Editors' Pick: Originally published Dec. 30.
It was an eventful 2015 for the retail sector, and another year full of twists and turns may well be on tap for 2016.
The year started with a bang in January as Target (TGT) announced that it would shutter all 133 of its money-losing stores in Canada. Target's shares went onto rally 12% from January to a 52-week high on June 23, although they have since fallen about 13%.
Meantime, Target's arch nemesis Walmart (WMT) took the wraps off a new plan to invest over $1 billion in its people this year through higher hourly wages and re-training. While the move will help burnish Walmart's reputation and attract better workers, the investments in people, as well as additional plans to spend billions on upgrading the company's e-commerce operations and freshen up its stores, have pressured profits and the stock price. Walmart's shares have lost roughly 30% in 2015, while profits for the nine months ended Oct. 31 have dropped 11.4%.
As Target was waving goodbye to Canadians and Walmart was saying hello to depressed profits, office supplies retailer Staples (SPLS) spent 2015 begging regulators to approve its bid for smaller competitor Office Depot (ODP) . Staples will begin 2016 still trying to gain the blessing of regulators on a transaction designed to create a company that is more competitive with Amazon (AMZN) .
With 2015 about to be a distant memory, TheStreet makes three predictions for the retail sector in 2016.
1. Dunkin' Brands brews up a key acquisition.
Tea is the most widely consumed beverage in the world next to water, and can be found in almost 80% of all U.S. households. According to the Tea Association of the USA, approximately four in five U.S. consumers drink tea, with millennials being the most likely candidates.
Over the last ten years, says the Tea Association of the USA, the ready-to-drink tea market in the U.S. has grown more than 15 fold to $5.2 billion.
Given the solid existing market for tea in the U.S., which is likely to grow nicely in the future as more people gain awareness of its health properties, it may be time for coffee giant Dunkin' Brands to dip its toes in the water so to speak. Doing so via an acquisition would also alleviate pressure on Dunkin' Brands core coffee business, which is feeling increasing price competition from McDonald's (MCD) for drip and specialty coffees, and pods for Keurig machines from various suppliers.
A logical acquisition for Dunkin' Brands would be David's Tea (DTEA) , which went public on June 5, 2015. Since its IPO, shares have plunged about 52% due to a broader sell-off in new restaurant issues, opening the door for Dunkin' Brands to make an opportunistic bid. David's Tea would give Dunkin' Brands access to the growing, premium loose leaf tea market, which the coffee titan could exploit in several ways.
The first would be pitching the David's Tea concept to its existing, and experienced, franchisees to have them aggressively open stores in the U.S. -- currently, David's Tea only operates 130 or so stores in Canada and 24 in the U.S. With an average size of 850 square feet and operating margins over 15%, the store could be a lucrative opportunity for an existing Dunkin' Donuts franchisee.
Another opportunity would be to bring David's Tea in ready-to-drink form to supermarkets in the U.S., where Dunkin' Brands already has relationships to distribute Keurig pods and bagged coffee. The company could also start selling certain popular David's Tea flavors in Dunkin' Donuts locations to help differentiate itself from McDonald's and Restaurant Brands' (QSR) Tim Horton's concept, and better compete with Starbucks' (SBUX) Teavana brand.
And finally, there may even be an opportunity to sell tea-flavored David's Tea ice cream at Baskin Robbins, which Dunkin' Brands also owns.
Dunkin' Brands would be following in the footsteps of Starbucks in buying a tea brand such as David's Tea. In Nov. 2012, Starbucks acquired loose leaf tea purveyor Teavana for $620 million. Since then, it has begun to sell Teavana brand tea drinks in Starbucks stores (most notably in concert with Oprah Winfrey), while opening new tea bars that serve handcrafted tea beverages.