Shrinking middle class takes a toll on retailers
Retailers just reported another quarter of disappointing results. It’s been five years since the recession ended, and many have cut outlooks for the rest of the year.
Even Amazon.com, which has been around for 20 years, can’t invest in itself and turn a profit at the same time. Some online retail startups just get another round of venture capital funding to cover up their lack of profit.
But what if the smart people toiling away at major U.S. retailers aren’t to blame? What if retailers’ slashed margins, due to constant price cuts, are at least partially attributable to a middle class that just isn’t as well-off?
Maybe a shrinking middle class is having as much of an impact on the performance of retail companies today as things such as online price comparisons, free shipping and student-debt-strapped millennials. And then there’s the latest disposable income buster: the monthly smartphone data plan.
Container Store chief executive Kip Tindall talked about a retail “funk” as the industry was beginning to report second-quarter results last month. Others have been just as downbeat.
“The consumer has not bounced back with the confidence we were all looking for,” Macy’s CEO Terry Lundgren said earlier this month. “We don’t need our customers to spend more; we need them to spend more with us.”
A big problem for the retail industry today is that Lundgren’s strategy is every retailer’s strategy. That strategy has retailers slashing prices to eke out sales gains at their own peril, said Robin Lewis, longtime retailer analyst and co-author of The New Rules of Retail.
The last time stores saw a burst of free spending was in 2006 and 2007. More households then had wallets enriched by two comfortable incomes and easy mortgage refinancing. But the recession forced many shoppers into a perpetual state of frugality.
Even the consistently employed have seen their disposable income slashed. Consumers are forced to shift funds to pay for unprecedented wage cuts, furloughs and cutbacks to retirement benefits.
“I don’t even know how to define the middle class anymore. ... There’s only growth in lower-income and upper-income classes,” Lewis said.
So what choice do retailers have? They are forced to “discount their brains out,” Lewis said. “It’s the devaluation of brands and retail. We’re in the worst of the worst, and it can lead to real deflation, and then consumers stop buying.
“When a woman sees a dress marked down to 80 percent off and she already has so many clothes in her closet, her reaction is, “I don’t need it, and it will be on sale when I do,” he said.
Last Thanksgiving, retailers constantly changed their prices online — where they can do it easily — in the week before and after Black Friday.
Amazon.com, the largest online retailer, waited until Black Friday, then changed prices on one-third of its most popular items, according to an analysis by 360pi, a firm that tracks online prices.
“In general, things are getting more extreme,” said Jenn Markey, vice president at 360pi. Last year, Markey gathered prices on 8,000 items during the 17 days from Nov. 20 through Dec. 6.
Half of working Americans in 2012 made wages of less than $30,000, according to the most recent data collected by the Social Security Administration, said Al Meyers, director of PwC’s retailer and consumer practice.
“It’s why retailers are looking outside the U.S. to grow,” he said. In the U.S., many are now limited to taking market share from each other.
A prevailing frugal attitude has also changed retail real estate development, favoring outlets over full-line department stores.
‘Race to the Bottom’
In a comparison of price changes and promotions between U.S. and U.K. retailers over the last three years, U.S. retailers were almost 50 percent more promotional than their counterparts in the U.K., according to RSR Research.
Paula Rosenblum, managing partner of RSR Research, questioned a retail belief that “in a race to the bottom, the company with the lowest costs wins.”
The idea is that low operating costs means low prices. But maybe the recent disappointing results from major discount chains Wal-Mart, Target and Amazon and a desire for two of the biggest dollar store chains to merge disprove the idea.
“All are aggressive drivers in the race to the bottom,” she said. “In other words: In a race to the bottom, nobody wins.”