Polar Opposites Rule Retail
Commentary by George Anderson
The center has gone out of retail. Maybe it has gone out of America.
Politically, economically, racially, spiritually… the nation increasingly appears to be divided into camps with separate agendas and views of the way forward.
At retail, the luxury market continues to remain strong while, at the other end, dollar stores, limited assortment grocers and Wal-Mart continue to command a sizeable and growing
share of consumer purchases. Those that have tried to take a middle position have often found themselves on the wrong side of Chapter 11 or worse.
The National Retail Federation’s (NRF) announcement earlier in this week that it would bring a new version of its future store, the X06 Marketplace, to its Annual Convention
in January is another illustration that retail is headed away from the middle.
The X06 Marketplace is an upscale gourmet food store with features such as a Wine Cave and Chocolate Café. The store will have to make extensive use of technology, most
notably radio frequency identification (RFID), to make the store more interactive with shoppers.
With all its bells and whistles, X06 sounds like an upscale consumer’s dream. It doesn’t appear likely, however, that it is something that consumers in places such as New Orlean’s
Ninth Ward, Brooklyn’s Bedford Stuyvesant or many rural areas in Appalachia are ever likely to encounter.
Moderator’s Comment: Is the polarity in retail formats a reflection of what’s taking place in American society? How will polarity impact what retailers
and consumer goods manufacturers do in the future? –
George Anderson – Moderator
What is middle class? Most people probably identify themselves as being middle class but I think we can break it down further to upper-middle class and lower-middle class. We now have an hour-glass economy where the actual middle class is quite narrow. The polarity has already taken place and has provided some exciting new opportunities for creative retailers.
Of course it’s reflective of society. What’s slightly different is that many wealthier shoppers are frequenting discount stores. Apart from the social acceptance of “value” shopping that has been in play for a while, the formerly affluent are much more concerned about the economy than was the case previously and work harder to save money. The middle will not likely vanish, but it sure is contracting.
Of course, a major change is taking place. I’m not sure that the middle class is disappearing, but it certainly is no longer THE middle class. Middle class Hispanics, middle class Asians, middle class managers, middle class seniors, and middle class singles are not one market. Why would one grocery store appeal to all of them? If the choice is upscale stores that are not affordable and Wal-Mart that is affordable, what will they choose? If mid-range grocery stores continue with a one size fits all format, they will continue to disappear one by one.
I am aware that many people have predicted over the past few decades that the middle income population will disappear, and I am aware that these statements are often discredited. That said, I feel the need to add a quote from Alan Greenspan from June 05 that addresses this issue. Greenspan is quoted as saying, “The income gap between the rich and the rest of the US population has become so wide, and is growing so fast, that it might eventually threaten the stability of democratic capitalism itself.” What does everyone think about this statement?
If this is the case (that retail is becoming increasingly polarized towards hi and low ends), then why is Wal-Mart banking on moving towards the middle in the apparel area? The Journal of Retailing just published a whole volume on the “Big Middle,” with both theme and empirical pieces. I think there is a big middle, I think it will stay, and I think that Wal-Mart is making a huge mistake.
Retail in the US is about the customer’s experience. At the beginning and then at the end of every shopping experience, the customer will decide:
“Does shopping at ABC Retail make me feel better about myself?”
The Wal-Mart answer is ‘yes – I feel better because I can buy more things for less and I am surprised by new items at low prices every visit.’ The Abercrombie answer is ‘yes – I feel better because I believe I look great and have bought into a sense of style and status with, or superior to, my peers.’
Retail’s middle ground was ruled by brands that gave up on the customer experience to try and be all things for all people, and found themselves irrelevant – style was cold, price was high, and the merchandise was all mediocre-for-the-masses. There are a couple of middle ground champions – Target (which has nailed the customer experience) and Kohl’s (which appears to be losing ground on the engaged customer – they still have time to turn it around, though). I think the middle ground is open for business – for the customer-minded business.
Fight for customer experience, and retailers will win customer loyalty.
JC Penney, Kohl’s, and Macy’s all appeal to the middle class and all 3 are doing reasonably well. I believe that many middle class stores are in trouble not because they appeal to middle class shoppers but because they’re mediocre operators.
The sermon being given for the death of the “middle class” may be premature. Economists, social philosophers, erudites and other sage folks have been predicting its upcoming demise for decades. But with an ever-growing underbelly of constantly-striving Americans, both U.S. born and immigrants, the “middle class” would seem to have enough necessary recruits to sustain itself regardless of what retailers and manufacturers might be judged as doing in today’s marketplace.
Let’s explicitly draw the distinction between the reduced numbers of the middle class demographic and the middle ground of retailers in the marketplace. I’ll address the latter.
As a sales growth strategist, I am alerting my supermarket industry colleagues to a trend that’s impacting some retailers now and will be intensifying in the next 2-5 years, with the expansion of upscale retailers like Whole Foods (estimated capacity 500 stores and commitment to be a $10 million company) and low price leaders like Wal-Mart (estimated capacity around 3500 stores with pressure to be $600 Billion in sales in the next 3-4 years). There are other retailers like Wegmans (upscale) and Winco (low price) who are expanding to new regions. Throw in Costco and SuperTarget with expansion plans and more retailers will find their position in the marketplace being jostled.
Shopper behavior also figures into the equation. The trading up and trading down grocery procurement phenomena is threatening to relegate conventional store to convenience shopping trips (quick and fill in trips).
When such “extreme” retailers come to town, most retailers instantly find their position in the marketplace altered, becoming entrenched in the undifferentiated or murky middle ground. At least in the supermarket channel, there will be an increase in chains working to differentiate themselves from the middle ground and the strategic choices are complex and challenging, and destiny-shaping.
Of necessity, the largest retailers tend to migrate toward the “big middle” as they expand and become more volume dependent. The big middle is defined by Brown et al (Journal of Retailing, 2,2005) as “the marketspace in which the largest retailers compete for the preponderance of consumer expenditures.” In other words, they try to sell something to almost everyone – in the manner of Wal-Mart, Kroger or Sears.
On either margin of the big middle there are niche positions – high price, high offering (a.k.a. luxury or innovative retailers) and low price, low offering (a.k.a. dollar store and off price). A retailer who succeeds well in either category and tries to grow its volume will inevitably face pressure to appeal to the big middle, at the price of blunting the sharp positioning that got it there in the first place.
This occurs concurrently and despite the “Trading Up – Trading Down” consumption phenomenon described by M. Silverstein at Boston Consulting Group. In truth, most of us are split shoppers. Even a starving artist can spring for a $4 latte at Starbucks now and then. There will always be a place for luxury-oriented retailers who serve a small but lucrative share of the marketspace. But the big middle isn’t disappearing yet.
Census and economic data show very clearly that there is still a “middle class.” It is far less homogenous than in past generations, and perhaps useless as a marketing consumer niche. In addition, there is still an aspirational lower middle class, which again, is far less homogenous than in past generations. These are facts.
Also a fact is middle ground retail is extremely complex and challenging. It requires margins high enough to support and meet expectations for service, ambiance, and presentation standards. It requires supply chain efficiencies to support the cost-to-serve. In many categories, it requires a delicate balance of private label and brand arrays.
The long and short of it is that to serve the middle and be considered successful, an organization must excel in store operations, marketing, supply chain, logistics, merchandising and product development. Not to mention squeezing every synergy possible out of shared overhead. That’s a lot of core competencies.
Luxury retailers don’t have to be excellent at supply chain, logistics or shared overhead. Discounters don’t have to excel in store operations, marketing or product development.
It’s possible to serve the needs of the various segments within the “middle.” It’s just damn difficult.
There has been considerable study done by WSL Strategies that concludes that we are in a society responding at retail to “supersizing” or “specializing.” I would agree that to be caught in the middle is very unpopular ground and potentially a recipe for disaster. My belief is that specialization will ultimately dominate the landscape. Sure the super-big-box retailers will hold a commanding market position, it is those retailers that carve out a specialty niche and blanket the area of expertise completely that will be in a position to operate at a higher operating margin.