Another holiday shopping season has come and gone; it wasn’t too bad depending upon whom you ask. After some difficult years at retail, many stores reported better sales. Consumer attitudes have improved too, along with a seemingly improving economy. Things may be looking up, but — as with many things in economics — the aggregate story is a composite of differing, often conflicting factors.
Let’s begin with the economy; it has improved. According to the U.S. government, top-line GDP grew nearly 3 percent in 2014. Even better, unemployment is down while consumer spending rose nicely. All in all, it’s a pretty rosy story — except when you look at the fine print. Although overall GDP grew last year, for many Americans it didn’t. Top wage earners did well; everyone else, not so well. Indeed, retail apparel store sales rose by more than 2 percent last year, but the growth was primarily at high-end stores. Mass market and discounters didn’t do nearly as well. Perhaps it is the result of an increasingly weaker American middle-class? Or is it the effect of online sales — up more than 7 percent last year — which continued to carve a growing share of consumer dollars?
Then there’s consumer confidence: it looks good until we dig into the details. Some consumers feel better about their economic prospects. After all, the job market has improved. But what about the kinds of jobs that are being filled? Many are for hourly wage service jobs. Also, there are new distractions in the marketplace, particularly for younger consumers. In many ways, gadgets have cannibalized garments. Today’s young consumer struggles with a very tight budget; there’s not a lot available for frivolous purchases. $150 for a pair of jeans? Nah, she’ll buy a new mobile phone instead. How does that affect retail sales? Specifically, what does that do to apparel sales?
So what are the American consumer’s discontents? When it comes to apparel purchases, fashion, fit, availability and source of production always are important. But today, perhaps more than ever, price remains central to consumer purchasing decisions, as economic uncertainty, changing demographics and tight budgets continue to weigh on consumers.
A Broke Consumer Straddled with a Broken Retail Business?
Are American consumers broke or is the system of retail sales broken? If so, does that explain lackluster retail apparel sales in 2014? Or is there more to the story? A generation of consumers helped to build the economy we know in the United States today. As the media so fondly reminds its readers: the consumer society makes up about three-quarters of the economy. So, it stands to reason that retail sales will reflect the overall performance of the economy.
The so-called “baby boomers” (people born between 1946-1964) built the consumer society, drove retail sales for decades and helped to propel the global garment industry to new heights. In fact, the very structure of the American retail industry grew to reflect the tastes of this generation. However, much of the generation is now approaching retirement age; consumption patterns have changed. The robust consumption of the older generation is increasingly being supplanted by a younger generation less inclined to consume. In addition, the children of the boomer generation – the so-called Millennials – don’t seem to buy clothing as their parents did.
There’s a squeeze going on with American consumers. And consumers are showing the effects of that squeeze by staying out of retail and apparel stores, but shopping online more in search of deals.
Millennials are young with limited financial resources while their parents are old with increasingly fixed incomes. And, of course, their choices are different. Electronic gadgets — cell phones, tablets and the like — siphon off sales of apparel. For many young consumers today, having the latest phone is at least as important to having the latest jeans. It’s bad enough for retailers to compete for dollars from a generation that may not have the buying power of some previous generations, let alone to compete with a new class of consumer must-haves!
They may like their mobile phones, but, as a result, don’t buy jeans as their parents did. The societal reasons for wearing denim may no longer be relevant, but social unrest these days may be more readily recognized in the form of a 140-character tweet, than in a pair of jeans. As a result, this generation buys fewer units of clothing. It is true that one portion of the market pays as the equivalent cost of a smartphone for premium denim jeans, but these consumers expect these garments to last longer. Mom and Dad wore their jeans but had lots of pairs buried in their closets. Today’s young consumers, may not have the financial ability to consume like their parents, but they still consume, just in a different manner. I find it curious, too, that many Millennials enjoy shopping at thrift stores. Why is that?
Today’s younger consumer is more likely to buy garments made with synthetics, for instance, compared to their parents. Sustainability is also important to this group. Renewables are essential; green initiatives imperative.
But there’s more to the story. Let’s go back to the Millennials’ parents. They still have incredible buying power. In a recent article in the Financial Times, “more than $15 trillion.” To put that into perspective, the entire gross national product of the United States is about $17 trillion. So, oldsters are purchasing goods and services at an annual rate equivalent to the entire U.S. economy. But much of that disposable income increasingly goes to health care and retirement expenses. Nevertheless, are apparel brands and retailers selling what today’s older generation wants?
The Baby Boomers were perhaps the most affluent generation in the history of the world. They were also the most educated and benefited by attaining high paying jobs that required a good education. In many ways, today’s aging Boomers are representative of the last generation of middle-class consumers. Indeed, retirement brings fixed incomes with less potential consumer-buying power. When coupled with the attitudes and economic limitations of Millennials, this leaves a greatly diminished middle-class, which in turn, translates into a greatly changed retail environment. The retail environment of the middle-class of the past has given way to something new — a challenging environment of splintered markets, low-cost production and diminished expectations. Needless to say, it’s a hard time to be a retailer in the United States these days.
Overriding all of this demographic change is an apparent decline in the role of the middle-class in the American economy. Indeed, the American economy has produced a wealthier elite, (the so-called 1 percent) and a larger class of low-income workers while the middle-class has shrunk in relation to the other two. This decline has profound implications for the overall health of the American economy and represents a serious challenge for retailers.
Economic inequality has become a hot political issue over the past couple of years. A weak economic recovery has left politicians scrambling to explain why the recovery from the recession in 2007 has been so anemic. In a recent Standard and Poor’s (S&P) study entitled, “How Increasing Inequality is Dampening U.S. Economic Growth, and Possible Ways to Change the Tide,” the credit rating service concluded that income inequality in the United States holds back growth of the economy. Further, S&P explained, “at extreme levels, income inequality can harm sustained economic growth over long periods [and that] the U.S. is approaching that threshold.”
Any discussion about income inequality is fraught with political catches. As reported widely in the media, politicians in Washington are tied in knots over the question of economic inequality. Indeed, the political fight often falls along party lines; the role of taxes and redistribution seems to be a key feature of the debate. Politics aside, there is plenty of evidence that economic inequality has, for whatever reasons, grown significantly and paralleled the rise of fast fashion, low-cost sourcing and surge in retail discounting.
S&P describes the issues succinctly:
“The topic of income inequality and its effects has been the subject of countless analysis stretching back generations and crossing geopolitical boundaries. Despite the tendency to speak about this issue in moral terms, the central questions are economic ones: Would the U.S. economy be better off with a narrower income gap? And, if an unequal distribution of income hinders growth, which solutions could do more harm than good, and which could make the economic pie bigger for all?”
Given the decades — indeed, centuries — of debate on this subject, it comes as no surprise that the answers are complex. A degree of inequality is to be expected in any market economy. It can keep the economy functioning effectively, incentive investment and expansion — but too much inequality can undermine growth.
Higher levels of income inequality increase political pressures, discouraging trade, investment, and hiring. [Consequently,] income inequality can lead affluent households (Americans included) to increase savings and decrease consumption, while those with less means increase consumer borrowing to sustain consumption … until those options run out. When these imbalances can no longer be sustained, we see a boom/bust cycle such as the one that culminated in the Great Recession.
In an insightful analysis, the New York Times recently reported:
“in the late 1960s, more than half of the households in the United States were squarely in the middle, earning, in today’s dollars, $35,000 to $100,000 a year. Few people noticed or cared as the size of that group began to fall, because the shift was primarily caused by more Americans climbing the economic ladder into upper-income brackets. But since 2000, the middle-class share of households has continued to narrow, the main reason being that more people have fallen to the bottom. At the same time, fewer of those in this group fit the traditional image of a married couple with children at home, a gap increasingly filled by the elderly.”
The authors turned to recently published Census Bureau data to make the case that constraints upon the American consumer have only become more pronounced since the so-called Great Recession of 2007. The economy may have improved since then, but the makeup of the American has changed along with it:
According to the Census Bureau data, the growth of upper-income Americans is not a new phenomenon. Rapid growth for the fortunate few has gained momentum since the 1980s. More recently, unfortunately, the growth of the top has been supplemented by growth of the bottom, an undesired result in any respect. The following graph tells the story. When comparing 10-year growth rates, growth in the upper-income bracket has risen sharply, as has the growth in the lower-income tier while the growth of the middle-income has lagged relatively to both.
So what does this mean for retail and the entire apparel supply chain? The game is changing — that’s what! It is a curious correlation: as income inequality has accelerated, the rate of growth in retail apparel sales has slowed. Of course, retail growth declined in real terms in 2007-2009 due to the Great Recession. Sales have improved since then, although after surging from 2010-2011 the year-over-year rate of growth has dropped back sharply suggesting a more difficult environment continues to plague retailers. In fact, recent retail gains have barely kept up with population growth — anemic performance, for sure!
Retailers, then, have been forced to find new ways of competing in a seemingly depleted consumer market for apparel. What did retailers do in response to this market? They cut prices, which was a reasonable response to a weakening market, but has strong implications for the industry over the long run. As a result, margins continue to be squeezed, supply chains stretched, and new channels — such as online — gain primacy over more traditional physical retailing. Tellingly, U.S. apparel import prices have been steadily falling since 2000. Some may say there’s too much supply, cheap labor, or the lack of import quotas helped to make lower prices as reality. For certain, these factors play a role, but falling prices remain largely a manifestation of tepid retail growth in the U.S. for more than a decade.
So What Does all of this Mean?
When the Baby Boomers came of age, the United States had a large middle-class. Indeed, retailers evolved to meet the needs of these customers: department stores, specialty stores and catalog businesses all strove to meet the needs of this affluent generation of consumers. Today, though, the traditional department store is under siege. Big-box retailers have carved out more and more market share at the expense of department stores while at the same time all forms of physical retailers struggle to compete with online shopping. The Millennial generation can buy their favorite clothes with a tap on their mobile phone — assuming they have any disposable income after buying those phones in the first place!
Nevertheless, income inequality weighs on the retail business. In fact, changes in consumer demographics have radically changed the ability of consumers to buy the latest fashion and has given new evidence for the rush to produce seemingly endless quantities of garments at the lowest possible price. Indeed, a competitive retail environment has forced so many merchants to lower their prices in an effort to compete better, as the ultimate consumer suffers from stagnant wages and buying buyer. The question for the long-term remains: what will this kind of economic environment mean for retailers? An already tough business just got a whole lot tougher…
Managing Director, Olah Inc.