The New Consumer
U.S. consumers have considerably reduced their spending in 2008 and YTD 2009 due to unemployment and declining home values. The savings rate has increased from 0.5% (lowest since the Great Depression) to 5%. Is current consumer spending environment reflective of a long-term trend or will consumers quickly revert to their old habits?
From 1996 to 2006, the U.S. economy grew at 5% and the retail sector grew at annualized 12% due to easy consumer credit and clever marketing. According to the IMF Economic Outlook and projections, the financial liability of the average American household is 134% of gross disposable income and 75% of its net financial assets. The consensus is that U.S. recession is likely over, but most market watchers anticipate slower US growth. In response to the US consumer behavior, retailers have slashed inventories.
As a result of the recession, U.S. consumers have been changing their retail habits in search of “value.” The bulk of consumer spending is not discretionary and retailers such as Wal-mart, Costco and McDonalds have been taking share from higher cost retailers. There has also been a rise of alternative “anchors” and new formats including specialty retails liker H&M and Forever 21 and discounters like Target, Wal-mart, Kohl’s, Big Lots and other dollar stores.
Mall traffic has declined and store expansion has essentially come to a halt due to the recession. There’s also no room for the #2 player as evidenced by Linen’s N’ Things, Circuit City, etc. going out of business. The category killers have benefited from intra-channel consolidation. The survivors have demonstrated some common characteristics including pristine balance sheets, superior inventory management and strong brand recognition. Niche internet leaders include Gilte Group, Blue Nile and Zappos are showing strength by differentiating from the box store model. Amazon, Expedia and Priceline have built strong brands, efficient and attract consumers seeking the lowest price online.
Malls have been suffering and they’ve been given concessions to keep occupancies up and even reducing rents. The U.S. has more than six times as much retail square footage as Europe, which will likely lead to more consolidation and bankruptcies. There will likely be few traditional enclosed malls and the good ones will only get better. The “C” malls will disappear first as there are currently 100 plus dead malls with anemic sales and high vacancies. There’s been a rise of alternative “anchors” and new formats including specialty retails liker H&M and Forever 21 and discounters like Target, Wal-mart, Kohl’s, Big Lots and other dollar stores. Lifestyle centers (i.e. new mall) give consumers additional reasons to visit such as restaurants, movie theatres and even amusements (Flow Rider in Orlando – surfing park in the mall). There have been 84 lifestyle centers built since 2000 and only one traditional mall since 2006. Outlet malls are also likely to suffer as a result of the internet. Consumers can now find deals online and rising transportation costs have reduced their willingness to travel to find bargains.
Online Shopping is a Growth Area
Online shopping still has a lot of growth potential. Online Retail sales are projected to increase by $28 billion in ’06 (1% of retail sales) to $335 billion in 2012 (10% of retail sales). Since the most recent recession started, mall traffic has declined and the savings rate has increased from 0.5% (lowest since great depression) to 5%. Store expansion has essentially come to a halt and dollar and discount stores have been winning share. There’s also no room for the #2 player as evidenced by Linen’s N’ Things, Circuit City, etc. going out of business. The category killers will only benefit from intra-channel consolidation. The survivors all have strong balance sheets and superior inventory management. Some niche internet leaders include Gilte Group, Blue Nile and Zappos and they’ve built a strong brand by differentiating themselves. Amazon, Expedia and Priceline have built a strong brand and known for their efficiency. It’ll be a tough environment for stores like Barnes and Nobles and Borders as consumers are all about price and will likely find the lowest price online.
There’s also a new device coming to market that essentially can scan an item from one’s cell phone in the store and will tell the location and price of that item within a short radius.
Disclosure: no positions held in any stocks mentioned