AddThis

Capital Investments

Factors driving future retailer spending include IT integrations

Ever since the financial crisis, consumer confidence has labored to regain strength, and spending has been correspondingly subpar. So it’s not surprising that retailers have been extremely reluctant to make big capital outlays. But now there are signs that consumers are loosening their purse strings and, as they do, momentum is building among retailers to renew capital spending on certain projects. For some, today’s low rates make this an ideal time to secure financing; however, some struggling retailers may need creative financing solutions to access the capital they need.

According to the latest results from the GE Capital U.S. Mid-Market CFO Survey, a bi-annual survey of 500 middle-market CFOs, 39% of retail CFOs surveyed expect to increase capital expenditures in the next 12 months. This is more than any other industry in the survey and almost double the number from the beginning of the year. The survey of finance chiefs also found that retail is the most likely to see increased financing needs in the next 12 months. That bodes well for the overall economy considering that middle market retail finance respondents have, on average, revenues of $150 million and 1,235 employees.

Without question, challenges persist for many retailers. In fact, middle-market retail CFOs in the GE Capital survey were the least positive of all industries about both the global economy and their own industry. A hefty 33% expect profits to decline over the next 12 months, an increase of 17 points from the previous survey. Another area of stress for some retailers is the availability of credit: 12% are having trouble lining up credit. That’s not a huge number, but it’s up substantially from 8% earlier in the year.

Given this muddled picture, why are investment expectations spiking so significantly — from 20% to 39% in a six-month period? It’s always difficult to pin down universal causes in an industry as diverse as retail, but there are some themes that seem to be, at least anecdotally, driving investment spending. For instance, after years of deferred capital outlays, many retailers can simply no longer delay certain projects — such as refreshing stores that have grown worn and out of date. Further delays risk turning off customers in a fierce competitive environment.

IT Integrations: Another big driver of capital spending is linked to online sales. Information technology (IT) integration projects that tie together websites, physical stores, warehouses and distribution have become business critical for many retailers. Today’s consumers expect robust websites where they can research items, check availability and easily place an order. These sites must be integrated on the back end across the enterprise to create maximum flexibility for the consumer and efficiency for the business. If a consumer orders an item online and chooses an in-store pick-up, the company needs sophisticated point-of-sale technology that integrates warehouse distribution with stores.

Smaller Stores: The trend toward online sales is also impacting spending on new stores. With so much purchasing occurring online, some retailers with large-store formats are beginning to experiment with smaller spaces with less inventory; this strategy leverages a trend among consumers to use store visits as part of their research before making their actual purchases online. For retailers, these smaller, leaner stores are a way to quickly and efficiently expand their geographic footprint, while relying on centralized data warehouses to fulfill online purchases.

More companies are also investing in energy-efficiency improvements. Some of these projects are driven by legislation, but more often companies are undertaking them voluntarily as a strategy to lower costs in the medium term. For instance, many lighting upgrades now have a payback in just 18 months, which makes them attractive to corporate leadership.

Financing Solutions: All these projects cost money — sometimes substantial amounts. Many retailers have ample access to credit, but some are not as fortunate. As noted, the survey found that an increasing number of retail CFOs are having trouble lining up financing.

Lenders are aware of these challenges, and some are stepping up with solutions. One creative arrangement that’s proving popular is to finance the estimated liquidation value of new equipment instead of financing an entire purchase. So if a company is buying $10 million worth of service vehicles with a liquidation value of $7 million, it might secure $6 million against that liquidation value; that’s far from 100% financing, but it does offer valuable liquidity.

Given the results of the latest survey of mid-market CFOs — as well as various recent consumer surveys — the retail industry appears to be turning the corner. After years of holding the line on spending, there’s an overwhelming need to invest in an array of capital projects. Some CFOs may delay investments into early 2013 to see how the new Congress resolves the fiscal cliff, with its toxic mix of tax increases and spending cuts. After that, retail investment spending may really begin to gain momentum.

Jim Hogan is senior managing director at GE Capital, Corporate Retail Finance, a leading provider of senior secured loans to retailers in North America, supporting working capital, growth, acquisitions and turnarounds (gecapital.com/americas).

© 2014