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The Bifurcation of Retail: How Retailers Are Competing on Price or Differentiating To Win

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Team Custora was in Las Vegas this week to attend Shoptalk, one of retail’s biggest conferences of the year. We’ve been meeting with marketing leaders, attending sessions, and hitting the blackjack tables.

One of our favorite sessions this week was given by Christina Bieniek, a retail consulting lead at Deloitte. Christina and her team set out to examine the “retail apocalypse”—a phrase used to describe the impending death of retail. As one of the most popular stories in the trade media these days, Deloitte set out to research the drivers of the so-called end-of-days for retail.

As the team started their research, they noted that the retail apocalypse didn’t jibe with any macroeconomic factors they observed, all of which were positive. Retail has been growing 2.5%— even outpacing GDP growth. And despite the doom and gloom in the news, both e-commerce and brick and mortar are growing. The retail industry had its best holiday season since 2011. The U.S. economy is strong—unemployment is at an all time low, consumers confidence and home purchases are strong, and household income has bounced back after the great recession. The S&P 500 has tripled since 2009.

The income gap is widening, with a disproportionate share of wealth in the hands of the top 20% of consumers.

And yet we continue to hear about the “retail apocalypse.” Rather than accept the conventional wisdom (which according to economist Ken Galbraith “protects us from the painful job of thinking”), Christina decided to take a data-driven approach to dissecting what is driving the retail apocalypse.

The Widening of the Income Gap

The team started by looking at income brackets, which have the highest correlation with consumer behavior. They broke the population into three cohorts—low income, medium income, and high income. Her results showed what many economists have also noted—that the income gap is widening, with a disproportionate share of wealth in the hands of the top 20% of consumers. In 2017, the top 1% took 82% of wealth accumulation, while 80% of Americans experienced little to no income growth. Meanwhile, non-discretionary expenses have skyrocketed across the board, from healthcare to education to food, disproportionately burdening the lower and middle income brackets. For the first time in over a decade, low-income families are operating at a deficit; their expenses take up more than 100% of their budget.

The Deloitte team also looked specifically at Millennials, who are often considered the disruptors of most traditional industries as we’ve known them.

Despite their reputation, Deloitte’s research uncovered that Millennials’ consumer behavior was very similar to previous generations. There was a much stronger relationship between income bracket and consumer behavior than between generation and consumer behavior.

Death in the Middle

Deloitte then plotted retailers on a spectrum—those which compete on price, those which differentiate themselves based on premier or luxury product offerings, and those in the middle, which play both sides. This research uncovered a bifurcation of growth—while the “premium” retailers grew 80% and the price-based retailers grew 27%, those in the middle grew only 2%.

This research uncovered a bifurcation of growth—while the “premium” retailers grew 80% and the price-based retailers grew 27%, those in the middle grew only 2%.

They also looked at store openings and closings, which showed a similar bifurcation. There were 264 store openings in the price-based group, 80 in the premium group, but 100 stores actually closed in the middle group.

Retail is still growing, but it’s growing disproportionally on the lower and upper end of the spectrum. Brands whose offerings are discounted or low-cost, and brands with premier offerings are thriving, yet retailers in the middle are struggling to grow.

The Retail Renaissance

According to Christina, this is not a retail apocalypse; it’s a retail renaissance. The new economic reality is challenging the notions we’ve always held about retail, and we can’t expect that what’s worked in the past for retail will continue to bear fruit. But by using the swaths of data we have available about consumers’ new economic situations to innovate, retail will enter a new age.

 

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