Is There A Brick & Mortar Route To Retail Success?

With Thanksgiving around the corner, the retail industry's prospects are squarely in focus. Retail is possibly the most visible face of consumer spending, which has powered the recent spurt in U.S. economic growth. But over the last few years, the industry's landscape has undergone several radical changes. The most important of these is possibly the tussle between brick and mortar formats and exclusive online stores.

Around this time last year, it seemed that e-commerce was easily winning the battle. This is likely the case even now, with several retail majors expanding their online presence significantly. However, some brick and mortar chains are resisting the temptation to go online and have found new ways to fight the retail battle.

Battling a Retail Collapse

Nearly 16 million individuals are employed by the U.S. retail sector, making it a significant cog in the country's economic engine. However, several of them have been forced to shutter several stores after failing to fend off online competition. And troubles don't end there for this category. Several big names have even had to file for bankruptcy this year.

To provide a small illustration, in 2017 alone, Sears Holdings Corporation SHLD has shuttered more than 350 Sears and K-mart stores. Meanwhile, The Gap, Inc. GPS and J. C. Penney Company, Inc. JCP have shut down 200 and 140 stores, respectively.

But it isn't that sales have completely fallen away for these traditional retail mainstays. Instead, several retailers with an online presence are witnessing a migration from brick and mortar outlets to their company websites.

Online, Offline or a Mix of Both?

This migration toward online portals has forced retailers to come up with methods to balance their online and offline presence. For instance, Target Corporation TGT is following a two-pronged strategy of increasing its online presence and slashing prices. Meanwhile, nearly half of its online purchases are either being shipped from stores or being picked up from brick and mortar outlets by customers.

Also, Wal-Mart Stores, Inc. WMT has decided to adjust its pricing strategy in order to find the right online-offline balance. The iconic retailer has recently decided to raise online prices for certain products for which shipping costs are significantly high. This move makes store prices for certain items cheaper, which means that it's a strategy that could backfire for online focused customers.

How Dollar Tree is Winning the Fight

However, some discount chains have not had to depend heavily on the online route to remain afloat in this fiercely competitive environment. One of them is Dollar Tree Inc. DLTR, which posted impressive third-quarter fiscal 2017 results on Nov 21. Comparable store sales (comps) for the quarter increased 3.2% in constant-currency, driven by improved customer count and average ticket. (Read: Dollar Tree Stock Jumps on Q3 Earnings Beat, View Up)

At the heart of its recent success have been store remodeling efforts and a decision to expand its food offerings. According to Dollar Tree's CEO Gary Philbin, strong consumables sales have fueled overall sales during the last quarter. Further, the company provided 125 additional Dollar Tree stores with refrigeration facilities. Dollar Tree has a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

Taking a Page out of Aldi's Book?

Dollar Tree has also been gaining from the integration of Family Dollar, which is contributing significantly to the company's results. Philbin said better food merchandizing led to a rise in sales at Family Dollar outlets during the third quarter. Such strategies are similar to Germany's retail giant Aldi which announced ambitious U.S. expansion plans this year.

One of the biggest reasons behind Aldi's discount business model is that 90% of the products are Aldi-exclusive brands, letting the grocer provide high-quality product without the hidden costs of advertising and marketing usually associated with national name brands. (Read: Why Aldi is the Grocery Store of the Future)

The Way Ahead

Most traditional retailers are choosing to take a middle path, striking a delicate balance between their online and offline efforts. But the success of discount stores like Dollar Tree and Aldi indicates that the American consumer is willing to opt for brick and mortar outlets ahead of their online counterparts if they provide strong product offerings at reasonable prices. Clearly, the days of brick and mortar stores are far from over.

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Gap, Inc. (The) GPS: Free Stock Analysis Report
 
Wal-Mart Stores, Inc. WMT: Free Stock Analysis Report
 
Dollar Tree, Inc. DLTR: Free Stock Analysis Report
 
Target Corporation TGT: Free Stock Analysis Report
 
J.C. Penney Company, Inc. Holding Company JCP: Free Stock Analysis Report
 
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