Global consumer discretionary: 2016 outlook

Seema Shah, Charles Allen, Shan Liu, Catherine LimBloomberg Intelligence analysts

North American consumer hardlines 2016 outlook

Housing, online drive consumer hardlines sales

Consumer hardlines, comprising multiple retail categories, refers to non-apparel merchandise including home products and furnishings, jewelry, beauty and wellness and office supplies.

The U.S. housing recovery and increased online penetration have boosted these retailers’ sales, while free shipping and rising investments in technology pressure margins. Though mostly U.S.-focused, these retailers must be cognizant of global trends, such as currency fluctuations, particularly if they seek international expansion.

Improving housing market drives hardlines sales

As home prices rise in the wake of the 2008 recession, retailers have seen a sales resurgence driven by increasing consumer confidence in home values. Home-improvement retailers and furnishers, in particular, have benefited as 67% of U.S. housing stock is over 27 years old, often requiring improvement.

Private fixed-residential investment, at 3.7% at the end of 3Q, remains significantly below the 4.6% 60-year average, leaving ample room for further spending in the home discretionary category.

Market saturation drives focus on productivity

The boom in retail store growth over the last 25 years, 4x faster than the U.S. population, has led many retailers to over expand, limiting their ability to continue to grow organically, according to McKinsey. Multichannel retailing and the decline of malls has shifted this emphasis to increased productivity within existing footprints.

Retailers aim to lift same-store sales through better customer experiences, direct and targeted marketing, including loyalty programs, and branded merchandise.

Hardline retailers taking on e-commerce challenge

Many retailers, including well-known hardline names from Bed Bath & Beyond to Ulta Beauty, were slow to see the threat of e-commerce, particularly from Amazon. They’re now focused on driving sales in this channel, investing in technology to build out and integrate infrastructure as customers demand 24-hour, seven-days-a-week access to products and brand content.

Websites allow retailers with space constraints in stores to showcase a greater array of merchandise and can also provide product and market research.

Capital allocation critical to retailer earnings

Share buybacks and dividends may reach new high in 2016, possibly topping $1 trillion, according to S&P Capital IQ. Low interest rates, lowering the cost to borrow, and uncertain economic conditions have prompted many hardline retailers to return cash to shareholders to boost earnings growth and investors’ total returns, often in lieu of investing internally.

Continued buybacks may signal that there are few growth opportunities in sight and may leave some retailers with obsolete or aging assets.

European apparel retail 2016 outlook

Europe apparel retail makes costly shift to mobile

Apparel retailers cannot ignore online shopping as the transition from stores accelerates and mobile browsing becomes the starting point for many purchases. Online retail poses its own set of challenges, including expensive customer acquisition and investment in fulfillment to get garments to shoppers even faster.

There are signs that retailers are becoming more prudent in their spending on shops, as profitability could be threatened by lower in-store sales and the cost of online operations.

Mobile drives online apparel retail to grab share

The rise of mobile-shopping means consumers are browsing more often, prompting apparel-retailers to expand their online offerings. Yet effectively converting the increasing traffic into sales remains a challenge for many companies.

Attracting new customers online can increase costs, with pure-play Web retailers such as Asos and Zalando prioritizing sales growth over profitability. Store-based retailers, including Inditex and M&S, are also embracing the Internet to stay competitive and generate higher sales.

Expanding e-tail warehouses add to online capex

Capital spending is building up at online retailers including Asos and Zalando, as they add fulfillment facilities to keep up with expanding sales. This exemplifies the way in which additions to warehouse space are replacing the expansion of physical retail space as a way to capture consumer spending.

Online orders typically still have to be picked and packed individually, making it difficult to achieve scale economies, especially when sales are concentrated into event days, such as Black Friday.

Clothing retailers rethink extravagant store capex

Clothing retailers raced to upgrade their stores to lure customers tempted by online shopping, particularly mobile. A shop visit needs to be a worthwhile experience, with an exciting store design and extensive product assortment.

However, the sales response to this has been uneven, so more focus is being applied. Flagship stores in major centers should remain well supported. Capital spending on stores is likely to decline, or at least stabilize, as it is directed at developing online shopping.

Asia-Pacific retail-discretionary 2016 outlook

Asia retail earnings may rise on e-commerce, malls

Asia retailers’ earnings may recover in 2016 as sales gain on investment in e-commerce and malls, which draw more customers than department stores. E-commerce marketing costs may rise as retailers such as Alibaba and Intime’s partnership, Golden Eagle and Esprit seek to boost shopping online and offline.

Potential tax cuts on imported consumer goods in China may dent Belle’s fashion-shoe sales, while benefiting luxury brands such as Prada. Hong Kong retail rents may fall as jewelry and luxury-watch shops shut.

E-commerce may revive Chinese retailers’ growth

E-commerce partnerships could help Chinese retailers surpass consensus estimates calling for annual sales and profit growth of less than 10% during the next three years.

Topping forecasts would depend on the online tie-ups expanding the retailers’ user bases and becoming profitable before the usual incubation period of two to three years, according to Bloomberg Intelligence checks with iResearch. E-commerce growth may help Chinese retailers offset falling profit margins at department stores and malls.

Rise of duty-free imports helps China retail sales

Duty-free and travel-related retail sales may surge in China under government plans to change tax rules and build more shopping venues. China’s new air and sea ports, as well as downtown duty-free shops, may add selling space for luxury brands.

Reforms of state-owned companies controlling China’s duty-free shopping may lure foreign firms into partnerships, boosting sales for both sides. Tax cuts and free-trade zones that exempt overseas products from duties are luring shoppers to import goods.

Hong Kong retail profit may recover on rent cuts

Retailers and landlords may strike deals for more rent cuts for Hong Kong shops. Weak retail sales resulting from lower Chinese spending have eroded profits at high-rent outlets.

Emperor Watch shut the Cartier shop that it operated for Richemont in the city and was granted rent cuts of 25-30% for five of its luxury-watch shops. Coach closed a flagship store in Hong Kong to protect its local profits. Chow Tai Fook, Chow Sang Sang and Luk Fook may consider shutting jewelry outlets.

China shoppers may shift travel to Japan, S. Korea

High-spending Chinese shoppers may choose to travel to Japan and South Korea as social unrest and a strong U.S. dollar-pegged currency make some avoid Hong Kong. Visitors from China to Japan more than doubled in the first nine months of 2015, while South Korea visits rebounded 16% in October, after falling 7% in January-September due to the MERS virus.

Southeast Asia may also be preferred, led by Thailand. Chinese travelers spend most on duty-free goods, and growth in tax-free spending exceeds local retail sales.

Bloomberg Intelligence offers valuable insight and company data, interactive charting and written analysis with government, credit insights from a team of independent experts, giving trading and investment professionals deep insight into where crucial industries start today and where they may be heading next.