While comps were generally higher in December and GAFO sales rose more than initial predictions, trouble is lurking for retailers in 2012. Several have already reported compressed margins, and they are the canaries in the coal mine.

 

Like consumers, retailers will be looking for ways to cut expenses in 2012 including co-locating stores to bargain hunting when shopping for tech vendors. They will also look for ways to invest their money wisely, such as by taking another look at the "Daily Deals" phenomenon of 2011. Now that the novelty has worn off, retailers will focus their investments on more customer-centric initiatives.

 

Read about these issues and more that retailers will face in 2012 in consulting firm AlixPartners' Top 10 Retail Predictions for 2012:

 

1. Polarization gets granular: We saw broad-based polarization throughout 2011. Deep-value and luxury did well, while the swath of competitors stuck in the middle struggled all year. In 2012, we expect this barbell polarization to begin reshaping the sub-segments of retail. We expect sub-polarization at each stratum of retail and in each category, as old stalwarts that were once the polarizers become polarized themselves. We believe this will play out most clearly in mid-tier department stores, with one taking share from the pack at the high end of mid-tier, and one taking share at the low end. This will leave many department stores "stuck in the middle of the middle" — neither strong players in their space (i.e., mid-tier department) nor strong purveyors of value in the polarized world of retail in general.

 

2. A new question arises: Do or buy?: Part of the strength in luxury retail, beyond the stronger consumer base, can be explained by the experience these retailers provide their customers. Few other retail categories can afford to invest in capex and G&A to create this kind of experience-based retailing, and as a result they may lose share to experiences in general (trips, dining out, bowling, entertainment, etc.). This will make a tough commercial environment even tougher, as consumers opt not to buy the blender in favor of attending the food show to watch things get blended.

 

3. Conversion, conversion, conversion: With fewer footsteps entering brick and mortar stores, retailers will need to pay increased attention to converting more of those customers that do come in. Retailers that do not invest in manpower, technology, tools and cross-channel integration to push higher conversion rates will fall further and further behind.

 

4. Exclusives and private label increase dramatically: We expect many more retailers to take up the mantle of private label and exclusive product offerings, partly to fight against the ease of comparison shopping, partly to control their brands, and partly to drive higher margins. Those that understand the risks and rewards will flourish with this approach.

 

5. Co-locating gathers steam: In 2011, a few retailers made headlines introducing partners like grocers, beauty supply shops and fitness centers into their existing store footprints. This year already we are hearing rumors of Apple extending its store-within-a-store approach, which it currently operates in hundreds of Best Buy locations, to Target stores. In 2012, we expect to see more of this trend, as retailers look to rationalize a glut of space that they can't cost-effectively exit completely.

 

6. Six-Sigma finally comes to retail: We expect leading retailers to double down on rapid response and flexibility in supply chain models to shed pounds off inventory positions, eradicate lost sales, and reduce margin-killing markdowns.

 

7. Specialty retail feels the heat: We expect a "flight to value" that will cut across all demographics, regions, age groups and income levels. As this trend becomes more pronounced, Walmart and Target, both longtime leaders in mass retail and grocery, can expect market share improvements across a number of segments, including footwear, office supplies, sporting goods, apparel, and books.

 

8. Retailers become bargain-hunters: In much the same way that consumers question the true value of a luxury purchase or comparison shop to find the best deal, retailers will need to be even more disciplined about assessing end-to-end costs. And this will pressure vendors to compete even more fiercely.

 

9. "Daily Deals" disappear: Built upon the premise that sacrificing profits through deep discounts can drive trial, "Daily Deal" sites made a big splash in 2011. Now that the novelty has worn off, retailers will begin to look critically at these and realize while they may boost sales (at the expense of margin), they do not increase customer loyalty. Consequently, we expect to see retailers shift their investments away from daily deals and toward other customer-centric activities that drive repeat business and contribute to profitability.

 

10. IT gets a seat at the table: Leading retailers will make significant investments in IT, with a focus on closing the gaps in their ability to link information across core systems to enable meaningful insight into the true profit drivers of their business. Retailers that fund this strategic analytics approach will attract, convert and retain the most customers, and the investment will pay for itself many times over. Those that continue with disparate systems that do not connect information will lose market share that they will likely never recover. We expect this separation to begin to become clear in 2012.