The almighty Apocalypse of X-men fame. (Source)

The retail apocalypse isn’t evenly distributed.

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To many, 2017 is the year of the “retail apocalypse.” Year to date, 19 chains have filed for Chapter 11 bankruptcy protection, including Toys R Us, BCBG, Radioshack, Payless, and Gymboree. Unlike the bankruptcies of the 2008 recession (e.g. Linens ‘n Things, Mattress Discounters, Sharper Image, Value City), these are unrelated to the economy. GDP growth is on an 8-year growth run, and unemployment has reached historic lows. Wage growth for the poorest quintile, stagnant for some time, has even returned in recent years.

Online commerce is the cause of the dramatic changes in retail, and Amazon has been the largest beneficiary. That much is obvious. What is less obvious is that some retailers are thriving during the “apocalypse.” I want to spend some time discussing those who are bucking the trend, and perhaps extract some signal from the noise.

IHL Group recently released a study covered by Forbes that shows that, in 2017, there will be more store openings (14,248) than closings (10,168). Yes, you read that correctly! Only two categories of retail will see net closings: specialty softgoods and department stores:

The biggest loser in retail is full price fashion. Payless, rue21, Ascena, Gymboree, and The Limited all top the store closing list. Joining them are electronics retailers like Radioshack, Gamestop, and hhgregg. Department stores Sears, Kmart, and JC Penney round out the list. These chains represent categories that are now more easily shopped online than offline. Fashion has been the toughest nut to crack, but startups like Stitch Fix have shown that it is possible to overcome traditional barriers like fit and returns.

Three categories of retail are growing quickly, each with a compelling value proposition that is tougher to find online today. One is the discount/off-price. Businesses like TJX and Ross Stores provide a channel for off season, high quality goods that must be liquidated. The value proposition to users is deep value, as well as the thrill of the hunt. Online native players like thredUP and RealReal are also benefiting from this enormous market. Some are opening stores themselves.

Another is convenience. Small format players like 7-Eleven satisfy an impulse buying behavior that’s tough to replicate online, although a few new startups have begun to do so. I’d put “dollar stores” into this category as well because they benefit from low AOVs, small formats, and convenient locations. E-commerce in this category is challenging because shipping and distribution costs are a drag on margin, but innovative startups like Hollar have begun to figure out a model that works here too.

The third winner, and by far the largest opener of stores, is the fast food/bar segment. As millennials continue to shift spend from goods to experiences, we should expect to see a higher share of wallet spent on “going out” in general. Starbucks, Dunkin’, Domino’s, and other category leading chains continue to benefit by growing their share of wallet, and stomach. Online players like GrubHub and Postmates already aggregate supply here, but are mainly focused on long tail of restaurants. While they deliver food and drink, they cannot ever deliver a romantic atmosphere or the aroma of fresh coffee roasting. Some things you have to experience in person.

The death of retail has been greatly exaggerated (yes, occasionally, by yours truly). What we are witnessing instead is a re-platforming of retail. We can learn what that platform should look like by observing what is working despite the incredible growth of online commerce. To survive, retailers must focus on some combination of these core differentiators: deep value, convenience, and experience.

My last point is that, while the apocalypse is not evenly distributed, it will not stand idly by either. In all these growing retail categories, there are startups nibbling at the heels of the incumbents. Many of them have retail strategies of their own. I very much believe that in a decade most of the growth in retail will come from brands that are born online. Combining the best of online and retail is the key to winning commerce in the new millennium.

“There will be more retail stores opening than closing in 2017” (Link)

Consumers haven’t gone into hiding and they’re not spending less. They’re spending more and there are more new stores — but tastes have changed. One of the most important things about these changes is that they are happening faster than ever before. There’s lots of reasons for that and plenty to debate about it but there’s no way to avoid the constant adaptation that’s now required. Organizations now need to be able to process new ideas at a rate that’s faster and more efficient than ever before. If you’re a legacy retailer of any kind, it’s hard to change quickly enough and that creates an opening for more nimble competitors. It’s not enough just to have something new, it has to keep evolving. That’s a challenge both for younger companies as well as the established players and it will be for the foreseeable future.

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Lightspeed is a multi-stage VC firm focused on accelerating disruptive innovations and trends in the consumer, enterprise, and health sectors. In the past two decades, Lightspeed has backed 400+ companies and currently manages $10.5B across the global Lightspeed platform.

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Alex Taussig

Alex Taussig

Partner @ Lightspeed. Current: All Day Kitchens, Archive, Daily Harvest, Faire, Found, Frubana, Muni, Outschool, Zola. Past: $TDUP, $TWOU. Writes

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