Fast, But Not Easy: Retailing in the Millennial Age
Contributing to this article:
Christopher Baggini, CFA, Senior Portfolio Manager/Global Equity Analyst, Principal
Daniel DiFrancesco, Global Equity Research Associate
Halie O'Shea, Portfolio Manager/Global Equity Analyst, Principal
Jason Schrotberger, CFA, Senior Portfolio Manager/Global Equity Analyst, Principal
Eric Turner, CFA, Global Equity Analyst, Principal
The "Millennial" generation — born between roughly 1980 and 1990, and numbering about 52 million in the United States, according to the Pew Research Center — is quickly overtaking baby boomers as a driving force in the US consumer economy. Millennials are culturally and economically diverse, and are viewed by some observers as better educated and more socially responsible than their Generation X and boomer predecessors. (Other traits variously ascribed to Millennials are "narcissistic," "confident" and "self-expressive.") As smart consumers, Millennials are bringing new demands in customer service to retailers, but it’s probably worth the effort to cater to them, as they represent an undeniably large commercial opportunity: Accenture, a leading management consultant, forecasts that by 2020, annual spending in the United States by Millennial consumers will grow to $1.4 trillion and make up 30% of all retail volume.
As the first all-digital generation, Millennials expect their experiences as customers to be quick, engaging, low cost and in the industry’s lingo, "seamless" for in-store or online shopping. Through astute application of technology, innovative retailers are establishing new value propositions for Millennials — which we think of collectively as "fast retailing" — and extending the benefits to all customers.
We want more
Having grown up in a hyperconnected world, Millennials are accustomed to having music, television, newspapers and magazines, as well as newer cultural forms such as blogs and Internet videos, accessible on demand in all sorts of places. About 80% of Americans of ages 25 to 34 own smartphones, according to a 2013 Nielsen survey, and according to a recent study by Women's Wear Daily and executive recruiters Berglass + Associates (WWD/Berglass), about 70% of Millennials check their phones hourly. Importantly, two-thirds of Millennials report using their phones to shop, and over half have executed purchases via smartphone.
It's not all about speed, however: WWD/Berglass report that the flow of information among Millennial consumers, their peers, the outside world and merchants allows for a richer retail experience, whether online, via mobile or in the store. The breadth and power of information makes Millennials more aware of what they are buying, and they expect a role in shaping the products merchants are offering.
Beyond knowing more about what’s out there, Millennials also set the bar for customer service very high, expecting personalized service, stimulating experiences in the store and online, value for money and loyalty rewards, all tied together with integrated retail information technology through any digital device (what the industry calls "omnichannel marketing"). And fast retailing is not only about Millennials: Nielsen reports that more than half of consumers over age 55 own smartphones.
In this convergence of bricks-and-mortar with the Internet, three facets of retailing stand out for their adoption of rapid and engaging techniques aimed at the Millennial demographic: fast-casual restaurants, fast fashion, and fast transactions.
Food with integrity
A meal at a fast-casual restaurant (costing $9 or $10) puts food in customers' hands at the speed of quick-serve restaurants (e.g. fast-food giants such as McDonald's, Burger King and Taco Bell, at $5) but with the healthier fare Millennials are looking for, and at a lower price than casual-dining restaurants (such as Applebee's, Olive Garden or Chili's, at $12 and higher, plus a tip). The fast-casual category includes Panera Bread, Potbelly Sandwich Chop, Cosi, Noodles & Company, and the category leader Chipotle Mexican Grill. Restaurant consultant Technomic reports that two-thirds of consumers surveyed visit fast-casual restaurants at least once a month — less often than the 91% for quick-serve, but on a par with the 68% frequency for casual-dining spots. Technomic also told the Financial Times that revenues in the fast-casual category had grown 13% for the year 2012 — twice the speed of the fast-food group.
Among fast-casual chains, we believe Chipotle Mexican Grill could benefit (headquarters in Denver; market capitalization at Nov. 27, $16.2 billion). Between 2008 and 2012, annual revenues grew at 20% on average, while earnings per share rose 39%. For the first three quarters of 2013, revenues gained 17% year over year to $2.37 billion, and earnings per share also advanced 17%, to $7.93. To cater to Millennials’ desire to participate in shaping products, Chipotle has customers design their own meals from a range of fresh ingredients — most of which are cooked in each restaurant — and view preparation in an open-plan kitchen. To minimize customer waiting time and reduce bottlenecks at the cash register, Chipotle takes orders online and via smartphone, and enters orders and swipes credit cards while customers are standing in line. According to software provider Hospitality Technology Solutions, the industry regards Chipotle's current app as the gold standard for mobile ordering.
We think messaging and branding are essential to Chipotle’s strategy, and in addition to conventional advertising the company develops "owned media," Internet videos and other content, that celebrate its meticulous sourcing of ingredients. Following a philosophy it calls "Food With Integrity," Chipotle does not serve meat or dairy products produced with antibiotics or hormones (although the company acknowledges that shortages will arise, and conspicuously notifies customers of the exceptions). Chipotle's exceptional growth, from a standing start 20 years ago to estimated 2013 revenues of $3.2 billion, has sprung from one menu concept — fresh Mexican food. The company has rolled out another business line, Asian-themed ShopHouse restaurants, and plans to leverage the same principles of wholesome, fresh ingredients prepared to customers’ instructions. Chipotle leads the industry in unit productivity and, as of mid-November 2013, the consensus of analysts’ estimates of earnings per share called for 20% growth in 2014, rising to 24% in 2015.
From twice a year to twice a week
Fast fashion replaces the apparel industry’s traditional two-season calendar of spring and fall collections with a shorter cycle that features rapid design of new garments, quicker manufacturing at lower prices, and frequent turnover in stores. The principles of fast fashion have evolved over the last two decades, and major players in the current market are U.S.-based Forever 21 and American Apparel, Joe Fresh of Canada, and segment leaders H&M of Sweden and Zara, a unit of Spain-based Inditex. Retailers see two benefits: Higher turnover of smaller lots reduces unsold end-of-season inventory, while the prospect of fresh styles constantly arriving in stores entices customers to shop more often. Fast-fashion retailers often base their production close to home, higher labor costs notwithstanding, to speed the design of new clothes, and avoid the long lead times of manufacturing and shipping from Asia.
We highlight the segment leader Inditex (headquarters in La Coruña, Galicia, Spain; market capitalization as of Sept. 18 €69.0 billion). From 2008 through 2012, revenues grew 11% per year on average to €15.9 billion (US $21.7 billion), while net profits grew 17% to €2.4 billion (US$3.3 billion). The efficiency of the fast fashion machine of Zara, the company’s flagship brand, has inspired many adoring articles and business school case studies, while building Inditex into one of the two largest clothing makers (neck-and neck with H&M), and made its founder and majority owner, Amancio Ortega, the world’s third-richest man. About 50% of volume is produced in countries close to headquarters, and then shipped two to six times per week to stores around the world. By monitoring demand so closely, Zara can forego predicting styles and instead react to what customers are buying: Roughly 80% of garments are designed in season, according to Boston Consulting Group. A 2010 Columbia Business School case study estimated that through its quicker response to customers, Zara has to mark down only 15% to 20% of merchandise, versus 30% to 40% for most retailers. Moreover, thanks to the steady stream of new styles, customers visit an average of 17 times per year, versus just four or five at The Gap. Fashion editor Masoud Golsorkhi told The New York Times: "[Zara] broke up a century-old biannual cycle of fashion. Now, pretty much half of the high-end fashion companies make four to six collections instead of two each year. That’s absolutely because of Zara. "
Inditex and Zara keep a low public profile: The company advertises only rarely, preferring direct contact with customers, and marketing investment is directed instead into beautiful and prestigious store locations. At mid-year 2013, Inditex sold from 6,300 stores (including 1,900 Zara units) in 86 global markets, and planned to open between 440 and 480 new stores during the year. For fiscal 2014 and 2015 analysts are forecasting that Inditex will expand revenues by 7% and 11%, respectively, and produce earnings per share gains of 7% and 13%.
Always in stock
Last, we consider fast transactions, referring to advances in retailers’ operations and logistics. To meet Millennials' desire for speed, insightful retailers are going omnichannel — bringing their stores to the Internet, as well as bringing the Internet to their stores, to offer customers a seamless experience in every sales venue.
As shopping online has become second nature, the boundaries between virtual and bricks-and-mortar stores are blurring. From its surveys of shoppers, Accenture found that among Millennials, Generation X and Baby Boomers, 41% admitted to "showrooming," or scrutinizing merchandise at a real-world store before going online to look for a lower price. Accenture also reported that about one-third of all shoppers said they buy online from a retailer when stores are closed. For retailers, "click and collect," where online purchases can be picked up from or returned to a local store, is becoming the standard. Moving in the opposite direction, retailers that started on the Internet appear to see value in setting up shop in the physical world: To establish credibility for its new company, Warby Parker, a purveyor of hip eyeglass frames and lenses at reduced prices, has opened 14 stores including a flagship in New York's Soho district.
Department store giant Nordstrom’s is a digital pioneer that has been selling online since 2000. The firm admits to several difficult years lining up customers’ online and in-store experiences, but by 2009 customers were able to access merchandise located anywhere in the company. Salespeople now stroll the floors with mobile devices, and in 2012 Jamie Nordstrom, head of Nordstrom Direct, told a conference audience that before long the company’s stores would do away with cash registers, as these lack the brainpower needed to deliver an integrated selling effort. He also set out same-day shipping as a near-term goal.
The fast transaction leader, in our view, is ultrahip specialty retailer Urban Outfitters (headquarters in Philadelphia; market capitalization at November 18, $5.8 billion). Through its Urban Outfitters, Anthropologie and Free People brands, the company is tightly focused on a young customer demographic, and accordingly has jumped ahead of the industry in omnichannel retailing. Through their smartphones, prospective customers can not only learn what items are in stock at a given store, but also see what music is playing, and tune in through iTunes or Spotify. Quick and flexible shipping has been emphasized as well: To minimize transit time, online orders are shipped from the company's central fulfillment center in Nevada or, if closer, from local stores. The Urban Outfitters brand ships to 120 countries.
For those customers who venture into the store, Urban Outfitters, like Nordstrom's, has created an interactive shopping experience through mobile point-of-sale systems residing on tablets. In September 2012, the company declared it had ordered its last cash register. Sales staff are able to process payments on the floor, simplifying customers’ buying decisions; if a desired item is not on hand, an out-of-stock software module can find the right one and ship it to the customer from another store.
Urban Outfitters’ annual sales grew 11% on average during the four fiscal years ended January 31, 2013, while net income rose 4.5% (including a 32% setback in fiscal 2012). For the nine months ended October 2013, sales gained 12% to $2.2 billion, and net income climbed 25% to $194 million. Analysts expect continued growth for Urban Outfitters, forecasting consensus earnings per share of $2.21 in fiscal 2015 and $2.58 in 2016, respective gains of 16% and 17%.
The views, opinions, and content presented are for informational purposes only. They are not intended to reflect a current or past recommendation; investment, legal, tax, or accounting advice of any kind; or a solicitation of an offer to buy or sell any securities or investment services. Except as otherwise specified, any companies, sectors, securities, and/or markets discussed are solely for illustrative purposes regarding economic trends and conditions or investment process and may or may not be held by Turner, the Turner Funds, or other investment vehicles or accounts managed by Turner or its affiliates. Past performance is no guarantee of future results.
Turner Investments refers to Turner Investments, L. P., its subsidiaries, and affiliates. Nothing presented should be considered to be an offer to provide any Turner product or service in any jurisdiction that would be unlawful under the securities laws of that jurisdiction.
Turner Investments, founded in 1990 and based in Berwyn, Pennsylvania, is an investment firm with more than $8 billion in assets under management in stocks, as of December 31, 2013. Turner manages growth, global/international, and alternative separately-managed accounts and mutual funds for institutions and individuals.
As of November 30, 2013, Turner held in client accounts 42,990 shares of Taco Bell, 8,080 shares of Chipotle Mexican Grill, 16,969 shares of Zara, 5,320 shares of Nordstrom’s, and 622,340 shares of Urban Outfitters. Turner held no shares of McDonald’s, Burger King, Applebee’s, Olive Garden, Chili’s, Panara Bread, Potbelly Sandwich Chop, Cosi, Noodles & Company, Forever 21, American Apparel, Joe Fresh of Canada, H&M, and Warby Parker.