LIVE MARKETS-Brave new retail world: fewer stores, bigger winners, AI influence

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BRAVE NEW RETAIL WORLD: FEWER STORES, BIG WINNERS, AI INFLUENCE

In his deep dive into the retail sector, UBS analyst Michael Lasser envisions further reshaping of an already transformed industry, driven by shifting consumer behavior, artificial intelligence and costs.

Lasser is predicting another 40,000 store closures in the next five years. And while huge retailers such as Walmart WMT.O, Costco COST.O , Target TGT.N, Home Depot and Lowe's Companies LOW.N "stand to disproportionately gain" from the changes, he sees smaller, marginal retailers being penalized.

After years of consumers gradually moving more shopping online, e-commerce adoption keeps growing, with online sales now accounting for about 22% of total U.S. retail sales, up from about 11% in 2019.

Now Lasser sees the rise of "agentic shopping" further perpetuating the trend.

"Agents are less swayed by splashy marketing campaigns, childhood connections, nostalgia, and emotional factors," said Lasser. "As a result, retailers should increasingly be distinguished by the attributes of speed, location, assortment, experience, and price."

In the last two years he writes that Walmart, Costco and Amazon.com AMZN.O have accounted for an average of about 40% of the incremental growth in retail.

And he says "there’s still ample opportunity for the leading players to take even more share from smaller players without necessarily coming for each other."

Retailers with a strong online presence are finding that they can do with fewer physical locations due to home delivery and curbside pickup, according to Lasser, who says that shoppers now tend to "visit stores more purposefully and less frequently."

And their budget priorities have moved from goods to spending on experiences such as travel, dining and entertainment, so retailers are competing for a smaller share of wallets than before.

To be sure, Lasser writes that, along with larger rivals, smaller retailers can use artificial intelligence to help them become more efficient and to compete better. But he says "whether existing tariffs are maintained or removed, the overall cost structure of operating a retail business is rising."

"This creates significant challenges for smaller and marginal operators," he said, adding that "these conditions are likely to accelerate consolidation."

So he sees the total of U.S. retail stores falling to about 907,000 by 2030 from about 947,000 at the end of the third quarter of last year. The forecast assumes annual retail sales growth of 4% moving forward, in line with the compound annual growth rate over the past 20 years. And he sees e-commerce penetration growing to 27% by 2030.

The move away from physical stores has been going on for years with just 2.8 retail stores, excluding food, per 1,000 residents right now, which is down 13% from 2003 levels, according to a UBS analysis that draws on Census Bureau data.

So which stores will close? Lasser points to clothing and accessories, where he sees 12,000 closures followed by consumer electronics, with 6,000 and then 4,000 closures in home furnishings. But in grocery, home improvement, general merchandise and auto parts, he sees a limit to closures.

Along with the five companies first mentioned he also sees consolidation benefitting Best Buy BBY.N, Kroger KR.N, Albertsons ACI.N, Tractor Supply TSCO.O, Dollar General DG.N, Dollar Tree DLTR.O, AutoZone AZO.N and O’Reilly ORLY.O.

(Sinéad Carew)

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