What’s Next for Retailers?

What can retailers expect when the economy finally picks up in 2010?

By Laura Kennedy, Researcher-Reporter, the Kiplinger letters

November 24, 2008

Some budget-motivated changes will stick. And that will alter the U.S. retail landscape.

Consumers will have an increased appreciation for value. The recession-inspired penny-pinching that will shrink consumer spending by 0.5% next year will give way to a permanent, but gentler, scaling back. “The consumer was living on steroids,” says Marshal Cohen, chief industry analyst for the NPD Group, a market research company. “It’s wake-up time. There will be this cleansing period for a while.”

Many who are trading down and shopping at Target, Wal-Mart and the like won’t upshift later, at least not for all products. They’ll find they’re happy with the caliber of products as well as the price points at mass merchandisers and discount stores.

Quality will make a comeback, though. Brooks Brothers, for one, is reminding customers that its made-to-last clothing is economical. “The main challenge...is to redefine the value equation,” says Tim Henderson, a senior director and consumer strategist for matures and shopper experience at Iconoculture, a market research company. “Value equals price plus something else.” Consumers who buy that and similar pitches now won’t reject them entirely when the belt-tightening is over. For example, women who are rediscovering cobblers out of necessity now will be more likely to purchase higher-quality shoes in the future, getting them resoled rather than buying cheap footwear and pitching the shoes after a season or two of use.

Shoppers will do less frivolous buying. The spending habits of younger generations of shoppers, in their 20s and 30s, are being formed in an era of more financial insecurity and greater risk than their baby boomer parents. “Boomers trusted Wall Street...it did quite well for them,” says Leon Nicholas, director of retail insights at Management Ventures Inc., a retail consultancy. “But Generation Y, Generation X, they’re not so sure. It will affect what they spend and how they think about wealth.” That, combined with these generations’ greater tendency to suspect consumerism and to back social and environmental agendas, may make them more careful spenders.

Retailers will respond with a variety of new coping strategies, many relying on the use of more sophisticated data gathering and sharing programs. In particular, relationships between retailers and suppliers will benefit from the improved research and transparency. “There’s more of an impetus to share data, to try and figure out what is going to be the right sales model for that particular merchandise,” says Stacy Janiak, retail sector leader at Deloitte.

Stores will also use enhanced data to pare down inventories. “[Retailers] have to get a very clear understanding of who is shopping in their store, a whole new dimension of shopper insights,” says Thom Blischok, president of consulting and innovation for Information Resources Inc., a market research firm. “It’s no longer about having everything on the shelf, it’s about having the right things on the shelf that are viewed as affordable by your shoppers.” Look for increased use of the “fast fashion” model used by H&M and Forever 21, for example. They don’t stock up as far ahead of seasons and turn merchandise over more often, enticing shoppers to come back frequently. Sellers of electronics, furniture and other hard goods will become choosier about what to keep on hand. All will want shorter lead times and greater flexibility.

Retailers of all stripes will beef up customer service. Stores will find it worthwhile to woo customers...and keep them coming back. More are concluding that competing on price alone is a losing battle and will focus on building loyalty, improving rewards programs, offering personalized products and generally going the extra mile for repeat customers. And even as they slash costs, retailers will aim to keep their stores as staffed as possible. The logic: “I’m going to spend some money to keep people in place and make sure to serve [customers] properly so I’m here in the long run,” according to Michael Londrigan, chair of the Fashion Merchandising Department at LIM-The College for the Business of Fashion.

Big stores will even spin off smaller siblings with more limited selections but more opportunity to create exciting surroundings and focus on customer service. Even though the U.K.’s Tesco is slowing further expansion of its small-scale grocery store, Fresh & Easy Neighborhood Market, on the West Coast, other retailers will continue to explore small-venue options. Wal-Mart opened testers of its new small grocery format, Marketside, in Arizona in October. Earlier this month, CVS launched the first of its upscale beauty product stores, Beauty 360, adjacent to one of its locations in Washington, D.C.

But the biggest shift coming for retailers will be simply geographic: much less space. About 7,000 stores will have closed by the end of this year, and at least that many next year. The weak will be picked off by the strong, particularly in the struggling specialty apparel and home furnishings categories. Private equity firms will be buyers -- in some cases, just to get the real estate.

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