Realigning the retail model

In the last few years, the US economy has seen a considerable slowdown in the growth of traditional retailing, evidenced more than anything else by failing flagship stores and retail malls. While the groundwork for this slowdown has been a few years in the making (accelerating since the Great Recession of 2008), it has become more pervasive in the last two years which have been particularly devastating for traditional retailers in the USA. This has caused many to predict the death of traditional retail as we know it, brought about by a combination of indifference by Millennials, the rise of online shopping and the slowing down of the economy.

Considering the list of major retail brands that have either gone bust or are significantly reducing their store footprint in the last two years, it is not hard to see why this talk of gloom and doom is finding traction even amongst the most established of market analysts. However, although a deeper look does indicate that traditional retail is struggling, all things do not point to a great retail apocalypse, at least not yet, if only because the economic fundamentals do not add up. Overall retail spending (online and traditional across categories) continues to grow, albeit more slowly, the US GDP has now grown for eight straight years, wage growth, while slow, is also going up, gas prices are still at historic lows and unemployment is hovering around a low of five percent. So what is wrong with retail? Scratch the surface and you see more significant trends shaping the future of the retail landscape in the US.

1) Experiences versus ownership

One of the key factors driving the growth (or lack thereof) of volume in retail is the way consumption patterns are shifting. A key driver experts point to is that consumers are moving beyond the materialistic satisfaction of owning things to paying for experiences that will broaden their horizons. So, while growth is tapering off for capital purchases like furniture and cars and is down on categories like clothing and accessories (around 20% since the recession), it is up in categories such as air travel (airlines shuttled a record breaking 823 million passengers in 2016). There has also been a restaurant renaissance with food and drink growing twice as fast as any other category in terms of retail spending. In fact, 2016 marked a tipping point when Americans spent more on dining out than they did at grocery stores. Then there is the fact that although car ownership is down, car rentals are up. All indicating that retail spend is not drastically down, it is simply being directed to different avenues.

2) Social media validation trumps instant gratification

A key driver shaping the redirection of retail spend is social media, particularly among Millennials. Experts claim that one of the key weaknesses of the established retail landscape (malls et al) has been the way they underestimated the impact of social media on young people. As more Americans get on the social media grid, their focus has turned towards acquiring validation from peers, through likes and shares. This has, in many ways, displaced the dopamine high that came from the gratification of friends salivating over the latest and often costlier fashion accessory or tech gadget. As social media continues to proliferate, malls have started using the medium to enhance the retail experience and broaden their appeal, often by giving greater share of retail floor space to restaurants, indoor mini-golf, movie theatres and arcades – avenues that lend themselves to be centre stage in social media sign-ins.

3) Evolution of online shopping

In the last few years, online retailing has moved beyond traditional categories such as media and books to encompass just about everything under the sun, including experiential purchases like clothes and even high-ticket items like appliances. The research firm Forrester recently estimated that online shopping is now a $200 billion revenue generating industry in the US. With online suppliers simplifying their transaction process (robust security features, risk-free returns and free shipping policies), it is not surprising to see why online shopping is catching on. Take, for example, Amazon – where sales over the last six years have grown from $16 to 80 billion. Adding to this tsunami of competitive pressure is the rise of mobile commerce which, thanks to better designed and more secure shopping and payment interfaces, has grown tenfold since 2010 and now accounts for nearly a fifth of total digital spend in retail.

4) The mall glut

While the effects of the retail slowdown are being felt from rural strip malls to iconic locations on New York’s Fifth Avenue, a large part of the problem is that America, in the last 40 odd years, has gone overboard building malls. According to Cowan Research which specialises in the sector, since 1970, the rate of growth of malls in America was twice the growth of the population. This has led to overcapacity in retail real estate, equivalent to 40% more per capita than Canada, five times more than the UK and 10 times more than Germany. Considering the scale of the glut retail leasable area, it was no surprise that when the recession hit, mall traffic fell by more than 50% on average and has not stopped dropping since. This, coupled with the rise of online shopping and changes in consumer behaviour, has meant that anchor stores, like J.C. Penney, Macy’s and Sears, which were once the major traffic draws for malls are now struggling to attract customer footfall.

Furthermore, as the retail landscape of the US changes, a growing number of market observers are cautioning against being too pessimistic on the future of retail. In their view retail is not dying; it is simply changing like it has done numerous times before. According to them, retail is prone to cyclic disruption to its business model and we are simply witnessing the next stage of the retail evolution rather than retail extinction.

Tariq Ziad Khan is a US-based marketer and a former member of Aurora’s editorial team. tzk999@yahoo.com