News

Deloitte: Consumer economics driving retail bifurcation

BY Marianne Wilson

The so-called ‘retail apocalypse’ is a myth. But retail industry bifurcation is not — and those in the middle are in a tough spot.

That’s according to a new study from Deloitte, which found that, rather than a battle of online against brick-and mortar, retail is changing in line with consumer income bifurcation. The revenues of both higher-end and price-conscious retailers are soaring, growing 81% and 37%, respectively, while those in the middle realized a mere 2% increase in sales during the past five years.

Overall, the retail sector is showing signs of healthy growth, Deloitte said, with sales increasing 3.5% in 2017, compared to a gross domestic product growth rate of 2.3%.

“Despite the popular narrative, the ‘retail apocalypse’ is far from reality,” said Kasey Lobaugh, principal, Deloitte Consulting LLP and the report’s lead author. “Brick-and-mortar retail is not on or near its deathbed. In fact, we’re seeing retailers open new stores at an astounding pace, and physical retail is growing alongside digital.”

The study shows a dramatic change in line with the impact of consumer bifurcation along economic lines. “While specific retailers may see an apocalypse, others see opportunity,” Lobaugh said.

Based on a survey of more than 2,000 consumers and an analysis of a large collection of US-based publicly traded retailers, “The great retail bifurcation: Why the retail “apocalypse” is really a renaissance study examines a growing disparity between consumer income cohorts and highlights the impact of this bifurcation on retailers. Incremental income generated since the recession has disproportionately gone to high-income households, with virtually all income growth between 2007 and 2015 going to the top 20%.

Key economic findings from the study include:

• Only one-in-five surveyed consumers (20%) are better off in 2017 than they were in 2007 in terms of disposable income, with little to spend on discretionary retail categories. Overall, 80% have fewer funds for traditional retail segments such as apparel. Alongside this trend, high-income consumers are 10% more likely to report spending more over the last year.

• Rising costs: Faced with stagnant levels of income, lower-earning consumers have seen the costs of nondiscretionary items skyrocket: health care expenditures have risen 62%, education 41%, food 17% and housing 12%, according to Deloitte’s analysis of reports from Bureau of Labor Statistics.

• New expenses: Modern consumer essentials like mobile phones and data plans now take up an increased portion of discretionary spending, stealing share from traditional retail categories. Low-income consumers feel the brunt of the impact, spending 3.6% of their income on digital devices and data, compared to just 0.71% or high earners.

“Households have diverged along economic lines and now people’s respective income levels are steering their behaviors and dictating the success of retail segments,” said Robert Stephens, senior manager, Deloitte Consulting LLP and co-author of the study. “More affluent shoppers have fueled high-end retail as their income and net worth have grown, while lower-earning consumers, faced with growing expenses and dramatically less disposable income, have turned toward price-conscious stores. Retailers that try to court all consumers will likely be challenged as income bifurcation leaves different shoppers with differing motivations.”

In line with consumer bifurcation by income level, Deloitte found the retail market is also bifurcating along economically-driven divides. Deloitte defined three retail cohorts: premier retailers that deliver value via premier product and experience offerings; price-based retailers that deliver value by selling at the lowest possible prices and clearly communicating that proposition to customers and balanced retailers that deliver value via a balance of price and/or promotion.

• More stores are opening than closing: From 2015 to 2017, price-based retailers gained 2.5 stores for every store balanced retailers closed. There have been more than 4,500 store openings from price-based retailers since 2015.

• Revenues have grown: Premier retailers have seen 40 times more revenue growth than that of balanced retailers over the last five years, with revenues soaring 81% versus a mere 2% increase for balanced retailers. Price-based retailers, meanwhile, have seen their revenues steadily increase 37% over the same period.

• Sales climb overall: Premium (8%) and price-based (7%) retailers’ sales rose in the past year, while sales of balanced retailers declined by 2%.

According to Deloitte, income bifurcation has triggered the following differences in consumer shopping behavior between economic groups:

• Preferred formats: Low-income consumers are 44% more likely to shop at discount retailers than other groups. These consumers are also more likely than others to shop at supermarkets, convenience stores and department stores.

• Channel choices: The majority (58%) of low-income consumers are choosing to shop in store, while 52% of high-income consumers prefer to shop online.

• Shopping around: In-store spending fragmentation – or the number of retailers a consumer regularly shops – is 17% higher amongst high-income consumers. Fragmentation is even more exaggerated online, as affluent consumers are 40% more fragmented for online retailers than consumers in the lowest income cohort.

keyboard_arrow_downCOMMENTS

Leave a Reply

J.Hoover says:
Mar-15-2018 09:08 am

Very insightful piece regarding consumer spending. The artificial tamp down on interest rates has forced investment in stocks which have risen due to the sustained influx of cash...artificially rewarding some and leaving the rest behind. Coupled with the seemingly unstoppable growth of debt, it puts our future in peril.

TRENDING STORIES

Polls

Do you think retail brands should steer clear of taking a stance on social and political issues?
CSA Regulatory Wrap-Up
News

Regulatory Wrap-Up: Insider’s weekly recap of retail-related legislative developments

BY CSA Staff

Wages

U.S. House: Democrats introduced a bill that would prohibit employers from retaining any tips regardless of internal pooling policies and mandate that all tips would be considered the property of the employee and not the employer. The bill has the verbal support of Labor Secretary Acosta and other key Republicans but still likely faces a long road to passage.

Connecticut: The governor announced his support for a slate of “fair workplace” bills that include an increase in the state’s minimum wage to $15/hr, an expansion of the state’s paid leave program, an anti-harassment training mandate and a ban on asking salary history questions.

New York: Two of the regional public hearings on Governor Cuomo’s proposal to increase the statewide tipped wage level has been rescheduled. The Syracuse hearing was delayed from March 12 to April 30 and the Buffalo hearing was delayed from March 21 to May 8. The proposal calls for an increase in the tipped wage for upstate workers from its current $7.50/hr to $10.30/hr.

Washington D.C.: The Board of Elections certified a ballot initiative that would increase the tipped wage from the current $3.33/hr to $15/hr by 2026, ultimately eliminating the tip credit altogether. The minimum wage would continue to rise with inflation. The initiative will appear on the June 19 primary ballot.

Target: The retailer announced an increase in their minimum hourly pay to $12/hr nationwide. The announcement follows an increase to $11/hr last fall and a promise to increase further to $15/hr by 2020.

Wage Theft

California: The Labor Commissioner’s office issued an $8.3 million fine to the Chino-based fitness chain, Camp Bootcamp Inc. for failure to pay their employees for their travel time between chain locations, overtime and other alleged wage violations.

Worcester, MA: The council is considering an ordinance that would empower the city to review and revoke property tax incentive deals for companies found to be in violation of wage laws. The proposal is under legal review and has unanimous support on the council.

Paid Leave

Hawaii: A paid leave bill requiring employers with fewer than fifty workers to provide paid sick leave accruing at a rate of one hour per every 40 hours worked passed the house and heads to the senate. The bill includes an exemption for employers who already offer a more generous paid leave policy or pay workers at a rate of $1.65/hr in excess in the minimum wage in 2019, escalating thereafter. Another bill which requires the state labor department to establish a paid leave program for all workers by 2023 and appropriates $1.5 million to a family leave fund passed the senate.

Utah: A bill that allows companies that offer paid family and medical leave to take tax credits passed the house and heads to the senate.

Dallas, TX: A city councilmember has expressed interest in passing paid leave legislation similar to the recently-passed ordinance in Austin, TX. It is unclear at this stage how much support such a measure would have in the council and state legislators have announced their intent to pass statewide preemption legislation when the legislature convenes in 2019.

Dollar General: The discount retailer announced a significant expansion to its paid leave program that will go into effect April 1. All eligible full and part-time employees will be granted two weeks of paid time off and four weeks will be provided to birth mothers. The company will also offer up to $4,000 in adoption assistance.

Scheduling

Connecticut: A senate committee held a hearing on a bill to prohibit the use of “on-call” scheduling by mandating that all employers provide no less than 24 hrs notice of shift schedules.

South Carolina: A bill to prohibit localities from mandating scheduling laws was introduced in the senate. The state already preempts local mandates on wage and paid leave.

Philadelphia, PA: The Committee on Youth and Children heard testimony from retail and restaurant workers as well as healthcare professionals and union leaders regarding the need for legislation to mandate citywide scheduling practices. Legislation has yet to be introduced, although it is expected soon and will likely mirror other proposals from San Francisco and Seattle. Representatives from the restaurant, retail and hotel industries continue to meet with council members and the mayor’s office to discuss industry scheduling policies.

Equal Pay

Massachusetts: An updated equal pay law will go into effect July 1 providing more clarity as to what constitutes unlawful wage discrimination and adding protections to ensure greater fairness and equity in the workplace. The attorney general’s office recently issued guidance and online resources to assist employers in complying with the law.

Labor Policy

NLRB: In a letter to NLRB General Counsel Peter Robb, five Democratic senators requested that the board abandon settlement talks with McDonald’s in the long-running case regarding worker claims that they were retaliated against for going on strike. The case is at the center of the ongoing debate around joint employer liability. The letter follows the board’s decision to vacate the recent Hy-Brand case. That decision re-established the joint employer standard promulgated during the Obama Administration. Meanwhile, lawyers for Hy-Brand will ask the NLRB to reconsider that case. The company intends to argue that Board members wrongly excluded their colleague William Emanuel from the decision-making process.

Idaho: The house passed a bill codifying that neither a franchisee nor a franchisee’s employees shall be considered employees of the franchisor. The bill now moves to the senate for consideration.

Taxes

Hawaii: A bill that establishes that retailers with more than $100,000 in annual sales are considered “to be engaged in business in the state” and subject to sales tax collection requirements passed the senate and now heads to the house. The bill also establishes that internet marketplace providers are considered the seller of the property for tax collection purposes for all applicable third-party sales.

Retail Crime

Virginia: A bill that increases the felony theft level from $200 to $500 has passed both the house and senate and now heads to the governor’s desk for his expected signature.

Data Security

Arizona: A bill expanding the existing law governing data breaches passed the house and heads to the senate. The bill, which is supported by the attorney general, strengthens notification requirements and expands the definition of personal information to include fingerprints, electronic signatures and email addresses. The bill was amended to ensure that a breach must still result in “substantial economic loss” to trigger notification requirements.

Health Care

Federal: Seventeen attorneys general submitted joint comments to the Labor Department opposing regulations that would allow for association health care plans to operate outside of the mandates of the ACA. The group requested that the rule be rejected as it would negatively impact ACA’s individual and small group health markets.

CEO Pay

California: A bill was introduced to tax corporate income based on a publicly-traded company’s CEO pay ratio relative to their median employee wage level as determined by the SEC pay ratio rule. Currently, non-financial institutions pay a tax rate of 8.84%. Under the proposed draft, that rate could increase to as much as 13% depending on their published ratio.

Key Takeaways

• President Trump’s official enactment of tariffs on imported steel and aluminum has brought condemnation from affected countries and potential retaliation. The exemption of both Canada and Mexico has given some trading partners, such as the EU, hope that they will receive similar treatment. However, countries like Brazil, the second largest exporter of steel to the U.S. and the largest importer of coal from the U.S., has indicated it is considering other sources of coal in response to the tariff. Operators need to prepare for overall increases in the costs of consumer goods as well as the impact retaliation would have on major imported products such as like agricultural commodities and apparel.

• The CEO pay issue continues to gain attention. As more publicly-traded brands release pay ratio data over the coming weeks and months, policymakers will be increasingly adding those data points to their public statements. The introduction of the bill in California that links corporate tax rates to published ratios is a stark example of the combining of the response by many blue states to federal tax reform with the rising pay equity issue. Even though the bill may have an uphill climb, the issue will continue to gain momentum as more ratio data becomes public.

• Employers may want to consider a close examination of the Labor Department’s new wage theft pilot program to identify the scope and strength of any potential safe harbor provisions. Additionally, since we expect state regulators in many big states like California and New York to become increasingly aggressive on enforcement, participation in the program may provide some level of good faith protection from zealous enforcement agents.

Legislature Status for Week of 3/12/18
• The United States Senate is in session this week
• The United States House is in session this week
• Thirty-six state legislatures are meeting actively this week:
o AL, AK, AR, AZ, CA, CO, CT, DE, GA, HI, IA, ID, IL, IN, KS, KY, LA, MA, MD, ME, MI, MN, MO, MS, NE, NH, NJ, NY, OH, OK, PA, RI, SC, TN, VT, WI

Podcast

Check out our Working Lunch podcast each week that includes further analysis into these legislative issues, policy, politics and much more. You can find Working Lunch on the Nation’s Restaurant News website, or by clicking here, and when you download the podcast and subscribe on iTunes here.

The Regulatory Wrap-Up is presented by Align Public Strategies. Click here to learn how Align can provide your brand with the counsel and insight you need to navigate the policy and political issues impacting retail.

keyboard_arrow_downCOMMENTS

Leave a Reply

No comments found

TRENDING STORIES

Polls

Do you think retail brands should steer clear of taking a stance on social and political issues?
News

Report: Ikea adding city showroom-formats; developing online services

BY CSA STAFF

Ikea is evolving to keep pace with changing shopping habits.

The home furnishings giant will maintain — or even raise — its already high levels of investment — going forward, reported CNBC, as it adds city-center showroom formats and further develops its digital capabilities. At the same time, Ikea will invest in traditional store expansion.

Click here to read more.

keyboard_arrow_downCOMMENTS

Leave a Reply

No comments found

TRENDING STORIES

Polls

Do you think retail brands should steer clear of taking a stance on social and political issues?