Moody's: Smaller retailers vulnerable as competition intensifies

Dive Brief:

Intense competition among huge retail players like Amazon and Walmart is increasingly endangering smaller retailers, for which even small revenue declines can be devastating, according to a report this week from Moody’s Investors Service emailed to Retail Dive.
For retailers under liquidity stress, even $10 million quarterly loss in revenue can create a make-or-break scenario, Moody’s said. Additionally, retailers are dedicating resources to their e-commerce channel because of its fast pace of growth, though digital sales have yet to reach 10% of overall retail sales. The costs are taking their toll in almost every segment of retail, Moody’s said.
Many retailers are struggling to adequately assess who their competitors really are, sometimes missing that challenges are coming from segments and/or retailers they're not fully anticipating. “Companies like Target are showing how important it’s become to be more tactical in taking on a range of competitors both big and smaller — and knowing which margin wars to target or avoid,” Moody’s analysts said.

Dive Insight:

Retailers are consolidating as they beef up their e-commerce operations to stay alive in the shadow of ever-hulking Amazon. In their report, Moody's analysts note the recent $2.1 billion tie-up between Home Shopping Network and rival QVC ("another example of 'bigger is better'"), along with Petsmart's acquisition of Chewy.com and Walmart's of Jet, as examples of retailers realizing that they can buy their way up. Such acquisitions can save time and other resources that would go to building out digital operations.

That leaves smaller retailers in a vulnerable position. "We believe that over the next two years, the bigger competitors will deepen their consolidated hold over the industry, leaving smaller retailers to fight it out for an increasingly smaller share of the market share pie," analysts said.

“Battles for market share are always difficult for smaller retailers, which generally operate with less financial flexibility than their larger peers on multiple fronts,” Charlie O’Shea, Moody’s lead retail analyst and author of the report, said in a statement. “If they engage in the promotional battle, margins will suffer; avoid the promotions, and you risk losing revenue, market share and customer loyalty.”

Moody's points to Target as a retailer that is strategic about its competition, picking its battles when it comes to price and differentiating its merchandise. "Target has been far more tactical in its approach," Moody's said. "It carefully selects the 'basket' of head-to-head items and related discounts, to ensure that it does not 'poke the bear' too much. Also, the impact on margin is such that the additional traffic generated means these consumers will spend enough on higher margin private and exclusive product to offset the hit on consumables."

But that, too, robs smaller players of some of their opportunities, as larger rivals turn to their market share in response to challenges from the likes of Target, Moody's said. "[P]roducts, such as Threshhold and the Victoria Beckham limited run ... are a little more upscale than Walmart and therefore not directly competitive, [so] Target competitors such as Kohl's, JC Penney, and some Macy shoppers now have a Darwinian choice: fight a price battle with Target, which it will likely lose, or find someone weaker from whom to grab market share."

Ultimately, though, Amazon is becoming everyone's problem, as it enters more and more segments. And, with its proposed merger with Whole Foods, grocers are next, Moody's said. “Almost every sub-segment of retail is feeling the looming shadow of Amazon’s ever-increasing presence online,” O’Shea said. “Prime Day creates a significant conundrum for all retailers, especially for smaller specialty companies, which have to figure out whether or not they want to match Amazon’s promotions.”