1) Fast-fashion retailers are seeing falling full-price sales, led by H&M and more recently, Zara.

What happened

  • Analysts were already concerned with Zara’s biggest competitor, Hennes & Mauritz AB (H&M), whose inventory was higher in 2017 than in the past 20 years, but whose profits hit a six-year low. While in 2018, the company will close more stores and open fewer than in recent years, it isn’t up to speed on the ecommerce front and is banking too heavily on its new off-price store, Afound, which isn’t going to offset depleted margins.
  • Now the same might be happening to Zara. The company’s inventories are rising, which might force it to discount more heavily moving forward.

Why it matters

  • One of the core benefits of fast fashion is that the trend cycles often lead to tight inventory control and high sell-through. However, Zara’s share of full-price sales is decreasing, a worrying sign for its margins and its ability to put the right product in front of shoppers at the right time.
  • As recently as December 2017, Inditex was outpacing H&M, which, at the time, experienced its largest drop in quarterly sales in at least a decade. But now, fast-fashion digitally-native brands like ASOS and Boohoo are outpacing both, unimpeded by brick-and-mortar retail. These digital fast-fashion brands can move around inventory more nimbly than their offline competitors, and Zara’s delayed investments in ecommerce might be catching up to it.  

2) Amazon plans to open up to six more Amazon Go stores this year, an unexpectedly fast expansion.

What happened

  • Amazon opened its first cashier-free Amazon Go store in Seattle in January 2018 after more than a year of hype and delays. The company will likely open more locations in its native city, with other possible openings in Los Angeles and Chicago.
  • New Amazon offerings are typically incubated for years before expanding—its Amazon Fresh grocery delivery service was in the works for five years in Seattle before the company launched the service in Los Angeles.

Why it matters

  • This quick expansion underlines Amazon’s interest in building its offline retail footprint, augmented by its Just Walk Out Shopping technology. There’s a chance that Amazon is either 1) simply expanding Amazon Go to grow its eponymous brick-and-mortar presence or 2) continuing to test Amazon Go with the goal of integrating it into Whole Foods, with or without keeping the standalone Go brand. If Go stays independent, it would give Amazon a ladder from Go and Whole Foods 365 (mid-level pricing) to Whole Foods flagship stores (higher-end pricing).  
  • The Just Walk Out Shopping experience is also easily transferable to other Amazon verticals such as electronics or fashion. News that the company is in talks with The Grove, a high-end outdoor shopping mall in Los Angeles, suggests that Amazon is targeting higher-income customers with Go, as does its acquisition of Whole Foods. After all, this is Amazon’s sweet spot as most Prime customers are wealthy.

3) Younique, a peer-to-peer sales beauty brand, is increasing Coty’s profitability despite slumping mass-market beauty sales.

What happened

  • Coty, which owns companies including Covergirl and Rimmel, among others, attributed its 19.4% rise in profitability last quarter ($131.9 million) to Younique, a digitally-native, peer-to-peer sales cosmetics brand founded in 2012. Coty invested $600 million in Younique in January 2017 for a 60% stake in the company.
  • Since the investment, Younique went from 80,000 to 230,000 sellers and the company saw its sales growth rise to the double digits last quarter. This comes at a time when Covergirl is undergoing a rebranding campaign, traditional peer-to-peer models such as Avon are struggling, and the mass-market beauty space is weak overall.

Why it matters

  • Younique’s scalability is a result of optimizing for online sales and reducing friction in ways unimaginable to predecessors like Avon, Mary Kay, or even Rodan + Fields. Younique was already poised to capitalize on the ecommerce boom when it launched, but it continues to take an active approach to engaging its sellers and customers as a digitally-native and distributed sales makeup brand.
  • Whereas even Rodan + Fields, founded in 2002, only recently began supplementing its in-person sales with ecommerce, each Younique seller is given a personal ecommerce site. They are trained in digital marketing and act as influencers on social media, allowing Younique’s sellers to do the talking instead of the company, which adds an element of trust to interactions between the brand and customers and builds loyalty. Younique also pays its sellers faster than its competitors do—once a seller makes $50, they receive a Younique debit card for direct deposits.

4) Adidas’ Speedfactory innovates the sneaker supply chain, but questions of scalability loom.   

What happened

  • In 2015, Adidas opened its first Speedfactory in Ansbach, Germany, where robots do most of the work, streamlining the supply chain and reducing the timeline for shoe production from the typical four months to just days. Last year, Adidas opened a second Speedfactory in Atlanta.
  • Speedfactory allows Adidas to cost-effectively test out different products in smaller batches and create customized shoes, while also digitizing the entire production process: each component in a sneaker can be traced to its source of origin, allowing the company to efficiently address any mistakes in production. The factories are also in much closer proximity to customers than the bulk of the company’s production, which happens in Asia.

Why it matters

  • Adidas and Nike are racing to push innovation forward in the footwear industry. In the future, plenty of this will come from using new materials, producing more customized products, and delivering them more quickly. The Speedfactory will be an essential tool to realize this future, but it won’t come easily. The factories are expensive, even when splitting the cost with a partner, and shifting to a distributed manufacturing model over a centralized one has not yet happened on a large scale, let alone with a company as large as Adidas.
  • While Adidas makes 360 million shoes a year, the Speedfactories can currently make about one million each. The focus seems to be on more forward-thinking and higher-end products that can take advantage of the modern factory’s capabilities, but it will be important to watch the expectations the company puts on these new initiatives, and if they become serious players or remain more niche offerings.   

5) ABC Carpet & Home sells the top floors of its flagship store, signaling that retailers and real estate developers alike will have to get creative to offset retail rent declines.

What happened

  • The deal between Normandy Real Estate Partners and the ABC Carpet & Home flagship building, which will convert the upper part of the building from retail space into office space, is one of a slew of other deals made by retailers that are reducing their footprints and/or redeveloping their spaces.
  • Lord & Taylor’s parent company Hudson’s Bay Co. sold parts of the department store’s flagship Fifth Avenue building to WeWork for its headquarters and other office space.

Why it matters

  • While retail real estate demand is falling, office space demand is rising—in the Flatiron district, where ABC Carpet & Home’s flagship store is located, only 10% of the neighborhood is available to companies seeking office space. Still, office space is significantly less costly; in 2017, Class A and B office space in Flatiron was an average of $71.84 per square foot whereas commercial space was $456 per square foot.  
  • ABC Carpet & Home has long been a pioneer among legacy retailers in adapting to transformations in the industry—it added three restaurants run by a celebrity chef and launched an area called Deepak HomeBase where Deepak Chopra holds events. Though it will keep its own corporate offices and lower-level retail space at its flagship location, the company pragmatically sees its store as an evolving concept. Its restaurants, for example, are furnished with ABC products, making dining at the ABC Building a shoppable, interactive experience. It also closed its Bronx outlet in June 2016, which put more focus on full-price products. Now the question is whether less space means higher sales per square foot for the company, or if the company could mitigate cutting square footage more effectively by shifting more to ecommerce.
  • Given the large discrepancy between retail and office rents, developers need to figure out if they should lease their properties to companies looking for office space, or hold out for flagship retail tenants. Either way, they will be making concessions on the rates they hoped for.