What’s Now and Next in Retail?

Rural Retail: The Next Frontier for Four-Wall Investment

What’s Now?

The COVID-19 pandemic has had an outsized impact on the retail landscape. The virus and associated responses to it have reshaped consumer behavior and accelerated long-term secular shifts in the market. Fear of viral transmission in highly trafficked indoor shopping environments, government-mandated store closures, and the economic reality of the COVID recession are all contributing to changes in shopper behaviors—posing unique challenges and presenting unique opportunities to nimble retailers.

Essential merchants selling food, staples, and household supplies across different retail formats are seeing gains from our collective shift toward the “stay-at-home” lifestyle. Rural retailers—arguably the most essential of merchants—provide basic supplies and provisions for people, livestock, and companion animals in less densely-populated communities in all 50 states which are not well-served by the “on-demand” economy. Tractor Supply Company (TSC), a notable rural retailer with an estimated 50% market share in the farm and feed segment according to IBIS, has been the fastest-growing publicly listed four-wall retailer over the past decade, achieving a 10% revenue CAGR since 2009. Following on the heels of 4.3% comp sales growth in Q1, TSC is forecasting 20%-25% comp sales growth in Q2.

In the deep discount segment, Dollar General, which skews toward a heavier rural footprint than its primary competitor, has demonstrated a similar trend, growing at a 9.4% revenue CAGR over the past decade compared with Dollar Tree’s 6.6% CAGR (adjusted for its 2014 merger with Family Dollar). Similar performance trends have been proven out in the home improvement category with Lowe’s (skews rural) vs. Home Depot (skews urban).

It is too soon to tell with certainty if COVID-driven urban flight will permanently alter population migration trends, but rural retailers can continue to grow with a prudent strategy focusing on localized merchandising, superior customer service, and structural cost advantages. Much of the rural retail customer base is comprised of “hobby farmers” and lifestyle enthusiasts who value knowledgeable customer service associates and rely on them for product guidance. According to Census Bureau data, approximately 58 million people are living in rural communities while there are only approximately 2 million working farms. According to the USDA, U.S. farm households have a median household income approximately 15% higher than the country as a whole. With lower costs of living, rural consumers have meaningfully higher discretionary purchasing power.

What’s Next?

We expect growth trends in the rural retail category to accelerate in a post-COVID-19 world. Rural retailers are poised to benefit from macro trends supporting the expansion of remote working environments and remote education, which have both been accelerated by the onset of COVID and quarantine measures adopted in response to it. Many city dwellers are beginning to see the appeal of exurban and rural lifestyles, and more large corporate employers are permanently granting their employees remote working flexibility. While we do not forecast a return to the Jeffersonian ideal of an agrarian nation of citizen farmers, we do expect a material shift in population dispersion favoring lower-density communities in rural areas.

Despite the favorable demographic outlook, rural retail is not immune to competitive challenges, and operators will need to reinvest in their companies to remain competitive over the long haul.

The broad secular shift toward e-commerce and its negative impact on traditional urban and suburban retail environments have been well-documented long before anyone had ever heard of COVID-19—we all know the story of malls and department stores falling out of favor as consumers shop online from the comfort of their own homes. Shelter-in-place orders and mandatory store closures brought on by the pandemic have only turbocharged these trends.

Fortunately for rural retailers, internet penetration and usage within rural populations have historically lagged urban communities, providing a real “moat” to the business model; however, rural internet usage is beginning to reach parity with urban usage and consumer shopping behavior will continue its inexorable march online. As former urbanites flock to rural areas, they will bring their existing shopping habits with them.

Additionally, widely dispersed populations present major logistical and profitability challenges for speedy e-commerce fulfillment, giving physical retailers with product on their shelves an opening to win business in smaller communities. However, ongoing investments in logistics and fulfillment technologies (driven in large part by Amazon and Walmart) will lower the profitability hurdles associated with serving rural communities.

Rural retailers must develop and implement effective omnichannel strategies and the associated technologies necessary to support those strategies with digital marketing, integrated inventory management, online purchasing, and fulfillment capabilities, including buy-online, pick-up in-store (BOPIS).

Independents and regional chains comprise 50% of the farm and feed retail segment. Most of these businesses remain locally owned by families and founders. Consolidation is going to be necessary to compete and gain scale. Companies will need to be capitalized appropriately to roll-up competitors and keep up with the digital expectations of customers. For all the foregoing reasons, we anticipate a wave of investment in the sector as rural retail becomes the next frontier for retail industry investing.

What’s Your Why?

We seek to help our clients find the capital provider partner with whom they have the most chemistry, the best alignment, and the same values. We maintain a constant dialogue with institutional investors focused on retail business models—we know how they think, and we know who will be the best fit for our clients’ specific goals. Scaling a business is hard, and unanticipated events like COVID-19 provide a perfect example of why choosing the right partner is critical. To us, there is a great sense of pride when we can align partners who share the same vision to create a business success.

About the Authors

James Cartales, Managing Director, Consumer & Retail
James is a  Managing Director in Cascadia’s Consumer & Retail practice. In this role, he focuses on advising branded consumer companies on mergers and acquisitions, recapitalizations, and private placements. As a founding member of the firm’s Consumer & Retail practice, he has been closely involved with the execution of most of the firm’s marquee branded transactions. Throughout his career, he has completed over 35 transactions. He has a particular focus on the intersection of consumer products and services and the evolving retail channels by which they are marketed and sold. Read James’ full bio here.

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