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Consumer Trends Signal Trouble For Retailers When They Are Least Prepared For It
The Yorkdale Shopping Center in Toronto. (Photo by Roberto Machado Noa/LightRocket via Getty Images)Getty
After a month’s delay because of the government shutdown, the U.S. Census Bureau just came out with its advanced monthly retail report for December 2018. The news was shocking: Adjusted consumer spending was down 1.2% from November.
Although comparisons with December 2017 were more upbeat—an increase of 2.1% overall excluding food services—it was hardly the exuberant results that people were expecting.
Going into the holiday season, the National Retail Federation was predicting an increase between 4.3% to 4.8% for sales from November 1 through December 31. Now based upon the Census’ advanced monthly report, holiday retail increased only by 2.9%.
The NRF immediately pushed back against the government’s reporting, with its chief economist Jack Kleinhenz stating, “Today’s numbers are truly a surprise and in contradiction to the consumer spending trends we were seeing, especially after such strong October and November spending.”
As the industry’s trade association, it is expected to put a positive spin on otherwise negative news. “It appears that worries over the trade war and turmoil in the stock markets impacted consumer behavior more than we expected,” NRF president and CEO Matthew Shay said.
But the NRF with its glass-half full outlook is missing other trends that signal the potential of an abrupt turnaround in retail from a boom in 2018 to a bust in 2019.
Temporary hiccup or long-term trend?
Despite Shay’s assertion that “all signs during the holidays seemed to show that consumers remained confident about the economy,” he was obviously ignoring the news from The Conference Board’s Consumer Confidence Index. In November consumer confidence fell from an 18-year high in October.
At the time, Lynn Franco, The Conference Board’s senior director of economic indicators, stated, “If expectations soften further in the coming months, the pace of growth is likely to begin moderating.” And that is exactly what’s happened. The Consumer Confidence Index took a dive in December and another one in January.
While Franco attributed the three-month slide to “more the result of a temporary shock than a precursor to a significant slowdown in the coming months,” I am not so hopeful. That’s because The Conference Board index is based upon surveys across a full range of American consumers from all income segments, with equal weights to high, middle and low-income consumers.
But after nearly 20 years studying the high-earners, I believe that the affluents’ perspectives on the economy and changes in their consumer behavior as a result have the most profound impact on retail performance.
Those with incomes over $100k make up only about 25% of U.S. households but account for some 50% of all consumer spending. They are the heavy-lifters in the economy and consumer trends that start with them are the harbinger of trends that will trickle down to the average American consumer.
Affluents are the bellwether for consumer trends
As a group, the affluents are the most highly educated in our society and also the best read. They follow the news, especially the business news, more religiously than the lesser-educated, lower-income masses. As a result, they see dark clouds on the economy’s horizon sooner than the rest.
Paying billsPhoto by rawpixel on Unsplash
To assess the affluents’ perspective on the state of the economy, we need to look at another survey, this one conducted by Ipsos at the end of 2018. With a consumer base of individuals with incomes $125k and above, Ipsos found that the affluents currently are far less optimistic about the U.S. economy than they were the same time last year .
Only 43% of those most recently surveyed believe that 2019 will be a good year for the U.S. economy. This compares with 56% the previous year who said 2018 would be a good one.
Further their perspective on how the U.S. economy performed in the past year also took a nose dive. Whereas at the end of 2018 some 67% said that 2017 was good for the U.S. economy, only 51% said the same about 2018.
This adds up to the affluents having a cautious outlook for overall economic conditions in 2019. They are going to watch closely the ups and downs that threaten their personal financial conditions and adjust their retail spending accordingly.
Affluents are confident they will do just fine if the economy turns
Another key finding coming out of the latest Ipsos survey is that the affluents overwhelmingly believe they are set to make 2019 a good year for themselves personally (71%) and for their families (78%) no matter what troubles overtake the U.S. economy as a whole.
As the most materially wealthy in our society, the affluents can pull back on retail spending easily. Other than day-to-day replenishment of consumables, they can painlessly dial up or down their discretionary spending as the mood takes them.
“Though cognizant of the mixed economic indicators, affluents expect to do well and weather the storm,” writes Michael Baer, senior vp and team lead for Ipsos Affluent Intelligence.
That means they are ready, willing and able to make adjustments to their retail spending if and when the storm hits.
Affluents will shift to careful, strategic spending
To forecast how previously free-spending affluent consumers are likely to adjust their spending in the face of changing economic conditions, we need to look at the work of DataPoints’ Sarah Fallaw, daughter of Thomas Stanley of Millionaire Next Door fame, who continues her father’s legacy in The Next Millionaire Next Door.
While her book focuses on strategies for people to become wealthy, it provides insights into how the affluents will respond when their financial status is threatened. Conventional wisdom in luxury circles held that the wealthy were immune to economic downs, but the 2007-2008 recession proved it wrong. They pulled back spending sharply.
“The book is designed to look at the habits, lifestyles and psychology of wealthy individuals 20 years after my father’s original book,” Fallaw shared with me. “My work is on the psychological side of that and a big part of it is their spending and saving habits.”
She studied people who over a lifetime have been “prodigious accumulators of wealth” (PAW) and compares their habits and behavior to high-earning but “under accumulators of wealth” (UAW), or the affluent poor with their annual income stretched to the limit by buying expensive houses, driving luxury cars and purchasing other expensive goods.
To become a PAW requires a lifelong habit of disciplined frugal living along with value-based spending driven by a pursuit of quality over quantity. Regarding the psychological makeup of the PAWs, Fallaw says, “They are excellent at prioritizing purchases. They are going to spend money on what matters most to them.”
Working in the frugal wealthy’s favor are an abundance of high-quality goods readily available at moderate prices. For example, 20 years ago the millionaires next door reported the most they spent on a suit was $612 in current dollars. Today they spent only $500. For shoes the most spent was $215, today it was $200 and $361 for a watch then, $300 for one today.
Further in the most recent study the most the millionaires next door spent on jeans was $50, sunglasses $150 and a piece of furniture $3,800. That is pretty modest levels of spending for wealthy individuals, who research planned purchases and avoid impulse shopping.
What I foresee on the horizon for retailers in 2019 is the affluents will take a temporary retreat in discretionary spending similar to that of the lifetime habit of millionaire-next-door’s frugal spending. The UAWs or what Fallaw describes as the “Income-Statement-Affluent,” will shift for the time being to PAWs’ characteristic frugal spending behavior until the economic storm abates.
How long it lasts and the extent to which the affluents’ purchase behavior changes is yet undetermined, but come it will and retailers need to be ready for it.
Are retailers ready for it?
For retailers forewarned is forearmed and while I am not predicting another recession, I am convinced that the affluent are going to be very cautious and careful about spending in 2019.
Another of warning for retailers is the fact that the Ipsos affluent study finds that 53% of those surveyed believe the country is headed on the wrong track. In particular, women are more pessimistic about the U.S. economy than men. If as popularly quoted women account for about 80% of all U.S. spending, their growing pessimism will have an even greater dampening effect on retail.
To get ready for it, Deloitte is out with a new study to prepare retailers if and when the economy turns, entitled “The next consumer recession: Preparing now.” It looks back at the two most recent recessions, the Dot.com bust and the Great Recession, to see what led up to each, how they impacted the consumer economy and how the next one might impact consumer businesses, most especially retailers.
One finding stood out among all the rest: American retailers are in the weakest position since 1999 to withstand another recessionary downturn . Deloitte analyzed the financial performance of 100 U.S. retailers taking into account sales growth, profitability and efficiency over the past 20 years. Measuring the return on assets, it found that from 1999 to 2012 retail performance rose during bull market periods and declined during bear markets, as would be expected.
But 2012 marked a turning point when ROAs went south, declining from 9.3% in FY 2012 to 6.1% in FY 2017. “The inflection point, which began in 2012 and continued unabated, has been staggering, placing the industry in a precarious place today, showing significant weakness during a time you’d expect strength in industry-wide ROA performance,” it reported.
Deloitte’s analysis identified slower revenue growth, compressed margins, increased SG&A expenses and slower turnover of inventory levels as the main contributors to the weakening ROAs. What ever the cause, the effect is the same. Many retailers have run out of options, having already cut costs to the bone and not invested in strategies since the last downturn to grow in the face of major structural changes at retail that have arisen since then.
These structural changes include the rise of e-commerce, the rapid entrance of new competitors more in tune with the cultural and economic climate, and the rise of discount players serving the 80% of U.S. households that have yet to recover to from the last recession. But these discounters offer affluents a way to save money too.
“What was more surprising was the degree to which the structural change of the industry not only continued unabated during the periods of downturn, but actually appears to accelerate, leaving many of those that failed to reposition during the downturn even more exposed when the market returned,” the report states.
In 2019 weakened retailers are facing a weak middle-class consumer base and the potential for a rapid withdrawal of the affluent heavy-spenders if they feel the least threatened in their economic status. It could add up to perfect storm at retail this year.