GE Capital: 2015 retail industry trends

New York -- A mixed economic backdrop is expected to drive modest retail sales growth in the 3% to 4% range in 2015, compared to 5.5% average growth in 2010-2012 and 5.8% in 2002-2006, according to GE Capital. Low- and mid-income households will be particularly constrained by stagnant earnings despite improvements in employment status and the housing market as well as lower gas prices.



According to GE Capital, the key trends in retail include the following:



Channel shift to continue: Consumers’ focus on value and convenience will continue to shift discretionary spending away from traditional retail channels in favor of e-commerce and discount venues.



Brick-and-mortar specialty stores that lack an effective omnichannel strategy will continue to donate market share. As a result, M&A activity could pick up as traditional retailers look to rationalize store footprints and reduce costs associated with incremental investment in multi-channel systems on top of upgrading and maintaining storefronts.



Margin pressure from accelerated growth in e-commerce: The accelerated growth and shift to e-commerce/m-commerce has diminished the pricing power of most retailers. This trend has increased margin pressure, given increased competition on free shipping and negative leverage of in-store fixed costs due to declining traffic.



Middle-market retailers will likely emulate their large competitors by enhancing capacity to fulfill online orders with store inventory, which could drive better gross margin with improved inventory efficiency, lower shipping costs and potential impulse purchases in the case of store pick-up.



Retail square footage rationalizing: Mall traffic will remain difficult, exacerbated by accelerated growth of the online channel on top of the encroachment by the discounters for many years. Square footage growth will be primarily driven by dollar stores, fast-fashion retailers and outlet malls.



Contrarily, the secularly pressured sectors, such as office products, consumer electronics, teen apparel retailers and department stores will continue to rationalize their retail locations.



Capital spending on multichannel systems looms large: There is increasing need for investment in multi-channel systems to maximize flexibility for the consumer and efficiency for the business. Based on GE Capital, Americas’ recent CSO Survey, many middle-market retailers have caught up with the game by optimizing their websites for mobile purchases and accepting point-of-service (POS) mobile payments.



There is more work to be done to enhance the multichannel capacity, such as enabling inventory search and fulfillment capabilities across store systems and distribution centers, as some large retailers have accomplished.



Cost of healthcare: With the ACA in its second year, healthcare costs remain an overhang for middle-market employers that are mandated to extend healthcare coverage to full-time employees. There could also be a negative impact from the ACA on those consumers who do not qualify for subsidies and are forced to spend more on their health insurance.



For larger retailers, the incremental cost of complying with the ACA appears to be manageable as their current coverage generally meets or approaches the ACA minimum requirements. Larger retailers are also better positioned to hire temporary employees.