Two Takeaways on the Future of Retail

June 3, 2019

 

When you read of the spate of store closures -- more than 7,150 have been announced by U.S. retailers so far in 2019 – you cannot help but think that something very big is happening.

 

And so it is. But to call it a "retail apocalypse," a phrase that has gained some popularity in the press, is an oversimplification and really not accurate. It’s more complicated than that.

 

The truth is that despite the growth of e-commerce and the rise of the Amazonian Empire, the vast majority of retail sales continues to happen in brick and mortar stores.

 

Retail sales hit a record of $6 trillion in 2018, according to the U.S. Census. That's better than the pre-recession high of $4.4 trillion spent in 2007. It's also a 50 percent increase from 2009's record low of $4.06 trillion.

 

Long-term, there is even projected job growth in the retail sector, which some may find surprising. The U.S. Bureau of Labor Statistics says overall employment of retail sales workers will grow 2 percent from 2016 to 2026. Granted that’s slower than the average for all occupations, but it doesn't foretell the death of an entire industry.

 

At least in the short term, consumers are feeling pretty good about the economy. The Conference Board's index of U.S. consumer confidence rose to a 6-month high in May.

 

"Consumers expect the economy to continue growing at a solid pace in the short-term, and despite weak retail sales in April, these high levels of confidence suggest no significant pullback in consumer spending in the months ahead," said Lynn Franco, senior director of economic indicators at the Conference Board.

 

China and a Gathering Storm

 

But some economists warn of gathering storm clouds. The gap between yields on long-term and short-term Treasury bonds, known as the yield curve, fell to negative 12.3 basis points this week, a level not seen since 2007. Yield curve inversions have preceded the last seven recessions. This time, the inversion comes as trade tensions with China heat up and business investment slows. 

 

For some time now, retailers have been warning industry stock analysts about the U.S.-China trade war's potential to hurt sales as tariffs push prices up and turn shoppers away. For the most part, shoppers have not noticed, because the first two rounds of tariffed products largely excluded consumer goods.

 

But now we’re entering a new phase, with tariffs being imposed on the third and fourth "lists" of goods set out by the Trump administration.

 

The White House has threatened to slap another round of 25 percent tariffs on roughly $300 billion in Chinese goods that would include apparel and footwear. That’s after a third round of tariffs, impacting goods like furniture and accessories including handbags, took effect in May.

 

The trade war is already hurting retailers, if only in terms of the amount of time that company executives are being forced to spend on contingency planning. Worse is yet to come.

 

I see two big things that are going to transform the future of retailing. By the way, I'm not a retail consultant per se. Rather, I do economic consulting for communities and corporate site selection for companies, That said, this is important stuff that everyone needs to know because consumer spending drives the U.S. economy.

 

Takeaway No. 1 -- Digital Technologies

 

This should not be a big surprise as digital technologies truly are transforming our lives. Those retailers that adapt and adopt will survive. Those that don't, well, you know the story.

 

(Store closures continue to mount, with some experts saying they could exceed 12,000 by the end of this year.)

 

Technological change has been the impetus for e-commerce, which made up 10.2 percent of all U.S. retail sales in the first quarter of this year, according to a report from the US Department of Commerce. The question is how far will it go.

 

Mark Pilkington, author of the book, "Retail Therapy: Why the Retail Industry is Broken -- and What Can Be Done to Fix It," says e-commerce has five big ‘Cs’ going for it – cost, convenience, choice, control and customer relationships.

 

“But retail still has the human factor, the physical product experience and the immediacy of delivery,” he wrote on Quora, which means brick and mortar retail can and should survive.

 

Shopbots and Drones

 

Nevertheless, advances in digital technologies will continue to eat away at the traditional retail industry. Those retailers that survive will simply have to change their ways. Wrote Pilkington:

 

“They can no longer be ‘glorified warehouses’, wasting their precious retail space on piles of inventory that no one is sure anybody is going to want. They cannot use their precious staff as dogsbodies, wasting their precious time on back-breaking menial tasks like stock management, till operations and administration which can be automated or shifted to the company’s e-commerce logistics arm.”

 

Indeed, Pilkington says artificial intelligence will result in online shopbots able to replicate 90 percent of normal human retail interactions. Virtual and augmented reality will enable customers to ‘see’ and even ‘touch’ the products. And drones, self-driving vans and street delivery robots will deliver to your doorstep.

 

There's little doubt that Amazon is planning for all of this, which is coming sooner than later. Its e-commerce dominance continues, spurred on by the company's recent move to offer one-day shipping on more than 100 million items for Prime members.

 

According to digital magazine Internet Retailer, Amazon accounted for more than 33 percent of all online sales in the U.S. last year. That number will only grow, unless the Justice Department brings a halt to it on the grounds of anti-trust.

 

The other tectonic shift that I mentioned was consumer behavior. But a new study by the accounting group Deloitte, says it’s not so much a matter of behavior than financial resources. Well, behavior is reflected by the resources.

 

Takeaway No. 2 -- Millennials are Hard-Pressed

 

Consider this: the net worth of the average 18- to 35-year-old has plummeted 34 percent since 1996, according to the Deloitte study. (Did your jaw just drop? Mine did when I read that.)

 

And while retail spending has grown about 13 percent since the early 2000s, Deloitte researchers say that figure is largely due to the growing U.S. population, not increased individual spending.

 

Kasey Lobaugh, chief retail innovation officer at Deloitte and lead author of the report about, says millennials put off milestones like home buying and marriage, because they just don't have the money. The rising costs of housing, education, and health have taken a huge toll on their buying power.

 

“What we really see when you look at the wallet is it's this pressure that they're under from, No. 1, their income levels are not rising, coupled with not just rising but in some cases skyrocketing non-discretionary expenses,” Lobaugh told Scott Simon with NPR.

 

The cost of education in particular is a burden. Student debt has increased by 160-percent since 2004 the study finds. As of 2019, student-loan debt is at an all-time high with a national total of $1.5 trillion. The study shows that various debt and rising living costs make it more difficult for millennials to save.

 

Retailer Reality Check

 

The Deloitte study finds that millennials today spend significantly more on basic needs than they would have a decade ago, while their incomes have stayed steady. Discretionary spending, like movies or a dinner out, have stayed flat.

 

Retailers that want to appeal to millennials need a reality check, Lobaugh said. Today's millennials have an average net worth below $8,000, putting the group in a worse financial position than previous generations.

 

 “I have many of my retail clients that say to me, ‘We have to win with the millennial.’ But what the data really tells me is perhaps it's the millennial who's not winning.”

 

 

 

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