— July 10, 2017
Retailers have a lot to think about these days. Between political risks and inflationary pressure, consumers are more cautious. Retailers have to constantly shift to remain competitive and maintain customer loyalty.
Recent studies in millennial consumer behavior reveal that ‘the convenience factor’ may be more important than price when considering a purchase. Brands who play off this trend, while providing unique products and experiences, could see a positive impact on their bottom line.
Here are five ways to navigate the ever-evolving retail landscape.
1. The Challenge: Mall Days No More
A shopping spree or “days at the mall”—which previously benefited major retailers—aren’t the focus of the millennial and Generation Z (post-millennial) consumer. Their consumption is increasingly based on travel, fitness, and dining out, habits encouraged by peer-to-peer-focused companies like Snapchat, Instagram, Uber, and Airbnb.
The stock markets are reflecting these priorities, with leisure and travel-related companies—including fitness centers, low-cost airlines, and fast-casual restaurants—generally outperforming apparel and household goods retailers. Department chains also continue to struggle.
And, of course, more and more people are shopping online. Continuous availability and changes such as the rise of Amazon’s drop shipping business model tie directly into the convenience factor.
Lastly, there is the question of millennial frugality. This is likely an effect of the 2008 recession, which, along with increased Internet usage and the emergence of low-cost online retailers like Amazon and eBay, may be contributing to consumer behavioral changes.
How to Win: Embrace the Millennial Love of Experiences and Accessibility
Spend your ad dollars where the millennials are. If it makes sense for a given product line, base your launches on the e-commerce subscription model. Focus on wellbeing and leisure-based product lines, and what we predict will be a continued uptick in digital payments. Millennials may also be likely to welcome virtual reality shopping experiences.
2. The Challenge: Last Days of the Department Store
Consumers are increasingly shifting purchases away from large, ‘big-box’ retailers—often associated with out-of-town shopping malls—in favor of smaller, more convenience-oriented stores. Established brands must follow the exodus.
How to Win: Focus on Consumer Convenience
In line with the consumer preference for convenience, retailers are increasingly moving away from these big-box formats in favor of smaller city-center stores or online shopping. As time-poor millennials demonstrate a preference for shopping little and often, these smaller and more accessible formats hold greater appeal by offering extended hours and popular products in nearby locations.
The growth of e-commerce is also accelerating this trend, diminishing the need for large locations to accommodate huge inventories, while driving demand for small, local premises that can act as in-store collection points.
3. The Challenge: Political Risk
The world’s largest consumer markets are facing elevated political risk, with the US and UK taking a new governmental direction. Legislative elections in France and the German federal election also leave retailers on on uncertain political ground.
In addition, proposed business tax cuts from 35% to 15% and the deregulation of Dodd-Frank are expected to buoy the finance industry. Yet, a tax cut for the wealthy may constitute a tax hike for the middle class, which could adversely affect consumer confidence and purchase power. This, in turn, could negatively impact other key customer sectors such as retail and travel.
In the US, there’s still a fair amount of ambiguity around how Trump’s presidency will affect retail and e-commerce. The industry awaits specifics on which policies he’ll move forward with.
How to Win: Design a Contingency Plan
The score on BMI’s short-term political risk index (STPRI) for five of the largest consumer markets globally highlights the current political risk level. This helps us assess the impact on the consumer.
Out of these five countries, four (US, UK, France, and Germany) have a downgraded STPRI score. This denotes increased political risk, but this isn’t always a negative for the retail sector.
Although countries with a stable political outlook are maintaining their STPRI score, political tradewinds (such as the potential for a leader to be ousted) can change the game. Keep an eye out on any policy changes and how they’ll affect the retail space.
4. The Challenge: Inflation
It’s predicted that commodity prices will rise in 2017, and this will no doubt have a ripple effect on consumer spending and retail.
In the US and UK, real wages in 2017 are forecasted to be flat while inflation rises. This will decrease the amount of disposable income as consumers grow more cautious towards their spending. Consequently, this will slow economic growth in both regions.
Consumer confidence in Germany is quite high, as unemployment is at a record low. German buyers are nevertheless guarding their pocketbooks when it comes to medium-to-high ticket purchases, which is more likely to affect advertising spend within automotive and travel.
How to Win: Focus on Consumer Buying Power and Confidence Levels
Buying power and confidence levels are a direct reflection of the economic environment. Some things brands can do to win:
- Pay attention to elasticity of demand when launching new products. Offer deals on commodies or product lines where demand is elastic—that is, where demand for products changes more than proportionately to a change in price or income.
- Offer amazing deals and discounts around big sale seasons such as Black Friday (UK/US), back-to-school (US), and summer/winter sales (France).
- Craft creatives with messages that convey an understanding of how consumers feel in terms of coping with reduced spending power.
5. The Challenge: Uncertainty Over Free Trade
A growing shift towards populism in developed markets signals a rejection of globalization and free trade, raising the likelihood of higher import tariffs for retail goods.
In addition, looming threats to free-trade through NAFTA, and the growing tensions between the US and some European Union states, perpetuates market uncertainty for broader business investment in key segments such as automotive and technology.
How to Win: Diversify
Although rising protectionism is a long-term risk—and we remain skeptical over the extent to which extreme scenarios will translate into policy—we believe retailers will pay greater attention to diversifying their operations in 2017. We also predict a likely uptick in M&A activity as companies look to mitigate risks and consolidate their market position. Look for domestic manufacturing opportunities and geographic diversification.
This year’s retail outlook may seem rocky and uncertain. But, we hope our analysis provides insight into which consumer and economic trends may be driving buying decisions. With a little planning, foresight, and preparation, this may just be your most successful year yet.