BrainTrust Query: Retailing in the Absence of Recovery
By Doug
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
working.
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
contend with.
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
inconceivable.
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.
Discussion Questions:
How should strategies change for retailers during this
recovery versus those coming out of previous economic downturns?
I think the fourth-quarter results from many retailers (moving into the black) show that their strategies have already changed. With few exceptions, comp-store sales were modest at best and even the biggest increases are barely putting retailers back at pre-2008 sales levels. So the smart retailers have figured out other strategies: Tougher expense management and better inventory control. Much of the gain in profitability came from efforts to get fewer goods into the right stores; the reduction in markdowns led to higher margins for many stores.
The good news: Many of these efforts to manage expenses and inventory levels will leverage dramatically if and when there is a recovery in demand. The less good news: Without a real increase in comp-store sales, these operational strategies can only be pushed so far before they become counterproductive through stockouts and declining service levels.
Retailers need to recognize the changes in the ration of savings and consumption. In fact, they need to recognize the prioritization…savings, over consumption. It used to be save whatever you have left over….oops, nothing. Now it’s save and spend carefully what is left over. Smart retailers have been doing the same thing by cutting back on inventory, limiting the SKUs, etc.
The change in pattern can help retailers plan. If consumers are more dependable in terms of their willingness to buy product and services in relation to their income and savings criteria, retail strategies can be based on greater predictability. It’s a matter of understanding the marketplace, how consumers are making their spending decisions, and devising strategies and messages that are in concert with shoppers.
Many lessons for retailers should have been learned by the economic events of these past two years. Among these lessons should be the point that many retailers over “rationalized” their SKU assortment to the point where consumers were turned away not by the recession but more so because the stores no longer carried their specialty and niche needs.
The key buried in Doug’s article is that “consumers will shop more when they feel less vulnerable and scared.” I don’t think that comes from savings. We shopped after 9/11 on our home’s credit to feel better about ourselves after finding how truly vulnerable we were.
I think we are about to embark on a more hedonistic retail environment as shoppers realize much of what we thought was stable, secure and bankable is and always has been more of a myth. As we learned after 9/11 and in October of 2008, it could all go away tomorrow.
However they find the resources to pay for it, I think baby boomers will still spend as we retire contrary to pundits scaring retailers they won’t.
Yes, there are and always have been trade winds to go against but that is not something new to retailers. Maybe I’m a minority voice, as in this video, but I bank on the fact that the best will adapt and succeed, not give up because of headlines and economist’s pessimistic crystal ball.
This article seems to be about a year out of date. Right now the economy is exploding with new opportunity. I couldn’t be happier. During the past year the typical household has seen their 401ks come rocketing back by hundreds of thousands of dollars. You can buy new home at a fraction of the cost from just a few years ago and finance it at less than 5%. Have you seen the prime rate? You can borrow money for almost free.
When retailers use the economy as an excuse for poor results, they are simply shifting the blame from their own inadequacies. Good retailers are moving forward all time and advancing, constantly taking advantage of the current state of the economy, regardless if it is good or bad. During the past two years we have seen so many good examples of well-run companies taking advantage of their weaker competitors and using the state of the economy to their advantage.
Good retailers may have bumps in the road but their overall trend will be increased sales and profits. The key strategy in dealing with any state of the economy is to first stop wasting time and resources by shamelessly blaming the economy and focus more on producing results.
As Doug points out, the spending party of the last several decades, fueled by unfounded optimism and an irrational expansion of credit, is over. Retailers now have to adjust to a more rational model. Talk of a “recovery,” implying that we will get back to the crazy expansion of the recent past is, in my view, misguided. This is the new model.
To survive in this new environment, retailers must, in 3 very broad strokes:
-Do more than talk about customer-centric. Recognize that customers have differing geographic and demographic needs and adjust buying and marketing accordingly. Putting out a homogenized national assortment is a waste of working capital for all but the most basic commodities.
-Focus on quality and value. There’s an old saying in the UK that “I’m not rich enough to buy cheap products.” Too often, retailers confuse value with price. Customers, at all levels, will pay more for higher quality. Selling cheaply made products at a promotional price is not a winning formula in the current environment.
-Embrace a realistic real estate strategy. In addition to runaway credit expansion, the last several decades saw selling space in America grow at a 3-4X multiple of population growth. Adding in the growth of ecommerce, there is simply too much square footage chasing too little demand. It’s time to address the real estate portfolio and begin to close the “D” and “E” level stores. They suck away resources and profitability.
Retailers need to get back to retailing. Relying on heavy discounts and unreasonable promotions are affecting profitability in the long term as merchants condition their customers to rely on loss leaders for everyday shopping. Value and price are very important but something more needs to be offered.
Think about it. Customers are so beaten down because of the economy and Obama and Iraq and Afghanistan and foreclosures and iPhone Apps that don’t do anything, any great service they get at the retail level will be forever ingrained in their minds. I say it’s time to get back to basics. After all, retail is all about adaptability.
In the ’70s, people built and bought smaller houses. This shows why value offerings are gaining ground. The bigger problem for retailers is they must do a far better job of promoting their products in the best possible retail platform–in their stores where shoppers can make the decision to buy one or more additional items.
There are many things about the “New Normal” that retailers need to be focused on that go beyond the short term; savings rates, priorities in spending, perceptions of value, channel capabilities/preferences, etc.
Additionally, new technologies are changing how people are collaborating to get work done and this will continue to drive productivity gains in retail which will still provide profitability even in the painfully slow recovery scenario.
Social networking the enterprises, smart/mobile handhelds, video communications, presence, location-based services, and rich media conferencing will all transform the way work gets done. The very nature of the retail value chain–distributed, labor intensive, and multi-partner make it particularly fertile ground.
Productivity gains are often a net result of economic downturns…there is every sign this is the case this time as well.
Before there is too much excitement about the increased savings rate, it should be noted that much of that increase is actually a paying down of previous debt. “Savings Rate” is not what people put in the bank, it is the difference of what they make and what they spend. Retail recovery can not even be considered until consumers get even. That is eliminating the burden of paying down debt.
Retail will not come back to the metrics of the last 30 years and retailers will have to understand that the rules for cost control and merchandising have changed significantly and permanently.
Start with the store itself. Do you need it? The U.S. is over-stored by a huge magnitude. That measure is not against the world, but other countries with similar economies. While the per capita square footage may not have to drop to that of the EU, it can not remain at 8 times the level.
Do not discount online. Online shopping provides a careful shopper with a world of alternatives that on-foot shopping does not.
There is a tendency to hype great retailing. It has become a huge part of the U.S. economy. But, realistically, the future is dim. Remember, once upon a time people hyped the great retailers like Woolworth, A&P and Sears. Today’s retailers face greater challenges than those Hall of Famers.
There is now a new reality taking place.
1) Baby boomers are now going past their prime earning years. So their spending will decrease until a new level is reached based on their retirement needs.
2) Many Americans owe more on their homes than they can sell the home for. It will take time for housing prices to recover.
3) Americans have been through two major stock market crashes in the last decade.
4) Over the last two decades manufacturing in America has been in a major decline.
5) Credit has tightened up for small business and consumers.
6) We now compete in a global environment. Both as employees and businesses.
The new economy is emerging, and how it will finally turn out is still not clear. What is clear is that this will be a period that will require adaptation to change. Those that can adapt will survive; those that do not will be remembered.
To see a slight increase for year over year numbers is a good sign. A better sign would be to compare Q4 2009 to Q4 2007 to understand how far off retailers are from sales when the economy was healthier (or at least appeared healthier).
Clearly retailers have made adjustments and continue to make adjustments including a focus on private brands, increased use of coupons and more active programs using loyalty data.
Increased savings will lead to smarter purchase behavior. Quality will trump quantity as shoppers look to buy only what they need. When they do make the purchase decision, they want it to last.
All of that said, as an industry we need to be concerned with some global trends that will impact all of us moving forward. The biggest concern is the consolidation of retailers and manufacturers. Similar to the banking meltdown and the auto bailout, we may see the “too big to fail” trend seriously affect the retail industry.
To learn more, I encourage you to read “Cornered: The New Monopoly Capitalism and the Economics of Destruction” by Barry C. Lynn. Barry makes some compelling arguments regarding the seriousness of monopolies globally.
Is this a new economy? Yes. Do consumers want value (lower-cost, higher quality products and services)? Yes. However, all is not lost. Much of what the consumers lost in their 401(k) in 2008 has been recouped in 2009. They are smarter. They are tougher. But they are spending.
There are many retailers, large and small that are doing better than the trend. These retailers are connected to today’s consumers and are flexible enough to respond to changes in demand. Building a store and hoping the consumers will shop it doesn’t work anymore. Then, again, that strategy never really did. There is a ton of unused retail space that can be had on the cheap. Consumers are not holding back as much as the media would lead you to believe.
Are there still too many people out of work? Yes. But that is not driving retail failures in the greater U.S. marketplace, only on a region by region basis. Other countries are accelerating their economies beyond what we are ready to do in the U.S., as we speak.
I could not participate in the instant poll because of the premise itself. Thank you, Gene, for pointing out this morning that the touted household “increased savings rate” does not mean that average people are socking more money away in brick banks (or piggy banks)–and that they will soon be back to consuming with abandon. In fact, the economist types I work with remind us of that false perception regularly. These same number crunchers are also extremely worried about a double dip recession. (And double dip with recessions is not a fun thing like a double dip of ice cream.) That the economy seems to be shedding fewer jobs per month than it has been is cause for encouragement, but that is not exactly the same thing as employers lining up to hire new people. Full employment is what will help make retail viable and profitable again, and that recovery is not right around the corner.
These are the facts of life that we who manage retail, or advise retailers in a responsible manner, must keep in mind.
Retailer’s strategies should be simple now: smaller – better. Gone are the days of mass expansion to any space that was available and gone are the days of so-so product and milquetoast competition. The “New Normal” is upon us and we now have to go back to the old battle cry–retail is detail. And how. Retailers need to look inside and out for new opportunities to improve all the “Ps.” And improve it must be, or you’ll be much smaller vs. just smaller and better. Les Wexner once said to us, “I don’t believe in stopping to smell the roses…I’m afraid I’ll get hit by a truck.” Sound advice for this day and age!
Key point to back the above: Abercrombie announced last week that they would close 100 stores. That’s their ‘smaller’, now for their ‘better’–TBD.
Consumers’ insistence on spending like there’s no tomorrow has produced a crossroads of sorts for retailers. We’re over-stored, and have most of what we need, but retail must invent new products that consumers will want to buy in order to stay afloat. Where in the world will we put it all? …And how will retail keep the bubble going?
I agree with the optimists; that is if I excise their Elmer Gantryish exaggerations and stick with the facts: the economy dropped a few percent, but now it has come back (or will soon). This is not 1933.
As for the bigger question of how businesses should use macro- and long-term trends for their (micro) planning, the issue is unclear: some people plan (or guess) right and do quite well, and some don’t…for every Henry Ford there are several Sewell Avery’s.
I am not as sure as some others that consumers will maintain their increased savings rate over the long-term. I believe that when the news continues to be this murky, people tend to act in ways that represent “conspicuous curtailing” rather than “conspicuous consumption.
That trend does not mean a clear reduction in overall spending — just a shift to deprioritize brands with which they do not have relationships.
Consumers will continue to purchase premium brands where the value and relationship is there. Where it is not, however, those consumers have moved and will continue to move to private label and more price-driven approaches.
Retailers can still continue to grow, if they work with their customers, particularly Best Customers, rather than against them. Customers still need care and advice and are willing to commit when they receive unbiased support for their difficult decision-making.
Wouldn’t we all?
The question of how long it will take consumer confidence to recover will be answered by whether the behaviors consumers are showing coming out of this recession are permanent or temporary.
To date, Americans have shown a growing tendency towards short term memory loss. Gas crisis? Sell the SUV and buy a hybrid or scooter. Gas prices ease? Jump back into the 8 cylinder gas hog. Recession that devastated retirement plans and home values? Focus on savings and conservative spending. Economic recovery … ? Who knows?
If consumers continue on the savings and lower consumption for an extended period of time, retailers will be well advised to focus on value, customer experience, and clearly understood promotions with minimal disclaimers.
If consumers return to their more aspirational ways, retailers could ease some of their current cost cutting and inventory management plans and go back to business as usual.
Either way, in this information economy, consumers will continue to be more knowledgeable and less easily fooled.
If I were a retailer, I would reevaluate whether I was serving my customer base with value, customer service, good in-store experience. These will be the foundations to get through the recovery period and should be a solid base to build on no matter how consumers behave in the future.