There are plenty of reasons why investors are attracted to retailers.
First and foremost, they offer familiarity. Investors are typically more comfortable holding shares of businesses they can understand and observe, and what better way to understand a retailer than to be able to walk into a store and make visual assessments.
They're also pretty easy to understand. Most retailers make their money by selling items from their shelves, with their major expenses being inventories and store overheads. If its sales can more than cover the costs of running and maintaining the store (as well as paying down any debt and taxes), then your company could well be making a profit.
However, there are also a number of reasons why retailers don't make for the best investments…
1. Lack of Competitive Advantages. The best shares to buy and hold are typically the ones which maintain sustainable competitive advantages or 'moats' as Warren Buffett would refer to them. Retailers typically struggle to maintain these moats, particularly where consumer trends are constantly changing.
Some businesses, such as JB Hi-Fi Limited (ASX: JBH), have done an outstanding job at changing with these trends, but it doesn't mean they're immune to change.
2. Competition. The retail space is also highly competitive, whereby even the biggest and most experienced retailers are not protected. Just look at Woolworths Limited (ASX: WOW) and Coles, which are currently being disrupted by German discount retailer Aldi.
3. The rise of Amazon.com could fall under the description of 'competition', but it really deserves a section all to itself. Amazon.com is taking the world by storm as more and more consumers do their shopping online. Amazon.com offers convenience, an enormous array of goods available to purchase and typically lower prices than most other retailers.
As Amazon's founder and CEO Jeff Bezos says: "Your margin is my opportunity".
4. Cyclical. Now, some retailers such as Woolworths and Coles aren't overly cyclical – after all, people are still going to need to eat and drink no matter what the economy is doing! But others are more susceptible to an economic pullback whereby consumers can elect to delay the purchase of certain goods such as televisions and new furniture. That could leave businesses such as Harvey Norman Holdings Limited (ASX: HVN) and Nick Scali Limited (ASX: NCK) vulnerable if the economy does take a hit.
