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The end of retail as we know it?

“I have no illusion that 10 years from now (the retail industry) will look the same as today, and there will be a few things along the way that surprise us… The world has evolved, and it’s going to keep evolving, but the speed is increasing.” Warren Buffett, as quoted by Business Insider.

It’s been a tough gig for investors in the retail industry so far in 2017.

Since the beginning of the year, shares across the sector have plunged, wiping out billions of dollars from investors’ wallets. Super Retail Group Ltd (ASX: SUL) and Harvey Norman Holdings Limited (ASX: HVN) are down more than 21% and 23%, respectively, with Baby Bunting Group Ltd (ASX: BBN) shedding around that amount as well.

Even long-time investor-favourite JB Hi-Fi Limited (ASX: JBH) has dropped almost 16% year-to-date; they have lost almost a quarter of their value since hitting a high of $30.20 in September.

What’s happened?

Earlier this month, the Australian Bureau of Statistics (ABS) noted that seasonally adjusted retail spending fell 0.1% in March. Department store spending was 0.6% lower with food retailing, as well as cafes and restaurants, down 0.5% as well. By comparison, economists had forecast a small rise for the month.

The update even prompted analysts from Citi to note “Alert: the retail sector is verging on recession”, as was reported by The Australian. Low wage growth may be one reason behind the reduction in spending, together with a rise in interest rates by the banks. Potential caution being practiced by consumers in relation to recent global events may also be having an impact.

Zooming in, the struggles have become evident from a company-specific point of view as well. OrotonGroup Limited (ASX: ORL), whose share price has plunged 39% since the beginning of the year, issued a note saying it had “received preliminary earnings figures for April 2017 (an important trading month for Oroton), which is indicating that earnings are down on the previous corresponding period” (emphasis added). Its shares have been entered into a trading halt, with a further fall in the share price likely once an announcement is made.

Department store group Myer Holdings Ltd (ASX: MYR), whose shares have lost more than a third of their value year-to-date, also released a weak update on its third-quarter sales performance last week, sparking a sell-off of the shares. Comparable store sales are down 0.3% since the beginning of the year.

The Reject Shop Ltd (ASX: TRS) is another business that has issued a pretty ugly downgrade recently, citing “challenging retail trading conditions”, together with RCG Corporation Ltd (ASX: RCG). RCG, which owns The Athlete’s Foot, has shed around 55% of its market value in 2017.

Where to from here?

The Warren Buffett quote cited above came from the recent Berkshire Hathaway Inc.  (NYSE: BRK.B) annual meeting, where Buffett’s partner, Charlie Munger also reportedly said “It would certainly be unpleasant if we were in the department store business”, according to Business Insider.

The retail landscape is a tough one to navigate. It can be incredibly difficult for businesses to find sustainable competitive advantages, given the low barriers to entry and often minimal product differentiation. It can also be particularly vulnerable to economic conditions, whereby consumers can elect to reign in their spending during times of uncertainty.

In addition to these struggles, Amazon.com, Inc. (NASDAQ:AMZN) has also confirmed its intentions to expand its operations in this country. Of course, it will have Australian retailers in its sights: after all, Jeff Bezos’ (CEO of Amazon) motto is “your margin is my opportunity”.

In fact, The Sydney Morning Herald highlighted recently that Citi analysts believe Amazon’s arrival could wipe out more than one third of JB Hi-Fi’s and Harvey Norman’s earnings, with those retailers being forced to slash their prices and margins. Ouch!

Foolish Takeaway

Although it will likely take some time for the ecommerce behemoth to set up shop, Amazon is a highly credible threat that investors need to consider before investing in the retail sector. While some businesses within the industry deserve a closer look as they fall in share prices, whether due to temporary difficulties or else macroeconomic trends, caution is certainly encouraged.

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The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Amazon and Berkshire Hathaway (B shares). Motley Fool contributor Ryan Newman owns shares of Amazon. The Motley Fool Australia owns shares of Super Retail Group. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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