business models including supply chains and distribution networks, while also enhancing customers’ store experiences.

E-commerce is disrupting almost all segments of retail to greater or lesser degrees with no end in sight. Its evolution has already shown that previously successful retailers may not remain so. However, it’s not all downside for those retailers that can manage their physical footprint while building successful online capabilities. Signs of winners and losers are emerging now, although the upheaval of the retail landscape will continue.

While e-commerce sales are still only around 10% of total U.S. retail sales, it has a disproportionately large impact on the traditional retail sector. For example, any news of Amazon entering a segment of retail is usually sufficient to trigger a drop in market value of even well- established players in that sector. At the same time, retailers are building out their capabilities – with significant fanfare. Two dramatic examples in the last two years were Wal-Mart’s purchase of Jet.com in 2016 and Amazon’s purchase of Whole Foods in 2017.

One analogy to consider is FedEx and UPS – FedEx started off mainly in the air and moved into ground, while UPS was almost exclusively ground based and moved into the…