The retail industry is brutally competitive and any company that can’t keep up with constantly evolving consumer demands will be challenged to survive. But it’s not all doom and gloom for the sector. There are still some bright spots with deal opportunities.

Where Amazon Can’t Compete

“It’s important to focus on sectors that provide services that’ll be distinguished from what you can do on Amazon, or what you can get at Walmart,” says Noam Cohen, managing director and head of retail at KeyBanc Capital Markets. “It’s finding those right opportunities that even in a tough environment make a lot of sense.”

For example, brick and mortar furniture is one area where Amazon has so far had a hard time competing, Cohen says. Furniture is bulky and expensive to deliver. It’s an item that needs to be brought inside the home. It’s also inconvenient to return if the customer isn’t happy with it. Therefore, physical furniture stores are better for consumers to shop in.

“It’s hard for Amazon to sell furniture that you can’t leave on a doorstep like RTA (ready-to-assemble) furniture,” says Cohen. “If people just don’t like what got delivered to their house, if there are a couple of nicks and dents or scratches on the furniture, they want to send it all back and that immediately destroys the whole profit model.”

To Cohen’s point, this month bedding retailer Tempur Sealy International said it is paying $4 billion for rival Mattress Firm. The combined company will operate about 3,000 stores globally. They hope that by combining, they will recapture peak pandemic sales.

Going Out for a Good Time

With inflation rising and the risk of a recession on the horizon, consumers are being more discerning when deciding whether or not to dine out.

“If you look broadly at the restaurant sector and any companies that are providing an enhanced experience, people are wanting to go there,” says Guggenheim Securities senior managing director Adam Rifkin. “So, you’re seeing a lot of the experience-focused retail and consumer services companies continue to do very well.”

Olive Garden owner Darden Restaurants said in May that is buying Ruth’s Hospitality Group, the parent company of Ruth’s Chris Steak House, for $715 million to expand its presence in the upscale dining sector. Darden also owns the Capital Grille, among other brands.

“The world has changed a lot in what consumers are looking for,” says Josh Benn, the head of Americas M&A advisory at Kroll. “I do think there is a change in what consumers are prioritizing in terms of their spending. A lot of the inflation that you’re seeing right now is on experiences. Restaurants, going out to eat. In-restaurant dining is doing very well.”

Time to Splurge on Yourself

A good way for retailers to succeed in inflationary times is to focus on more affluent consumers who have bigger wallets. That is what skincare conglomerate L’Oreal has been doing. In April, L’Oréal SA announced plans to acquire luxury cosmetics brand Aesop for $2.5 billion as a bet on growth in high-end cosmetics. Founded in 1987, Aesop is known for its expensive skin, hair and body care products. L’Oreal has been focusing more on the higher end of the market because consumers in that segment are less affected by an economic downturn.

“If you look at the consumer today, it’s the higher-end consumer that is the stronger consumer relative to a lower-income consumer,” says Cohen. “If you’re going to focus on any demographic, that’s the demographic that you want to focus on.”

What other retail sectors do you see shining through in this market? Love to discuss. E-mail me at [email protected]

– Demitri Diakantonis