The Reality of Retail

 | Jul 17, 2014 | 3:00 PM EDT  | Comments
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Most investors accept that the only certainty is that the future is uncertain. However, when it comes to retail, I would dare to say that its future reality is perhaps the easiest to predict with a fair degree of confidence. Unfortunately, that future does not look enticing.

The first reality is that retail is a very brutal business and it will only get more brutal in the future. Margins are very thin, inventory obsolescence is a fact of life, the failure rate is very high, and there are virtually no competitive advantages in the sector except for scale.

Scale is dominated by Wal-Mart (WMT) and Target (TGT). I am pretty confident in saying that over the next 50 years, I doubt you will ever see someone trying to create another general retailing chain.

The second reality is the most obvious, but it not often given the proper appreciation or respect. The future of retailing is going to be online. Unless you are Wal-Mart or Target -- and even they are investing heavily in e-commerce – brick-and-mortar retailing is a declining business. I'm excited to report that I will blessed with my first child, a boy named Noah, in late August. I have purchased more than 90% of his clothing from Zulily (ZU) by using my smartphone and iPad. I can lie in bed, browse Zulily's beautiful site, pick what I want and in two weeks, it shows up at my home. And, guess what? The products are far better and cheaper than anything I can find in traditional stores.

I'm not ready to invest in Zulily yet. I think the valuation is stretched but I think the business has staying power. By business, I'm generally referring to the online purchase of clothing and other goods. Whether Zulily can do it alone or if it's just a matter of time before Amazon (AMZN) takes it over, time will tell. But the endgame is the same: Retailing is becoming an online business.

The third retailing reality is that brick and mortar retailing is going to continue to become a more niche business. High-end malls are not going away -- while consumers will buy more online, plenty of folks will still enjoy visiting malls and retailers such as Nordstrom (JWN), Apple (AAPL) and other niche brands. However, all those business would not survive today without an online component.

Before investing in any retailer, take this simple, yet often overlooked reality to heart. Retailing is the most disruptive industry today and it will only continue to become more disrupted by the migration of consumer away from brick-and-mortar stores to the Internet .

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