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Retail -- Changing, Not Dying

|Includes: AAPL, BBY, HD, LOW, TGT, Walmart Inc. (WMT)

Much has been written on Seeking Alpha recently about retail -- and many comments suggest the death of retail.

Here is my rebuttal.

Retail is changing. Retail is not dead or dying. Competition from on-line -- Amazon (NASDAQ:AMZN) -- is changing how we shop. However, on-line will not be the end of retail.

I grew up in family retail -- unusual family retail. We sold pick-your-own vegetables and cut-your-own Christmas Trees. The business is now in it's 43rd year and thriving.

I'll talk first about Christmas Trees. Yes, Christmas trees are retail, but they are also entertainment. Bad economic years are good years for cut-your-own Christmas trees. When people can spend less on gifts, they look to family activities. Getting the generations together to spend an afternoon selecting and cutting a Christmas tree is both entertainment and retail. It's an event. It feels good. Nothing on-line can replace this.

Then I'll talk about fresh vegetables. Depending on what one is picking and what one does with the vegetables when one gets home, picking vegetables is something betweeen entertainment and hard work. Picking a few tomatoes and peppers on a nice day is entertainment. Picking a bushel of beans in 90 degree heat is hard work -- and then one has to go home and process them which is even more work. On-line cannot compete with the entertainment of going outside on a beautiful day to pick a few tomatoes. On-line has a very hard time competing with the quality of home-processed beans. Yes, there are super-premium brands starting to come close.

Now I'll talk about my current life. I telecommute. My wife runs her own business from the home. Both of these trends will increase as on-line increases. Grocery shopping is an opportunity to get out of the house. Usually, it's something we want to do, together to get out of the house -- and we'll often include a meal out. Other times, it's an opportunity for one of us to get out of the house and away from the other. Going on-line to shop? We're both on-line all day, we want a break.

Notice the trend here -- we're not just buying stuff -- we're doing things and buying stuff in the process.

So lets talk about Walmart (NYSE:WMT) and Target (NYSE:TGT). Despite all the differences, I view Target as simply an upscale Walmart. To me, they're basically the same store, just Target is a little brighter and cleaner. Shopping at either one is a painful necessity. It's not fun. It's not entertaining. It's not pleasant. I go in, get what I have to, and I get out.

Shopping at Costco (NASDAQ:COST), at least for me, is a little different, especially on a Tuesday evening instead of a crowded weekend. I stop and look. I browse. Sometimes I try the food samples. Yes, some trips are buy what I need and get out. Others are almost fun.

And I'll contrast that with Lowe's (NYSE:LOW), Home Depot (NYSE:HD), and Best Buy (NYSE:BBY).

What do home improvement and electronics have in common? I often need expertise when I'm shopping. These stores choose to have relatively cheap help, and the advice I get is sufficiently inconsistent I don't trust it. I'm sure that some of it is very good advice, but without background knowledge to evaluate the advice, I just don't know. In contrast, and particularly with electronics, I feel like I get better advice on-line. Why purchase from Best Buy when I can get better advice, more information, a better price, and reasonable shipping from Amazon? For home improvement it's a little different. I usually figure out what I'm doing on-line, then go to one of the local stores to make the purchase.

The service side -- something else Amazon can't do well, yet. Best Buy (through Geek Squad) offers a service component Amazon cannot offer -- yet.

And now, the "local yarn store" or LYS. Yes, I'm a guy. I'm also a spinner and knitter. I used to raise alpacas, and I have this closet full of alpaca fiber. When I go to purchase yarn and fiber, I want to feel it. Amazon cannot offer me the tacticle. Some high-end on-line yarn and fiber stores offer sample cards which allow this, but mostly, I like to feel what I'm buying. Unfortunately, local yarn shops come and go with an average life span of only a few years. They boom when knitting gets trendy and bust when the next fad comes along.

So, enough rambling, what do I think of future retail? How will it compete with same-day delivery?

On-line has changed retail, and it will continue to change retail. Reliable same-day delivery will have an impact. I think this will put pressure on a number of segments of traditional retail. I think, however, it offers opportunities for retail segments that offer something on-line cannot.

1) The entertainment component. Physical retail that offers an entertainment component -- a get out and do something component -- in addition to shopping will thrive.

2) The local and known quantity component. Shopping with somebody who supports you and supports your community will never disappear in niche markets. Granted, these small and local businesses offer few investment opportunities. Further, if one considers the local retail that got pushed out of the market by Walmart, one might suspect the opportunities are niches rather than broad market. Those that survive in these niches will offer something Walmart cannot or will not.

3) The service component. On-line, for the most part doesn't do service well. Big box price competitors, for the most part, don't do service well. Opportunities to order service on-line are increasing, but service will remain a way to differentiate many retail operations for the forseeable future. Beware, though, cheap labor trying to compete with on-line in a high knowledge environment. There are ways for on-line to compete on service.

4) Competing on price with Walmart and Target in the physical universe and every discount retailer on the world wide web is a very, very tough task. The vast, vast majority of those who attempt it will fail. Further, the big on-line retailers will have the greatest advantages with optimizing the supply chain and competing on price. This is where physical retail loses, so find a different differentiator.

I think there is opportunity in using the physical to sell the on-line. Apple (NASDAQ:AAPL) does this very well with the Apple store. You go to the Apple store, you physically touch the toys, you talk to somebody who is entheusiastic about the toys -- and often knows something. Good stuff. If you buy from the Apple Store, Apple wins. If you don't buy from the Apple Store, but buy the device on-line for a better price (or some other reason), Apple still makes the sale. I hypothesize that Apple doesn't really care if you purchase from the Apple store. The purpose of the Apple store is to drive the purchase decision, not make the sale -- it's marketing. The Apple store complements on-line purchases. Apple uses the physical to sell the on-line.

Unfortunately, my now-defunct local yarn shop served much the same purpose. Shoppers would go into the store, feel the yarn, browse, consult the knowledgable store owner and other customers, then purchase on-line for half the price. That's why my local yarn store is defunct. The store competes with on-line. The manufacturers and on-line retailers benefit from the shopper's ability to evaluate the yarn locally, but unlike Apple the local store receives no benefit from sales by on-line competitors.

I think there is a lot of room for physical retail to cooperate/complement on-line retail. There ought to be a way to make money doing so. If I knew how to accomplish this with a yarn and fiber store, I would consider opening a local yarn shop, myself. I don't know the business model that accomplishes the cooperation and complementary service instead of competition between on-line and physical. The Apple Store is the best example I am aware of. Apple is certainly making money through this channel. I'm sure others are and/or will figure out how. I just don't know the model.

In terms of investment, I'm skeptical of Walmart and Target. Partly this is the Peter Lynch approach -- I don't like shopping in these stores, so why invest in them? Partly this is because if you take competition on price to the limit, the internet wins most of the time. I'm wary of any physical retail that cannot find a way to differentiate itsself from the on-line world. I won't claim to know where retail is heading, but I think there is plenty of room for physcal retailers who offer something on-line retailers cannot. I think there is an opportunity for physical presence to drive on-line sales as Apple does with the Apple store.

In terms of competition from on-line with same day delivery? Look for the high end and middle class to suffer first. Given the income divide and the number of families barely getting by, I don't think the low end moves to same-day delivery nearly as fast as the high end. This may contradict my previously expressed skepticism with respect to Walmart.

I'm a data analyst and techie trying to save enough to retire before I'm 90. I'm not a Wall Street writer or investment advisor. I write this in hopes of contributing thought and discussion to those on Seeking Alpha who have provided so much good advice to me. I wrote this myself. I have no positions in any company mentioned in this article, and no intention to initiate said positions any time soon. This article represents my current thinking and I reserve the right to change my mind at any time. All potential investments have risks and flaws -- you must choose your own poison.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.