CPA INSIDER

What the ‘retail apocalypse’ means for CPAs and their clients

Changing habits of retail consumers offer opportunities for CPAs as advisers and analysts.
By Lea Hart

By now, everyone has seen the headlines: Many venerable brick-and-mortar retailers are posting quarterly losses and declining sales, all while Amazon's profits soar.

"The big shift has been this migration to online shopping," said Ryan McDevitt, assistant professor of economics at Duke University's Fuqua School of Business. "It's really accelerated over the past five years."

Brick-and-mortar retailers, from big-box stores to local shops, are going to have to rethink their approach if they want to survive in this changing market, he said. And they'll need help from CPAs.

As trusted business advisers, CPAs will need to understand what's ahead for the retail industry and be prepared to help their retail clients answer some tough questions. Retailers will likely be wondering if they need to close or reshape their stores or reduce labor or inventory, or they might be looking for innovative ways to adapt and keep up with the changing face of retail. CPAs can help their retail clients through these changes by understanding the trends and providing both financial analysis and advice.

"Think about how the industry you're going to be serving is going to change in the next two, five, or 10 years," said Jim Carroll, a futurist and innovation and trends expert whose career history includes a stint as an accountant. "Your services will change—what do you need to change now about what you do and how you do it?"

Is this the retail apocalypse?

When Amazon first came on the scene, people didn't expect it to have the kind of impact it has had, McDevitt said.

"Brick and mortar offered convenience," he said. "But now, Amazon has infiltrated every market—in some cities, they deliver in under an hour."

Carroll said the consumer mindset has changed. Not only is it convenient to shop online and have something delivered quickly, but it's also easier than ever to comparison shop with your phone while you're in a store to find out who has the best deal.

High fixed costs are a problem for some brick-and-mortar retailers that have overbuilt.

"You've got too much retail space," said Ronald Friedman, CPA, partner at Marcum LLP. "We're seeing it with malls that are closing up."

There's also a generational component. Baby Boomers might still shop at Macy's, but Millennials have come of age with online shopping and many aren't as inclined to spend time in brick-and-mortar stores, Friedman said.

It may not be the end for brick-and-mortar stores, and some—such as grocery and home improvement stores, perhaps—may continue to do well. McDevitt said stores, like those operated by Apple, that also offer services, including tech support and shopping assistance, are likely to survive.

While it's not the end, the struggle is real. Time magazine reported last year that roughly one-third of malls in the United States could close their doors in the near future. The same article noted that both Sears and J.C. Penney had shuttered numerous locations in recent years. Another big name clothing store, GAP Inc., endured an unenviable string of quarterly comparable sales declines. And as Amazon prepares to purchase the Whole Foods grocery chain, grocery retailers may wonder what's next for their brick-and-mortar stores.

"It's too soon to predict that they've had their last breaths, but it certainly looks like they're going to have to change their thinking," McDevitt said of the retail industry in general.

CPAs can help retailers change with the times

"CPAs are going to be increasingly called upon to assess business worthiness and long-term viability," Carroll said.

Friedman is based in Los Angeles, widely considered a U.S. shopping mecca, and said he has come to serve not just as a business adviser but also as a trend analyst for his clients.

"My advice to accountants is to tell brick-and-mortar retailers to create an entertainment space," he said. "Keep inventory under control, keep expenses down, ride out the storm, but try to change with the times."

Today's consumers are looking for a reason to come into a retail store, he said. They want to go out and be entertained, perhaps with a café or coffee shop in the store, Friedman said.

As fewer people shop in stores, retailers are starting to consider having smaller stores or showrooms, where a consumer can try on a size or test-drive a product and then order from a tablet in-store to get the exact item they want delivered the next day from a warehouse to their home, Friedman said. A CPA can perform the financial analysis associated with inventory management, helping the client plan inventory levels, how much to buy, and what categories to buy in, he said.

In his role, Friedman has helped his retail clients evaluate lease options, noting it's important for a client to be able to get out of a bad location with minimal risk. For clients who have multiple store locations, Friedman said, a CPA can help with deferred rent calculations and tenant improvement allowances. For clients considering building out a store, a CPA also can assist with financial projections for their bankers.

McDevitt said one of the biggest challenges retailers face regarding service is finding the best way to measure and reward productivity. They tend to emphasize aspects that are easy to quantify, such as sales per hour. But he said those types of measurements don't always lead to long-term value for the company.

CPAs can help their clients by developing ways to encourage practices that lead to the greatest long-term value, and do so in a way that's not susceptible to online retailers stealing the sale solely by offering a lower price, he said.

"As an example, a pushy salesperson might succeed in getting a customer to make a small purchase today, but the negative encounter might mean the customer won't come back in the future," McDevitt said. "A more thoughtful salesperson, on the other hand, might provide impartial advice, like telling the customer to wait a month for the newest model to come out, that doesn't lead to a sale today but results in a loyal customer who will come back more often in the future."

CPAs need to take a holistic look at the business, McDevitt said. Help clients analyze what makes their business special, and find things that aren't superficial and can't be chipped away at by online retailers—such as a unique product line or brand, he said.

Carroll said that overall, it's important for CPAs to understand and appreciate the speed at which change is happening in the retail industry.

"Spend some time with your clients," he said. "See if they appreciate the depth and speed that it's happening."

CPAs will need to be future-focused for their clients, he said. Look for trends reported in the news, talk to people in the industry, and look at the disrupters, Carroll said.

Lea Hart is a freelance writer based in Durham, N.C. To comment on this article, contact Chris Baysden, senior manager of newsletters at the AICPA.

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