RealMoney Ratings: A Split Among Retail Investments

The multi-line retail industry is valued as revenues generated through the sale of goods at retail prices via department store and general merchandise stores. The department stores, which account for 25% of total revenue, comprise sales through large-scale retail outlets offering a wide range of products. On the other hand, the general merchandise store, that contributes 75% of total revenue, includes all other multi-line retail outlets, including discount department stores and warehouse clubs.

The U.S. is the largest driving force in the growing general merchandise and department-store segment, which added $520.4 billion, or 40.3%, to total market revenue during 2006. Moreover, the regional market growth rate from 2001 to 2006 was 12.6%, although it slightly declined 0.5% during 2006, hurt by lower consumer spending and generally slow economic growth.

The industry is highly concentrated and labor-intensive, characterized by low-margins/high-volumes. Thus, revenue generated is based on overall market share rather than on overall market growth. With tough competition from retail giants like Wal-Mart (WMT - commentary - Cramer's Take), price becomes the main determinant and is optimized through cost reductions by way of overseas market expansion and enhanced supply chains.

The use of technology in inventory control helps with cost-reduction, thus providing competitive deals to customers. Suppliers are able to electronically access certain levels of store sales data, which helps timely reordering and shipping.

The multi-line retail business is marked by consumer-spending and fashion trends which drive demand. Over the past few years, retail-space growth in the U.S. has outpaced demand, resulting in consolidation, with a few stores scaling-down their merchandise lines. Moreover, traditional department stores, which were once thriving and profitable, are struggling to compete with hard discounters and high-end specialty shops.

Consequently, warehouse clubs and other general-merchandise stores are replacing traditional department stores as a shopping destination. That said, the slowdown in the U.S. during 2007 continues to grip consumer confidence in 2008. With growing consumer awareness, retailers need to differentiate among themselves by formulating a marketing plan, which provides consumers with wider alternatives, thus attracting and maintaining a loyal customer base.

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This article was written by a staff member of TheStreet.com Ratings.