BrainTrust Query: Retailing in the Absence of Recovery
Stephens, President, Retail Prophet
Through a special arrangement, presented
here for discussion is an excerpt from a current article from the Retail
Prophet Consulting blog.
It seems that each week experts sift through
the tea leaves of economic indicators looking for even the faintest sign
that the fabled "recovery" has begun. The problem with a speculative view
of recovery is that it’s oddly similar to the shortsighted behavior that
brought on the recession in the first place.
In order to really understand our current
problem, we need to look back as far as the late 1970’s. It was then that
many of the causes of our current situation were born.
An exhaustive study by law professor Elizabeth
Warren found that the average American family in 2005 was actually significantly
further behind economically when adjusted for inflation than the same family
in 1979. Despite many women entering the workforce, percentage growth in
wages remained largely stagnant as the cost of living escalated tremendously.
After paying for their basic
needs, the average family had less money left over at the end of the day
than they had almost 30 years earlier despite having more family members
This fact, however, seems completely incongruent
with the level of consumption and spending that was taking place in most
parts of North America throughout that period, particularly the fairly
rampant spending after 2000. If in fact, consumers had less discretionary
income, then where was the money coming from to fuel this spending?
The answer lies in a leveraging of historic
proportions that began in the 1970’s but really hit stride in the mid 1980’s.
Throughout the period of 1970 to 2005, the average personal savings percentage
went from 12.5 percent to negative one percent. Institutions and governments
were following the same course, running up dept and deficits the likes
of which were never thought possible.
During the week of October 6, 2008 the entire
house of borrowed cards collapsed and the consumer found themselves caught.
Their investments declined, including in many cases their only real nest
egg, their home. They had no cash in the bank and a mountain of unforgiving
debt. And on top of it all they now had the added worry of job loss to
What’s followed is a period when personal
saving rates rebounded and continue to rise even now. It’s that upward
trend in savings that has had even the most aggressively discounting retailer
scratching their head as to why their goods aren’t selling. The consumer
is rebuilding their war chest. How long the savings rate will continue
to push upward is unknown but a return to a double-digit percentage isn’t
What all of this amounts to is that the economy
will only begin to heal in a real way when the average consumer feels decidedly
less vulnerable and scared. This means a suitable amount of cash in the
bank, relative job security and signs of sustained growth in the value
of their investments and holdings. Until these things are firmly in place,
any potential recovery will be stymied. It took decades to get into this
situation. Recovery could take many years and be painfully gradual. There
is simply no cogent argument for a fast recovery.
How should strategies change for retailers during this
recovery versus those coming out of previous economic downturns?