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Sunday, February 9, 2014

Purchasing Power and Changing Retail

By early February, all reports were in from retailers on the type of holiday season that we experienced in 2013. Most of the reports were modestly positive and some were negative (Mastercard reported a 2.3% increase) but, if you dig a little bit, the results were a very clear snapshot of what is going on with wealth distribution in this country.

We had a very slow Black Friday (day after Thanksgiving) kickoff to the holiday retail season. As we moved to December 10th, foot traffic was still slow so retailers began discounting heavily and, when that did not put a zing in sales they began offering last minute shipping deals to push consumers over the edge. It worked to a certain degree but the final volume was so great that UPS could not handle it. Many did not receive their gifts by Christmas Day which left a foul taste in many people mouths.

On top of all of this, there was the Target credit card fiasco, which hurt that retailer significantly especially with post Christmas sales. Even Starbucks felt the pinch as fewer shoppers meant a lower number of people on weekends stopping for lattes.

So, overall, it was not great. Break it down a bit and you see America in early 2014. The top 5% of American households are now responsible for 38% of the consumption. So, your high end retailers such as Tiffany’s and Michael Kors among many others are doing just fine. It appears that the term “wealth effect” which was very prominent in 2004-2007 is back in vogue. With the S&P 500 rising 30% in 2013 and stock indexes hitting all time highs, the affluent consumer is feeling wealthier and is spending again with confidence.  Also, doing well are the “Dollar” stores at the other end of the demographic divide whose growing customer base is  struggling financially and finding Wal*Mart and Target just too expensive these days.

Stores appealing to the middle class are not doing so great. I heard a startling statistic a few weeks ago and was skeptical until I crunched the numbers myself. To be certain, I sent the number out to a few market researchers just to confirm it. Everyone said it was true but no one wanted to be quoted on it. What is the stunning shift in demographics?

Well, let me answer with a question. What is the fastest growing demographic in the U.S? Is it Women over 85? Some ethnic group? College graduates? Nope. It is Americans falling in to poverty! Each month as many as several hundred thousand Americans fall from the lower middle class in to poverty. Some 46 million are now on food stamps which is a record.

Retail has always been an exciting and dynamic part of our economy. And, it is a marvelous indicator of consumer activity. What is happening in retail is a reflection of our nation as a whole. Remember, only 50% of Americans have an IRA or are contributors to a 401k plan. So, the 30% gain in the S&P meant hundreds of thousands of dollars or more to most of the readers of this blog but had zero effect on the lifestyles or prospects of most Americans. The wealth effect is indeed back but is quite selective these days.

On top of all of this, on line buying continues to soar at double digit compounded growth. This has to have retailers dealing with the broad middle class very nervous. Notice how few new malls are going up around the country. If Amazon and fellow travelers keep growing, we will soon not need anywhere near the retail space we currently have nor will we need anywhere near as many service employees.

Retail is changing as it always has. This time, however the changes are happening far more quickly than ever.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

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