Summary
Turning points are all about permanent changes in the behavior of consumers and the retail environment. Retail managers that recognize them and tailor their organizations to respond to the changes will be the big winners. Here are six turning points that may make a difference.
Analysis
Turning points, often buried in the day to day routine, are hard to see. Sometimes they are culmination of many small changes. It’s like turning an airplane along a wide arc. The passengers may never know they are heading in a different direction until they disembark. Less often, they are the result of a single big change. Unfortunately, whether big or small, identifying turning points are more often the study of history than the anticipation of future events. It is in that spirit of anticipation that I suggest six turning points in 2007; each of which may significantly change US retailing in subsequent years.
Turning Point One: Malls are dead. Well maybe not dead, but mall shopping is in intensive care. Consumers have been abandoning malls to shop strip centers and the Internet for several years. That trend continued in 2007. According to ShopperTrak, mall traffic declined by more than 10% during the week of December 16th. Overall, analysts estimate mall traffic was down by more than 4% for the December 2007 period.
Analysis will quantify these decreases in terms of a decline in shopping frequency, increases in off-mall shopping, and the continued rise of ecommerce which isn’t new information. However, what is new is the perpetuation of a pattern of behavior in which consumers are buying both goods and services more frequently and in larger numbers from non-mall venues. Buying behavior is in part about value which malls could better manage, but it is also about habits. For the better part of the last 50 years, consumers were in the habit of going to malls to shop. That has permanently changed and a change in tenant mix isn’t likely to reverse the trend.
Turning Point Two: Tesco’s invasion of US grocery retailing. Six Fresh & Easy stores that opened in the fall of 2007 that will grow to 50 stores by February, maybe 200 by year end 2008 and more than 1,000 are possible within a decade. Impossible a decade ago, Tesco, the world’s number three grocery retailer, comes to America do business in Wal-Mart’s backyard with the odds on chance of not just succeeding, but changing the way Americans buy and prepare food.
Made possible in part by the grocery industries lack of innovation, Tesco recognized smaller, neighborhood stores in combination with healthy, easy to prepare meals, would appeal to time conscious consumers that wanted good food that was convenient to prepare and accessible. Aided by rising energy prices and contaminated products from Chinese food imports, Tesco is positioned to capitalize on a large, under served market, that reflects a salient change in what, where, and how Americans want to eat.
Turning Point Three: Made in America. Contaminated food and toxic material in toys are but a few of the problems businesses have had with Chinese imports in 2007. Combine tainted food and child safety concerns with America’s homeland security fears and “Made in China” not only becomes a product liability for business, but a red flag for consumers.
That doesn’t mean China won’t continue to be an important US trade partner, but the costs of doing business with Chinese companies will be higher and the potential liability of recalls greater. Savvy retailers will develop alternatives to Chinese made imports, especially for food, toys, health and personal care products.
Turning Point Four: Quality for price. Why buy one, when you can buy two at twice the price. That attitude has guided consumer buying behavior for the last several decades. But that’s changing as prices rise a lot faster than income. Products that once seemed cheap, almost disposable, will appear expensive as consumers trying to balance escalating living expenses in 2008 with the high cost of many, poor quality, low utility products.
A growing number of consumers no longer want cheap, low quality products, if that means they have to replace them in six months or a year. Manufacturers that focus on quality and functionality will have an edge on price only competitors; as will retailers that sell them. That doesn’t mean low price products won’t be in demand. Non-core inflation will hit low income consumers the hardest in 2008. However, there will be a greater segmentation of the market as consumers redefine value in terms durability, utility, as well as, price.
Turning Point Five: High prices are here to stay. Today, most retailers still view costs in 20th century terms. However, that is a mistake. What’s different today is the starting point. For the most part, American demand no longer defines the supply curve. Oil rich economies in the Middle East and emerging states are like India, China, and Russia are consuming a greater proportion of all branded products, commodities, as well as, investment capital. While economic cycles will continue, absolute prices will remain significantly above 20th century levels in 2008 and subsequent years.
This means that over the next decade energy, commodity and capital costs will be significantly higher in spite fiscal and monetary policies. As a consequence, either emerging nations will take the lead in innovation and technology, bringing parity to their standard of living at the expense of American consumer or the US government and industry will recognize the need to invest in enabling technology and infrastructure to stimulate real growth in GDP, jobs, and wages.
In hindsight, 2007 was probably a turning point which ended the 20th century economic expansion that was based, in no small part, on the capital invested by government in the countries infrastructure and technology during the Great Depression, World War II, and Cold War era. Whether it was the development of cheap TVA energy, the US highway system, or aerospace technology, both investors and consumers were the beneficiaries in terms of stock price appreciation, increased number of jobs, and real increases in wages. However, the productivity of those investments has sharply declined which leads to the sixth turning point.
Turning Point Six: Retail will contract. By any measure, the amount of selling space exceeds the demand for the product which is especially true if the US economy contracts. For instance, as demand decreases, there are even fewer economic reasons for a Sears Roebuck or Kmart to exist. With the exception of several of Sears’ product brands, the only key differentiating characteristic of the trade names and their competition is location. Now, with mall traffic declining, location is no longer the competitive advantage it used to be. With no turn around in site and sales continuing to decline, reverse operating leverage will probably dictate a reduction in the number of Sears and Kmart stores to prop up 2008 earnings.
Similarly, Macys’ great experiment in ‘one department store fits all’ starts 2008 with nine fewer stores. Unfortunately, the consolidation of May Co. and Federated stores under the Macys brand a year earlier did nothing to reduce over storing, but it did make sameness in merchandising a bigger industry problem. If Macys can’t adequately differentiate its product offers locally, more stores will probably be slated for closure in 2008 as they become redundant and irrelevant to consumers in local markets.
Excess selling space isn’t just a department store issue as demand contracts, but a problem for specialty retailers too. Large specialty stores like Limited Brands and the GAP have seen a continued decline in stores sales over the last five years. Limited Brands sold a majority interest in its unprofitable Express brand in 2007 only to watch sales continue to decline about 7% in November.
Likewise, Gap’s comparable store sales declined about 6% in the third quarter; continuing its multi-year trend of lower sales. Decreased demand and strong competition from emerging chains like Urban Outfitters, Aerospostale, and Charlotte Russe, means more apparel store closures in 2008 and they aren’t the only ones. Companies like Circuit City, RadioShack, Zale, Pier 1 Imports, Office Max, Jo Ann Stores, and Auto Zone are just a few specialty retailers that may have to decrease selling space to regain profitability in 2008; that’s assuming they all survive.
These are six turning points in retailing that may materially effect what retail management does in 2008 to grow sales and profitability. Some could impact business immediately like store closures, higher prices, and product quality. Others could help shape retailer’s strategic decisions for the future such as, location strategy, new market segmentation, and supply chain development.
But whether these six turning points are the key ones for retailers to recognize or another six, the most important point for mangers and investors to understand is that 2008 won’t be a business as usual. As one writer put it, if we have a recession, it won’t your fathers recession. It follows that these changes aren’t one time occurrences that temporarily disrupts normal business activity for several quarters and disappear.
If they are turning points, and I think they are, they mean something has permantly changed the consumer or the retail environment and there is no going back.
