The New Retail Reality

“We are seeing very, very weak growth of zero to 2 percent,” said Andrew Tilton, senior economist for the U.S. and Canada at Goldman Sachs. He attributed the “very sluggish economy” to three factors: high commodity prices, especially for oil and gasoline, fiscal austerity and the depressed housing market. Tilton noted that in every other recession since World War II, gas represented a smaller share of the consumer budget. Now it is completely the opposite, with gas accounting for a “huge increase in share of consumers’ wallets,” largely due to demand from emerging markets.

Tilton told the conference that the “age of fiscal austerity” has begun and predicted more government cutbacks in 2012. The 30 percent drop in the home prices is exacerbated by the amount of excess housing that still exists. Tilton injected some “positive news” — the fact that housing prices will not drop anymore. Furthermore, new homes will need to be built to keep up with population increases. He also disputed claims that the U.S. resembles Japan following its financial crisis in the 1990s. “The big difference is that the U.S. population is growing. It won’t be stuck in neutral forever,” he said.

Still, U.S. consumer purchasing is constrained by the debt that consumers have amassed over the past 30 to 40 years. Tilton pointed to the fact that household debt currently stands at 114 percent of household income, although down from its peak of 130 percent in the third quarter of 2007. “We are still a number of years out until it reaches a normal level again,” Tilton explained.

Citing low interest rates, Tilton contended that inflation is not the problem. “The bigger issue is that demand is repressed,” he said. He predicted that the Federal Reserve will keep rates at zero “well into 2014.” He warned that the economic crisis in Europe poses a greater threat to the U.S. economy than decreasing exports. “It could look like 2008 again, damaging the availability of credit if banks pull back. That will slow the economy a lot,” he concluded.

Tale of Two Consumers

“Holiday spending accounts for one-half trillion dollars,” said John Long, partner and retail strategist at Kurt Salmon Associates, a global management consultancy with 15 offices worldwide. To explain the current economy, he told the story of two consumers — “high-income earners driving double-digit increases in luxury goods and low-end earners still struggling and very cautious about how to spend their small discretionary income.” He was not particularly worried about the impact of higher commodity prices since he said consumers appear to have accepted them. However, he cited the fact of “no significant change in unemployment” as one of the biggest challenges to economic recovery.

Long’s data is culled from monthly surveys of 8,000 consumers across the U.S. at all income levels and over 100 retail executives.* He noted that while the surveys have been highly predictive in the past about holiday spending, since the recession, consumers are “telling us one thing and doing another.” As a result, he acknowledged, “It is very difficult to determine whether they will spend less — as they say they will — or do the opposite, as we have seen over the past two years.”

“There is no magic bullet,” Long said. Yet he was emphatic about the importance of online retail, identifying it as “the single biggest growth opportunity,” and noting that every earnings report now includes online sales. He pointed out that online sales are incremental and not cannibalizing brick-and-mortar purchases. He advised retailers to determine what they can do to make the shopping experience “more sticky” in terms of attracting customers. Long predicted that in five years, growth will come from international markets, innovation and social media, but he cautioned that success with the latter depends a great deal on the target market.

“A key trend is the proliferation, not of ecommerce, but mcommerce (mobile) and fcommerce (Facebook),” noted Long. He cited statistics showing that one in ten visitors comes to a site from a mobile device. “When they come to your site,” Long advised, “you better make it easy for them to buy.”

Value Equation

In light of the economic perspective provided by Tilton and Long, Lewis asked the panel, “Is this as good as it gets?”

“No one feels great,” replied Joseph Gromek, CEO, Warnaco Group Inc., a $2.5 billion international apparel manufacturer, 75 percent of which is Calvin Klein products. The first half of 2011 was stronger, but shoppers are looking for value. “The low end is being squeezed. We need the middle market, which is trading down,” he noted, adding that the “dysfunctional government” is not improving people’s attitudes. Sixty percent of Warnaco’s sales come from outside the U.S.

“There is a fundamental shift in the market,” observed Alexis Maybank, chief marketing officer (CMO) and founder, Gilt Groupe, an online shopping emporium for designer goods and luxury travel at discounted prices. “The premise now is that fashion is no longer disposable.” Gilt Groupe attracts 20-, 30- and 40-year-olds who want the high quality and style that Gilt Groupe offers, but also care about what the brand stands for in terms of environmental and social responsibility.

“Everyone forgets how horrible the economy was three years ago,” said Neil Cole, CEO, Iconix Brand Group Inc., a New York-based company that licenses diverse fashion brands to leading retailers and manufacturers worldwide. He described “an incredibly resilient economy,” but still voiced concerns about the new world economy where “hiccups in Europe” can have a global impact. “Luxury consumers today are influenced by the value of their portfolios while for the mass market, it’s the cost of gas and housing,” he explained.

New Retail Ecosystem

Maybank stressed that Gilt Groupe is not a “liquidation platform.” Rather, it delivers “a special price point and excitement.” Echoing Long’s remark about the importance of social media, she described it as “ubiquitous,” calling social media “the new ecosystem of retail.” Given that “social media takes the conversation to where things are happening — online,” she advised retailers to look at their website as their “new flagship.” Every day you are “only a few clicks away from a purchase,” she noted. Still, she cautioned that it is critical to be responsive to both the negative and the positive in this very fast feedback loop. “With mobile, your product has to be delivered to the customer on his or her terms,” Maybank emphasized.

“Fashion products must be marketed in a very compelling way,” said Gromek. “It’s a bit of a game.” Specialization is the route endorsed by Cole, who believes that a global market dictates that you determine what market needs are and be “very good” at fulfilling them.

Gilt Groupe’s business model allows it to respond quickly to trends, as well as to changing economic conditions. Maybank pointed out how cost savings accrue when a company has little overhead and still manages inventory turnover as often as 100 times a week. Seventy-five percent of Gilt Groupe’s merchandise sells out in the first 90 minutes. Maybank explained that adaptability is built into the company’s business model as it pursues a two-prong strategy: Give customers access to something that is hard to find, plus help them put together a look.

“Business is changing at every level,” said Cole. Yet customers still need to be inspired. “Do everything you can to keep your loyal customers happy and excited,” advised Robin. “It’s not about price,” said Gromek. “It’s about want and creating the desire for something — even if you don’t need it. Consumers will spend any amount they think reasonable,” he asserted.

Article from the Rapaport Magazine - December 2011. To subscribe click here.