Could macro socio-economic trends be the real driver of retail woes in the US Market? Or is it all to blame on Amazon, e-Commerce and lousy merchandising decisions? What role do customer loyalty initiatives play in all of this? Lots of questions but our search for evidence never stops. An in-depth study recently released by global management consulting firm, Deloitte, offers some important clues.
(as first reported by Quartz).
Mike Capizzi, CLMP
Deloitte conducted an in-depth study over more than a year to dig into what’s really going on in the industry. The importance of retail to the US economy is well chronicled - millions employed and accounts for an important share of the country’s GDP. The study examined the large-scale (macro) changes happening in the US economy, polled a representative sample of 2,000 consumers, and even laid out all public US retailers along a value spectrum to prepare its analysis. One of their primary conclusions was there was no “retail apocalypse” as 2017 headlines often suggested. Deloitte says the phrase suggests the whole industry is collapsing- In reality, it’s not.
But, the report clearly points out that US retail is changing in significant and fundamental ways.
At the high and low ends of the value spectrum, retail is thriving. In the middle, it’s faltering. This split is playing out right along with the slow evaporation of the US middle class. Between 1971 and 2015, the share of US income held by America’s middle earners has contracted from 61% to 50%, according to Pew Research. Wealthy families had three times as much wealth as middle-income families in 1983; by 2013, they had seven times as much. Since the economic downturn began in 2008, most Americans saw their discretionary funds either fail to grow or even shrink. The bottom 40% of the population had less discretionary money to spend in 2016 than in 2007. For the middle 40% discretionary funds remained unchanged, while income dwindled. The rich, on the other hand, saw their net worth and discretionary money grow.
The 80% of Americans who didn’t see their discretionary funds grow in the last decade have likely become more price conscious, driving traffic to off-price brick and mortar outlets and discount e-commerce sites that sell at the lowest possible prices. Factor in the huge millennial population that came of age during the past decade – a generation often characterized by lower starting incomes and higher education debt than their predecessors – and you have an accelerator. This generation is also especially adept at finding the best deals possible over the web, not at the mall.
By contrast, the growing wealth at the top is creating more customers for high-end items. This is making winners of low-cost retailers, including Dollar General and Old Navy, and premium brands, such as Coach. These high and low categories, Deloitte says, are also where brands are adapting best to their customers’ needs.
Brands in the middle, which rely on a mix of price and promotions to drive sales of goods that aren’t exclusive or the cheapest on the market, have seen substantial customer and same-store-sales erosion. Deloitte calls it the “great retail bifurcation.”
E-commerce is certainly another accelerator. According to Deloitte, between 2012 and 2016, online retail had a compound annual growth rate of 12.5%, while stores grew 1.3%—modest growth but still growth, in the channel that still makes up 91% of all sales. In the past year, the trends have only grown more pronounced. Sales at mid-priced retailers declined 2%. At premium and low-priced retailers, they grew 8% and 7%, respectively. Deloitte also notes that these changes are also fueling a divide in how people shop, since low-income consumers are more likely to shop in stores, while their high-income counterparts are the shoppers most likely to buy online.
The same dynamic plays out in the main metric driving the “retail apocalypse” headlines: store closures. According to Deloitte, more stores are opening than closing. But they’re all on the low and high ends. If you look at the middle only, the situation does look dire.
As more and more US department stores close and malls are converted into other work spaces, Amazon is being blamed for the “retail apocalypse.” The past year has seen many middle-class suburban malls put on life support, largely because department stores are struggling to remain relevant. Since 1975, America built malls at four times the rate of population growth and, according to research firm IHL, “the majority of malls that were built in the last 30 years were in areas thought to be middle class.”
Could it be that these macro socio-economic forces are the real culprit in the on-going challenges faced by many American retailers?
So, what does all of this have to with customer loyalty programs? While we cannot offer the kind of concrete evidence cited by others in this editorial, we can venture to guess from over 20 years of loyalty marketing experience in the retail sector. Here goes:
- Lack of investment in the programs themselves. As same store sales came under increased pressure, some retailers even began to cut their investments in best customer initiatives.
- Despite the rhetoric, continued focus on customer acquisition via price tactics at the expense of customer retention via data-driven loyalty tactics. “Let’s not reward our best customers for staying with us, let’s give 25% off to total strangers for trying us!”
- Reluctance and/or financial resistance to technology upgrades which could help identify, maintain and increase the yield from best customers across all channels, while identifying those with potential to become best.
- Over reliance on Private-Label Credit Card programs as the loyalty platform. Sure, I’ll reward you as a best customer but only when you pay me the way I want you to pay me. Are you kidding?
- The total reliance on discounts as the principal value proposition, often delivered via a reward certificate or voucher system full of friction, fast expiration and only good towards a return visit.
- The complete neglect of soft benefits, customer experience and emotional connections that characterize the best loyalty designs in the world.
- One size fits all “blast” communications practices. Easy does not often align with great.
What do you think? We’d love to hear from you! Any many thanks to the Deloitte Team and the exceptional staff at Quartz for putting us on alert.
Mike Capizzi is Dean of the Loyalty Academy and is a Certified Loyalty Marketing Professional (CLMP)