The Great Consumer Reset/The Great Retail Reset
By Craig R. Johnson, [email protected]
After sharply ratcheting down expenditures in 2008-09, consumers have indeed resumed spending at about the same 5% year-over-year growth rate seen prior to the recession. In short, American consumers have now completed a historic “reset”, fueling the strongest retail rebound seen in decades.
The retail industry completed a parallel “reset” over the same period. Since the mid-2000’s, after decades of often overexpansion, retailers sharply curtailed store development plans, closed rafts of underperforming stores, cut overhead and staff costs, and redirected growth strategies more online. Like consumers, retailers have — with the exception of laggards offering neither newness nor value — been on a major rebound since 2009.
The consumer reset is most evident in the steep deleveraging in household finances over the past four years, which — despite stubbornly high unemployment — has resulted in the healthiest household balance sheets this century:
- Consumer revolving credit (primarily credit cards) has fallen almost 20% from its peak just before the 2008 Lehman collapse, and for Q4 was flat year-over-year (YOY) at $800 billion;
- Record low interest rates have spurred a multi-year wave of home refinancings and, combined with mortgage writeoffs, have led to a continuing 7% decline in mortgage debt outstanding from its 2008 peak to only $13.6 trillion; and
- As a result, the Fed’s Household Debt Service ratio has fallen from its peak 14% four years ago, to barely 11% — its lowest level since 1994.
At the same time, consumer incomes, after taking a dive during the recession, are slowly recovering, with disposable personal income up a solid if not spectacular 2-3% year-over-year for several quarters now. Combined with modestly increasing incomes, households are enjoying a twin engine boost of over $600 billion in free cash flow, or $50 billion/month available to boost monthly retail spending (ex autos/gasoline/restaurants) that now averages some $240 billion.
Consumers have resumed the retail spending growth that characterized the earlier 2000’s—but fueled now by current cash flow rather than tapping home equity lines or plastic. Consumers ratcheted down retail spending sharply in 2008-09, but then bounced off the bottom in 2010 with a 4.5% year-over-year annual increase, and ramped up in 2011 to almost 6% YOY (not including auto and restaurant sales).
Looking forward to 2012, retail growth will continue at our forecast 5.7% year-over year, contrary to pundits convinced that consumers are either tapped out or “spent out” post-Christmas. They are not. Indeed, as the Fed data shows, consumers continue to repair their balance sheets. And, although credit card transaction volumes are growing at double digits, the growth is primarily among “transactors” (holders who use the card for mileage or points but pay off each month) as opposed to “revolvers” who carry a monthly balance.
Turning from the demand to the supply side of the retail economy, merchants have mirrored the consumer reset: reducing overhead costs, jettisoning real estate, rationalizing product lines and — after the worst two years in memory — are now on a sharp rebound. Approaching the recession, America was overstored and bloated retailers were over-square-footed, with expectations hyperinflated by the housing-induced spending bubble. And just as they were about to hit the recession wall, retailers simultaneously found the ground literally shifting under them, with the internet earthquake. In less than a decade, e-commerce grew from barely 1% of total retail sales to over 10%, rendering store planning assumptions, many superstore concepts—and a number of retailers themselves — “virtually” obsolete.
Since the mid 2000’s a host of retailers, including newly irrelevant superstores, decamped the landscape — largely among the Top 100 — either via Chapter 11 or acquisition:
- Blockbuster (2006 sales $3.6B)
- Borders ($3.5B)
- Circuit City ($11.9B)
- Comp USA ($3.6B)
- 84 Lumber ($3.9B)
- Gateway (Retail) ($2.7B)
- Goody’s ($1.6B)
- Gottschalk’s ($0.7B)
- Linens N Things ($2.5B)
- Mervyn’s ($2.2Be)
- Movie Gallery ($2.5B)
- Sharper Image ($0.4Be)
- Steve & Barry’s ($1.1B)
- Sym’s/Filene’s Basement ($0.4B)
Just as importantly, virtually all major retail chains — with a few exceptions such as fast-fashion players Forever 21 and H&M, and small footprint chains such as Aldi, Francesca’s Collection and Vera Bradley — substantially rationalized their store fleets. Among mass merchants, mega-chains such as Walmart and Target cut back new store development during the recession, while reducing by 10-15% the footprint of even planned superstores from the 200,000 SF range — and launching new small format initiatives with Walmart Express and CityTarget.
In the struggling home improvement sector, The Home Depot was first both to halt new store growth and to close marginal stores, while Lowe’s slowed new store growth as housing tanked, but only last year announced its first major “rightsizing.” In the department store sector, Macy’s has closed only a few dozen duplicate mall stores in the wake of its merger with May six years ago and the recession, but — like smart retailers even in good times — has just announced another round of 10 underperforming store closures this month, even while selectively opening new units.
Among specialty merchants, many chains have trimmed store fleets in weak C and some B malls, using the harsh discipline of the recession to make the hard decisions often put off in good times. Facing occupancy costs that spiked from tenant-friendly 10%-14% of sales during the boom to a crushing 20%-25% during the recession — and sometimes leveraging lease co-tenancy or early-out clauses — many apparel and other chains cut bloated store fleets. American Eagle Outfitters, Abercrombie & Fitch, Hot Topic, Chico’s FAS, Charming Shoppes, The Talbots, Gap, Pacific Sunwear, Ann Taylor, all dropped 30 to 100-plus units the last few years. Some, like Gap and Talbots, consolidated multiple formats into a single unit in a mall. Others kept stores open, but transitioned in the mall to smaller space.
Perhaps the most difficult downsizing, however, remains the 30,000-sq.-ft. to 60,000-sq.-ft. specialty superstore, which has been notably disintermediated by the Internet and may be a concept whose time has come — and gone. Circuit City and Linens’ n Things each departed several years ago. But their aging hulks still widely mar the retail landscape as there are few if any takers for that kind of retail space — except for HH Gregg and grocers such as Whole Foods Market whose special requirements usually make it simpler to start greenfield. Retailers still wishing to maintain extensive marketplace points-of-presence but in a smaller footprint are finding it difficult to sublease half their space, with five to 12 years left on their lease, to retailers that want a commensurate share of the frontage and signage.
But merchants that did bite the bullet during the recession, have found that their prudent pruning has been rewarded with new growth — and sharply higher store productivity. In short, the retail reset has — as of this Christmas — resulted in record holiday sales for well-run retailers, and new store productivity that has finally surpassed pre-recession peaks. Overall, holiday sales were up some 6%, and total 2011 sales up 5.9%, year-over-year.
Based on year-to-date actuals and Customer Growth Partners’ fourth quarter estimates, a number of retailers will beat their 2006-07 peak sales productivity per square foot:
- Chico’s: $733/sf (versus $586 2006/53 wks)
- Macy’s: $171/sf (versus $172 2006/ 53wks)
- Nordstrom: $432/sf (versus $419 in 2007)
- Ross Stores: $271/sf (versus $227 in 2007)
On an aggregate basis, the retail industry finally passed 2007 peak productivity levels this past year, as industry sales rebounded from 2009’s anemic $166/SF to $189/SF in 2011.
In short, consumers reacted to the recession resourcefully and intelligently, and they are now completing a stunning comeback — even with stubborn job and housing woes. Retailers that reacted with similar intelligence and nimbleness are being rewarded with reenergized customers and robust sales.
Craig Johnson is president of Customer Growth Partners, a consulting and research firm serving retailers, vendors and institutional investors. He can be reached at [email protected].
Walgreens takes circular to the digital age
DEERFIELD, Ill. — Walgreens is following in the footsteps of the likes of Target and Walmart in offering a digital edition of its weekly advertising circular that will offer additional items through Walgreens.com and the company’s mobile applications.
The Sunday circular — read by more than 50 million consumers, according to Walgreens — also will get a new look and feel, designed to improve the shopping experience.
“This is the most dramatic refresh we’ve made to the weekly ad in more than two decades, delivering added value for our growing numbers of online and mobile customers, as well as a better experience for those who look forward to seeing it in print,” stated Joe Magnacca, Walgreens president of daily living products and solutions. “We’re giving people more convenient ways to shop and save, and this complements our multi-channel strategy by finding new and different ways to cater to today’s consumers.”
A recent Nielsen study found that more than 70% of shoppers expressed a desire for basic digital delivery of advertising inserts in the future. As traffic to Walgreens.com continues to grow, online views of the circular alone have increased more than 50% year over year, Walgreens reported.
“We know that for approximately half of the visitors to Walgreens.com, their next action is to go to one of our stores to shop,” Magnacca said. “For our loyal customers who don’t use computers or the Internet, all of the items we feature online each week will also be specially-marked in our stores.”
The new design includes coupons grouped together by category on easy-to-find pages as well as sale items featured more prominently throughout. Walgreens has also added “QR codes,” enabling mobile users to quickly view more deals directly from a smartphone. Customers also can visit category-specific Walgreens websites highlighted in the ad or find additional bonus buys inside stores.
The online and mobile circular features hundreds of additional in-store offers, online exclusive pages and other “bonus buys.” Online ads also allow for social sharing via Twitter and Facebook and the ability to create advanced shopping lists, among other features. Those who sign up to receive the weekly ad via email will receive it as a sneak peek, delivered on Fridays. Signup is available online at Walgreens.com/sneakpeek or in stores. Those who register will receive a $5 coupon, Walgreens said.
To view the new weekly ad, visit Walgreens.com/weeklyad.
Toys”R”Us keeps it cool with “Ice Age”
CENTURY CITY, Calif. — Fans of the "Ice Age" film franchise will find everything they need at Toys"R"Us ahead of the July 13 release of "Ice Age 4: Continental Drift." The retailer is set as the film’s exclusive toy destination in North America, featuring movie-inspired products and promotions that will launch on July 1. Teaming with Twentieth Century Fox Consumer Products, Toys“R”Us will offer an extensive merchandising program, including a toy line from Just Play and The Promotions Factory.
Toys“R”Us will support the program with specially designed Ice Age in-store boutiques to give fans the latest and greatest toys, books, board games, backpacks and more inspired by the summer’s coolest movie, all in one place. The Toys“R”Us website will also act as an extended headquarters for Ice Age toys and gear, where items can be purchased with the click of a button. While this particular retail partnership is exclusive to North America, product will also be sold at Toys“R”Us stores around the globe with programs tailored to individual territories.
“As Ice Age has continued its growth as a global franchise, it has become a favorite brand among parents and kids alike,” said Lisa Harnisch, Senior Vice President, General Merchandising Manager, Toys“R”Us, U.S. “Working with Fox Consumer Products and a lineup of leading manufacturers, we’re excited to deliver a differentiated merchandising program in support of the latest installment in the Ice Age movie series.”