The Retail industry is the second largest industry in the US, in terms of both the number of establishments as well as the number of employees, and accounts for nearly $4 trillion in total sales. While single location establishments account for more than 95% of all retailers, they only generate approximately 50% of all sales. While leaders in the industry, such as Wal-Mart, Target, Home Depot, Federated, Sears, Best Buy, and Gap, continue to dominate, they are sometimes slower to innovate, leaving plenty of room for growing specialty stores.

Prior to the financial crisis that hit in 2008, consumers enjoyed low interest rates, access to abundant credit and a booming housing market and high disposable income. This environment led to an active M & A market, with blockbuster deals such as Sears and K-Mart, Federated and May Company, and private transactions with Toys-R-Us, Linens n’ Things and others. We are now in a challenging environment in which credit has tightened dramatically, consumer debt is at record levels, and the housing market slowed dramatically. The result: retailers must put a capital structure in place to enable them to endure a period of lean sales and limited growth. At the same time, the environment creates opportunities for strong competitors, who will have a chance to absorb companies that may have strong product lines but which suffer from weak execution.

The retail model is one that faces high real estate costs (location, location, location), high employee costs and complex inventory management dynamics, which tend to be exacerbated by the seasonal nature of most retail stores. More and more pressure is being applied to suppliers, but, because more and more products are being produced overseas, especially China, there are longer lead times and increased logistical issues. Leading retailers will be able to demonstrate strong and sustainable growth (10% or more), exceptional unit economics (20% or more store level contribution) and a compelling and defensible concept.