Hot 100 Rank.xlsx
“There is no question that large, undifferentiated retail is in trouble and has been for some time,” says Leon Nicholas, chief insights officer for Kantar Retail, “but the headlines about the closing of American retailing is an overreaction. There is some level of exaggeration.”
That sums up the picture presented by the 2017 edition of STORES Magazine’s Hot 100 Retailers. There is a distinct lack of big-box general merchandise retailers on the chart — no Walmart, no Target, no Costco, no department stores — while there are plenty of businesses that exhibit differentiation in the marketplace, innovative merchandising and an appropriate value proposition for the intended customer base.
What is hot in retailing is what is different. And what’s different is a little bit of everything: meal kits, online building supplies, chain liquor stores and niche supermarkets. What isn’t happening is the collapse of bricks-and-mortar retailing. online retail currently accounts for roughly 10 percent of total retail sales, excluding automobiles and fuel; Kantar Retail sees that increasing to 18 percent by 2022.
Parity is a long way off, Nicholas says. “In 30 or 40 years will it be closer to 50 percent? Sure,” he says, adding that hard goods sales will migrate to ecommerce more quickly but “the more discretionary and the more perishable purchases” will move online at a much slower pace.
“I think innovation is not just an online phenomenon,” Nicholas says, citing as an example Kroger’s takeover of Roundy’s Supermarkets, primarily for its innovative Mariano’s division. Walmart’s acquisition of Jet.com is another example of a bricks-and-mortar retailer purchasing innovation.
“The older, traditional retailers have been operating on [business] models that served them well in the past.
It’s the old-school model like ‘stack it high and watch it fly,’” Nicholas says. When companies take over smaller retailers, “the dynamic involved is that established players are looking to buy market share … . This is a giant game of catch-up, buying intelligence, buying people, buying credibility.”
This is evidenced by the crème de la crème of the Hot 100 Retailers. Four of the first five are ecommerce businesses, two of which have been acquired by bricks-and-mortar retailers and two which have followed the public-company trail.
The fifth is No. 3 Ascena Retail Group — parent of such chains as Ann Taylor, Catherines, Dress Barn, Lane Bryant and Maurices — and a perennial hot retailer due to aggressive mergers and acquisitions in recent years. This strategy may no longer be serving it well, however: The company reported a net loss in the last fiscal year and recently announced plans to close about 660 stores after a $1.03 billion loss in this year’s third quarter.
Capturing share
Topping the Hot 100 Retailers chart is Blue Apron, founded five years ago with a mission “to make incredible home cooking accessible to everyone.” The genesis, corporate history goes, was that co-founders Ilia Papas and Matt Salzberg wanted to cook at home with their families, but found grocery shopping and menu planning burdensome, time-consuming and expensive.
Since then, the company has delivered more than 150 million meals to households, representing about 25 million paid orders. In addition to meal ingredients and cooking instructions, Blue Apron also sells wine, kitchen tools and gadgets, and pantry staples frequently used in recipes. Though the company has yet to make money, it is working on cutting costs, such as lowering the costs of goods sold as a percentage of net revenue from 77.3 percent in 2015 to 67 percent last year.
Blue Apron’s annual sales were $77.8 million in 2014, $340.8 million in 2015 and $795.4 million last year. The company currently operates in all 48 contiguous states, with major fulfillment centers in California, New Jersey and Texas, and believes it still has opportunity to grow.
U.S. grocery sales totaled $781.5 billion last year, according to a Euromonitor study cited by Blue Apron — $9.7 billion, 1.2 percent, was generated online. Restaurant sales were $543.1 billion in 2016, 2.2 percent of which were online.
“We believe that our business is poised to capture share from the grocery and restaurant markets and to benefit from shifts in consumer experience over goods, and increasing interest by consumers in where their food comes from,” Blue Apron said in its initial public offering in June.
Blue Apron faces competition in meal kits from traditional supermarkets as well as rival online subscription services such as HelloFresh, Purple Carrot and Sun Basket.
Analysts also suggest that the market for subscription-fee meal kits is close to saturation: Nearly three-quarters of new subscribers cancel their subscriptions within the first year, finds Cardlytics, a payment card analytics firm that tracked 45,000 people who first bought meal kit subscriptions in January 2016; 23 percent of subscribers give up after a month and 52 percent quit within six months.
Wayfair holds the runner-up spot on the Hot 100 chart, another ecommerce business that has been publicly held for nearly three years. The company has maintained a torrid growth pace as it expands its online catalog to include even greater price and quality ranges.
On the No. 4 rung is Chewy.com, a company in its sixth year of operation after being founded in the suburbs of Fort Lauderdale by Ryan Cohen and Michael Day.
“I always wanted to do something with pets, but I couldn’t figure out how to monetize it,” says Cohen, who serves as the company’s chief executive. After going to the pet store he realized the online market was “really under-penetrated,” he says.
Plus, “I understand the customer because it’s myself, so we built the company.”
Build they did, ringing up $26 million in sales in the first year, which grew to $900 million last year. Projections for this year were for sales to more than double; only a couple of months into the current fiscal year, though, Chewy.com received a buyout offer from established pet supply retailer PetSmart. The purchase price was estimated at $3.35 billion, reportedly the highest price ever paid for an online startup retailer.
Rounding out the top five is Build.com, the U.S.-based ecommerce retailer owned by European plumbing supply dealer Wolseley, which is renaming itself Ferguson this year as it focuses more on North American markets.
Build.com was founded in 2000 in Chico, Calif., by university classmates Christian Friedland and David Bocter. Today the company, which owns the brands FaucetDirect.com, Handlesets.com, LightingDirect.com and Venting.com, has expanded to include lighting, hardware, appliances, fans, chandeliers and other home improvement merchandise.
Niche marketing
Most of the Hot 100 Retailers have carved out a niche for themselves and grow their businesses by exploiting the opportunities within that niche. Is there a danger that the specialty can be too narrowly defined and burgeoning businesses could find themselves hemmed in by the competition?
“They could niche themselves into a corner,” says Kantar Retail’s Nicholas. “We are a way down the road before they niche themselves into oblivion.”
A bigger problem is that retailers are losing shoppers. “There has been an immense consolidation in [shopper] trips, so shoppers are shopping loyally,” he says. “They’re making fewer trips but are buying more” at the retailers they favor.
One niche area that is very well represented on the Hot 100 Retailers chart is groceries, which represent a fifth of all Hot 100 Retailers. Supermarkets include traditional operators such as Kroger (the largest supermarket chain in the country), as well as large-volume grocers Hy-Vee, DeMoulas Super Market, Golub’s Price Chopper and K-VA-T Food Stores.
Niche supermarkets are not necessarily small operations, as witnessed by the continued growth of Wegmans up and down the East Coast, limited-assortment Aldi all over the country, natural foods Sprouts Farmers Market in the west and Grocery Outlet, primarily west of the Mississippi River.
Five chains on the Hot 100 Retailers chart are in the business of selling wine and spirits. Leading the pack is Total Wine & More, which opened 20 stores last year. The privately held company, which fashions itself as “America’s wine superstore,” generates approximately half its sales through a winery-direct program that involves small- and medium-sized wineries around the world without U.S. distribution.
“The barrier to entry for these wineries is that two or three wholesalers dominate in every single state,” says founder David Trone, who not too long ago stepped down as chief executive in favor of Kevin Peters.
The U.S. alcoholic beverage market is estimated at $211.6 billion, almost equally split between malt beverages and wine/spirits, according to importer Park Street. Wine accounts for about 15 percent of the alcoholic beverage market; more than 70 percent is produced in the U.S.
If grocery merchandise has been slow to move online, alcoholic beverages have been veritable snails when it comes to ecommerce. This is primarily a result of rules and regulations dating to the repeal of Prohibition 85 years ago.
Slow progress online has made it easier for wine and liquor stores to proliferate and land spots among the Hot 100 Retailers. Lee’s Discount Liquors was founded 40 years ago by Korean immigrant Hae Un Lee, BevMo! started in northern California in 1994 as Beverages & More and ABC Fine Wine & Spirits was launched by Jack Holloway in 1936 when he added alcoholic beverages to his cigar store. Spec’s Wines, Spirits & Finer Foods in Houston, owned and operated by the founding Jackson family, includes delicatessen departments in its stores.
Convenience stores comprise another significant segment of the Hot 100 Retailers, boosted by improved food offerings and the prolonged period of low gasoline prices that has kept Americans in their cars and on the road. 7-Eleven, which earlier this year purchased 1,000 gas stations and c-stores from Sunoco, recently introduced two sandwiches priced under $2.
“We can drop a product [in stores] overnight, and all of a sudden, we’re in a brand-new business,” says Nancy Smith, 7-Eleven’s senior vice president for food and beverage.
Prepared food accounts for about 22 percent of the typical c-store’s non-fuel sales, according to the National Association of Convenience Stores.
Convenience stores also have an expanding role in ecommerce, serving as pickup points for merchandise shipped by online retailers. “The convenience sector is one of the few where bricks-and-mortar holds a structural advantage over online, so the sector remains well-positioned for the future,” says Martin Mehalchin, a partner at the sales and marketing consultancy Lenati.
Future plans
The economic environment has improved recently — consumers are expressing confidence in the buying climate at the highest rate in 15 years, according to the Bloomberg Consumer Comfort Index. In addition, Bloomberg reports that American shoppers are as optimistic about their personal finances today as they have been at any time in the last decade.
Though there are “eye-catching headlines about store closings,” says Robert Sockin, economist at UBS Securities, “we don’t see much of an effect on retail employment and therefore on consumer spending.”
Growth plans announced by such Hot 100 retailers as Ulta Beauty, The Home Depot and Nebraska Furniture Mart should keep them on the path for a return performance next year.
As for the rest of the retail world, Kantar’s Nicholas sees mall-based retailers facing possible struggles. He refers to the enclosed shopping mall as “a period piece” dating to the middle of the 20th century.
The current challenge is for big-box operators to ask themselves, “How am I going to better use the space I’ve got?’” he says. “Big boxes will become more of a mall-in-the-box, a place with multiple stores within a store.”
Nicholas sees space set aside for in-store restaurants, classrooms for educating about merchandise or product safety or nutrition. “The [locations]will be a node in the retail ecosystem, not so much experience as functionality.”
Learn more about the Hot 100 breakouts
Sustained Sizzle
Restaurants
Food / Drug / Mass
Hard Goods
Soft Goods
Ecommerce
David P. Schulz has been writing for STORES since 1982 and is the author of several non-fiction books