The future of retail A recent piece in The Wall Street Journal reminded me of the timeless maxim, "There's always a bull market somewhere." Often among the unlikeliest sources.
Harken back to the chaos of 2008. There were seemingly no bastions of strength. With most asset classes -- save for a few alternative and fixed-income investments -- dragging investor capital down to epochal lows. The S&P 500 fell nearly 39 percent. Real estate stocks lost 43 percent. World stocks dropped 42 percent. Even corporate bonds clanked across the basement floor.
Yet from the darkness, light.
I recall surveying portfolio positions, as sell stops were triggered. Volatility skyrocketed. And seeing some unlikely heroes. Foremost was a discount retailer. One used as the butt of poorly heeled jokes as frequently as it is in portfolios. But Dollar Tree returned 61 percent to investors. Even as the world seemingly collapsed around it. In fact, Dollar Tree, and some of its deep-discounter peers, rank among the retail world's true success stories.

How could a retailer that claims, "Everything's $1.00" as part of its brand compete in the age of Amazon? When the likes of Wal-Mart, Sears, Nordstrom and Kroger have had to reinvent themselves just to survive? What is the future of retail?
Over the trailing year, the SPDR S&P Retail ETF has lost 5.5 percent, while Dollar Tree's stock has gained 25 percent. While Kroger fell 21 percent, Dollar General climbed 23 percent. And while Nordstrom plummeted 23 percent, discounter Ross Stores gained 15 percent.
How?
Because the deep-discount retail stores have learned a few things that many of the high-end retailers have forgotten, and discovered the future of retail.
1) If you can't beat the competition, change the way you play the game.
2) Know your customer and serve that customer alone.
3) Own the market niche your competitors don't want.
4) Focus on big trends and dominate them.
Consider Dollar General (DG). A company that has managed to thrive in the small, poor, rural communities left behind by the economic recovery.
Among the many low-cost items filling DG's aisles include canned goods, condiments, frozen pizza and plastic toys made in China. Meat, vegetables and fruit? Too expensive to stock.
DG has geared its business model toward the future of retail: low cost, convenience and higher margins. Well-known bigger brands are rarely carried. Nor are DG's customer's looking for them. As the company's core demographic is comprised by households with incomes of less than $40,000. Households who have long felt abandoned by the economic recovery.
Regular readers of this missive recall that we wrote about this in August of this year (The Middle Class is Dying. Here's an Antidote). With Pew Research having reported that as of 2016, the middle class had lost financial ground in 203 of the 223 metropolitan areas surveyed (here). Yet, as others shrunk from this growing dilemma, discounters like DG and Dollar Tree discovered the future of retail and rushed into the void. Seeing an opportunity to meet the needs of an unattended constituency.
DG has translated that effort into new stores in needy neighborhoods nationwide. Fueling explosive growth. As annual sales have surged from $16B in 2013 to $22B this year. And the company intends to add thousands of new locations to its 14,000-store footprint. From which it currently operates in 44 of 50 states.
The leading discounters contend that bricks and mortar retail is not dying. It's simply changing. Becoming more stratified. And those able to better meet the needs of the landscape's unique stratifications have been thriving.
In so doing, DG's strategy cuts across the grain of conventional retail wisdom. It does not open giant, multi-million-dollar stores and warehouse. Does not provide product in bulk. Doesn't offer delivery services. In fact, DG decided long ago to change the field on which the game is played. Accordingly, most of its stores are no bigger than basketball courts. And even including its larger venues, the average cost for a new location is only $250,000.
Moreover, DG has leveraged the misfortune of others.
When Wal-Mart misread the changing retail environment and was forced to close 100 small-town Express-branded stores, DG swooped in a scooped up many of those locations. Filling the stores with goods packaged in smaller quantities, or branded specifically for its target demographic. All of which resulted in new constituents paying higher margins at lower costs. Allowing the company, in fiscal year 2017, to earn $1.25 billion in profits on less than $22 billion in sales.
Sometimes, everybody wins.
According to a recent report from Boston Consulting Group, the focus on the low end is a big retail trend. And remains in its infancy. Certain corporations have figured this out and leveraged this opportunity. But most investors remain oblivious. Focused on the old guard. Many of whom have gotten skewered for failing to evolve.
Meanwhile, discount retailers continue to enjoy increased sales by tailoring more products to low-income households. All the while, ignoring what was long held as conventional wisdom.
While Wal-Mart and Kroger have been cutting prices to compete with Amazon, discounters like Dollar Tree and Dollar General have been relying on smaller store sizes and smaller product assortments to draw in customers and earn a loyal base. And when the next economic downturn occurs, such retailers will continue to sell the least expensive goods at the highest margins to a loyal following.
Like Leonardo da Vinci said, "Simplicity is the ultimate sophistication."
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