Hold the (Window) Dressing

The world of shopping – and shoppers – is neatly divided into haves and have-nots. While the recovery of the luxury retail business, due largely to its successful globalization efforts, has been in the forefront of the news a lot lately, at the opposite end of the spectrum another equally strong and important movement is underway.

As a market researcher, I like to separate the thinking I do sitting down looking at numbers and tables from the insight I get from the four months of the year I spend on my feet in malls and stores and observing and talking to people across the world. Like most retail pundits, I am cynical about government data as it relates to things like personal income, unemployment, and consumer spending. By its nature it deals in aggregated numbers whose relevance is often questionable.

Based on my on-the-ground observations, our retail world is now a clear reflection of this have/have not dichotomy. Both ends of the spectrum want more for less, but what they want, and how they want it, is very different.

Manhattan’s Bleecker Street fashion district is overcrowded, and in London and Moscow posh restaurants are backlogged in reservations. The luxury sector is now serving the new class of consumers whose affluence is less than two decades old, but whose appetite for high-end brands is seemingly insatiable. In the US, there was a magic moment in the mid 1990s when the majority of wealth went from old-money aristocracy to people who earned their piles of dough in the course of their own lives. This shift toward nouveau riche is occurring in other countries as well, though it’s happening at different times and rates. In Shanghai and Beijing, new mall after new mall is anchored by Gucci, Prada, Burberry (BRBY.L) and Rolex. China may be manufacturing cheap goods for American firms, but it is also luxury’s fastest growing market.

However, this is a group of “haves” that is different from those a generation ago. Think about the differences between the House of Windsor and House of Warren Buffet and their respective work ethics and values. Speaking personally, I did not know ten years ago who had been “voted off the island,” just as today I have never watched a single segment of American Idol or Survivor. Most nights I’m still working. Even if I were to TiVo the shows, as many do, I’d never get around to watching them. Most of the people I know are in the same situation. For all the finger pointing at investment bankers for their role in today’s financial quagmire, no one should dispute their work habits, or envy their long hours.

The self-made, hard-earned nature of affluence is having an impact on luxury retailing. Consumers are demanding value, even in high-end luxury goods. They’re shopping around, using the Internet, getting more for their hard-earned dollar and hard-won success. Couponing is on the rise in some of the most affluent neighborhoods. They want entertainment, an emotional experience.

In most parts of the world, the booming 21st century market for luxury goods is strongest in those products that are the symbols of affluence: shoes, watches, handbags, cars, luggage and personal electronics. Those symbols are worn and recognized easily. What has been a tougher sell to the newly wealthy are those items whose appreciation is anchored in a more subtle sense of refinement, like fine furniture or a custom tailored suit. In these areas, the retail challenge becomes the merchant’s ability to communicate value. Why does this item cost one price and a strikingly similar item cost ten times as much? However, over time, this challenge will be overcome.

Though Saks (SKS) and Neiman’s are enjoying a rapid recovery, slip out to Flint, Michigan or rural Texas and you will see a very different world. Real unemployment is over 30 percent if you count everyone that has dropped out of the formal job search. However, there is a booming grey and black market for employment in segments of the United States that could be approaching what you find in Greece or parts of Spain where the unregulated and thus unmeasured parts of the economy account for more than 30% of a given local market. Many of these workers are undocumented, paid in cash, and not counted in government figures. An estimated 15% of American households have no bank account.

If you think this has little impact on retail, think again. It has resulted in a surge in business at flea markets, farmers markets, pawn shops and garage sales. Person to- person sales for used goods like cars, furniture, and other goods through The Pennysaver, Craigslist and other classified media are also on the rise. Many of these transactions are done in cash, off the books.

What’s scary is that the have-nots are very aware they have been marginalized. If the poor in the 19th century got to peek in the doors and carriages of the rich, in the 21st century the poor have seen the lives of the wealthy up close on television and in the movies. A six year-old from the hillside slums of Rio has the almost the same knowledge of brands as a six-year-old from Grosse Point. In their darker moments, the modern political scientists have to be worried that if the disparities of the 18th and 19th centuries brought us Marat and Marx, the Facebook revolutions of the Arab world represents the process of how modern economic and political anger is manifested.

It isn’t just North America and Europe. You wonder what goes through the mind of the Chinese People’s Liberation Army member from a small village in Hubei which has trouble getting clean water, seeing the new airport in Beijing, or the monorail in Shanghai, wondering where his government’s priorities are. Inches away from the front gate of the Four Seasons Hotel in New Delhi starts a breathtaking drop in economic standards that is as extreme as any found in human history.

In much of the rest of the have-not world, the struggling is against the forces of downward mobility. Sam Walton knew that his most important customer was the single mother raising her children. Our global lower classes are faced with cost increases that are not negotiable, from housing and medical care, to mobile phone service and gasoline. If the commodity price increases that have piled up earlier this year get passed on this fall, how will the have-not consumer respond? So far, the cost of the living has been ameliorated by savings in the supply chain process, yet this fall, we can no longer conceal that the cost for food, apparel and other necessities is going up. While riots are not around the corner, American spending habits are very much in flux, and our financial future is uncertain.

There are some sure things. The American market for private label trails other parts the first world; one easy way of trading down is to move to the store’s own branded products. Labels like President’s Choice, 360 and Kirkwood are here to stay. Aldi, the no-frills discount supermarket chain which is owned by a very private trust in Germany, grows underneath the radar screen, market by market. They now have over 1,000 stores in the US. If what has happened in Europe is any indication, the uberdiscounters are winning the same victory that American mass merchants won twenty years ago, in that there is no shame in being seen in their parking lots. Buying used or previously-owned stuff has lost its stigma and is seen as simply being smart. The business of odd lots and end lots has never been better.

One very private merchant I visit periodically is Ollie’s Bargain Outlet, whose home office hides behind a run-down strip mall in Harrisburg, Pennsylvania. It sells rugs, books, furniture, power tools and foodstuffs. Distressed merchandise, often sold out of distressed real estate, offers real bargains and yet the store’s return policies are liberal. This billion-dollar, 102-store business focuses on the simple reality that retail is the interim step between the back of a delivery truck and the trunk of the customer’s car.

Everything else is window dressing.

Paco Underhill About Paco Underhill

Paco Underhill is the CEO and Founder of Envirosell, a behavioral research and consulting firm with 10 offices globally. Paco and Envirosell’s work has been featured in The New York Times, 20/20, National Public Radio, Smithsonian Magazine, Wall Street Journal, and other major news media. Paco is also the author of What Women Want, which was published in soft cover edition by Simon & Schuster in July 2011; Call of the Mall, a walking tour of the American shopping mall; and Why We Buy, the bestselling book about retail in history. In addition, Paco’s columns include regular features in major trade publication DDI Magazine, as well as Goldman Sachs’ in-house publication.