Around the World with Paco Underhill

cooking_oilWhat We Can Learn From Emerging Markets

Merchants have a temptation to move up-market. We suspect this is a reflection of their desire to seek higher margins. While we can applaud the successes of luxury categories at the upper tier of the market, it is at the other end of the spectrum where we find insightful examples of merchant innovation. For many of the world’s consumer product goods companies, future earnings and sales growth are anchored in their ability to not only move up, but also to more effectively cover the down-market. But we may be missing some very special lessons in this traditional marketing strategy. We can learn from what’s hidden in plain sight in emerging economies by recognizing the transformation of our ideas and the ingenuity of adapting our concepts to local solutions. There is also a new wave of clever entrepreneurs who are retooling conventional retail and marketing in novel grassroots ways.

Sumba: Rethinking Trust and the Pragmatics of Third-World Recycling

The Indonesian Island of Sumba has the peculiar distinction of being the world’s southeastern-most home of the horse. Its equine culture is unique to the archipelago, and adventurous tourists invade the island for its horse festivals that involve ritual battles on horseback. Its welcoming villages are dominated by tall prehistoric megaliths, not unlike Easter Island. But in Sumba, these giant icons are made all the more startling by the vibrant human life that continues on the island, in contrast to the abandoned statues of Easter Island. Sumba has a few resorts that tend to be patronized by glitterati looking for places where the tabloids can’t find them. It is, in its way, paradise lost and found. [Read more…]

Value is in The Eye of the Beholder…Who is Blind

PrintThere is a binary system governing value. The first “beholders”of value are its creators and sellers. The second are its consumers. Unfortunately,the first beholders have become blind to what their intrinsic value really is, or should be. As a result, they are blinding the second beholders by devaluing their products, leaving these consumers to conclude that the default “real value” is the lowest price.

No, I’m not getting all philosophical on you. Or maybe I am, if you’re able to fully understand the magnitude of what I’m about to serve up. It’s an enormous message for all businesses and, by extension, our economy as well.

It’s about the real, universal, global and all-encompassing definition of value, not just for the consumer, but also how you define it and hold it for your products, services, business and, indeed, your life.

For starters, before I take on the task of defining value and explaining why its creators and consumers are both blind to any common understanding of what it actually is, I submit that the collective “we” have been marking down value for a long time. The devaluation of value seems to be accelerating, particularly with the explosion of online businesses that don’t yet make a profit, relying on waves of funding and price promoting to stay afloat. This business model simply exacerbates the “marking down” syndrome. And this fragile model is also exacerbated by ongoing overcapacity throughout our economy, in which price promoting and endless methods of discounting become “weapons of necessity.” The end of this vicious cycle, of course, is worthlessness—AKA, zero value.

[Read more…]

Supermarket Disrupters Rattle the Industry

Amazon Expands Grocery Delivery Service To Los Angeles AreaConventional supermarkets — those mid-tier retailing behemoths — are beset on all sides by disrupters. Some of those disrupters are cloaked in technology, some aren’t; others are self-inflicted and emerging from within.

Let’s take a look at what the disrupters are doing to the biggest retailing industry of all.

To begin: the greatest disruption traditional supermarkets have faced in the 60 years or so they’ve been feeding America came a generation ago when Walmart got into the grocery business. Walmart’s go-to-market strategy changed everything, particularly how product was acquired and distributed. For the longest time, even as the threat grew, Walmart was ignored by the supermarket industry, largely because Walmart wasn’t — and isn’t — much of a marketer and had difficulty at the time with presenting quality perishables and still does.

But none of that really mattered because Walmart swamped supermarkets with such a significantly better pricing offer that it soon became the country’s dominant grocer. [Read more…]

The Hidden Message in How Americans Spend

Consumer spending increased by 3.7% in June, the highest 12-month smoothed monthly increase in almost two years, according to data released last week by the Bureau of Economic Analysis.

This year, Americans will spend $12 trillion on stuff, slightly more than the $11.7 trillion they spent on stuff last year.

These gross numbers are pretty meaningless and hard to wrap one’s mind around, but if we look behind the big numbers at what we’re spending our money on, and how some of those expenditures are growing, it’s not only pretty interesting, but can also tell us about how optimistic we’re feeling, about our consumer preferences as a society, and where we might be headed.

When the government tracks consumer spending, it creates two major categories: goods, which are separated into durables like cars and washing machines, and nondurables like clothes and food; and services, such as private school tuition, cab fare, eating in restaurants, and going to the doctor.

What I’d like to do here, though, is to categorize them a little differently.

pyramid2

Abraham Maslow (remember him from Psychology 101?) created the theory of the hierarchy of needs; simply stated that self-actualization is not possible until our basic needs are met. So, using a pyramid as a model, shelter, food and clothing (physiological needs) are the most basic needs at the base.

Fast forward to the top, creativity and artistic pursuits, are defined as self-actualization, or achieving our full potential as human beings. I’m super-simplifying here, but you get the idea. So if we look at trends in consumer spending through a redefined prism of Maslow’s hierarchy, and taking a few liberties with the climb to the top, some interesting patterns emerge. We can start with non-discretionary (need) categories like food, clothing and shelter at the base, and discretionary purchases, (more wants than needs) like restaurant dinners and new cars at the top.

So how have Americans been spending their money? And what’s behind these spending trends?

 

Level 1: Food, Clothing, Shelter (Basic Needs)

For one thing, it looks like the American Dream is alive and well, and home is still where the heart is – at least the heart of non-discretionary spending. As the chart below illustrates, spending on housing, which totaled an annualized $2 trillion as of June 2014 data, has been growing much faster than groceries and apparel, the other two key need categories, whose totals were $900 billion and $367 billion, respectively. Much of this increase has been due to tightened supplies of rental properties and energy costs, which have driven up monthly housing and utility costs, causing people to dedicate a larger share of their wallet to housing costs. Despite rock-bottom interest rates, home purchases have been about as spotty as job market recovery, resulting in an increased demand for homes to rent.

Although food prices have risen for certain categories, like meat and dairy, large supermarket chains are in a tough race for market share, which has kept inflation to a minimum and allowed consumers to take advantage of loss-leader bargains. In both apparel and groceries, showrooming has enabled price transparency across competitive retailers. As the chart shows, although spending on housing rose by 4% last month, slightly ahead of the total spending increase of 3.7%, spending on groceries rose by less than 2% and apparel spending edged up by less than 1%. In other words, Americans are spending more on housing because they have to, and taking advantage of the promotional environment in apparel and food to because they can.

RRSpending1

Level 2: Health and Wellbeing (Safety)

Next, let’s look at how we are spending on keeping ourselves healthy, the next level up on our redefined hierarchy of needs spending pyramid. Consumption of pharmaceuticals has skyrocketed in recent months as millions of formerly uninsured people got coverage under the Affordable Care Act and began to take medications for chronic illness and other conditions, causing windfalls for Big Pharma companies and the major drug store chains. However, spending on medical services and other forms of healthcare has grown by just over 3% as hospitals, clinics and physicians find their ability to bill patients is extremely limited under the new health care legislation. More people are going to doctors, according to CMS, the service that administers Medicare, but total spending is being offset by the declining average cost of a doctor treatment or visit. Maybe the Affordable Care Act is actually keeping health care affordable? Time will tell.

RRSpending2

Level 3: Quality of Life Connections (Belonging)

Next, let’s take a look at some spending categories up a little higher on the hierarchy of values: feel-good “big ticket” items. The auto industry has benefitted greatly in the past year by the unleashing of pent-up demand. During the recession, car sales declined because people decided they would just make do with their old clunkers. Once the economy started to grow again and employment and income started to recover, millions went out en masse and purchased new cars. However, that growth started to slow considerably early last year, as shown by the chart below, and then picked up again starting in February of this year. Although new car sales are strong, at an annualized $98 billion in June, they’re not growing as much as they were in early 2013, though part of that is due to tougher comparisons— that is, they’re being compared to stronger months than they were in early 2013.

Another interesting category in this realm is communication ($276 billion), which includes mobile device (smart phone) contracts, where growth is an annualized 4%, but off from the higher levels seen last year, primarily because the tablet craze has quieted considerably.

And growth in furniture and appliance spending, representing a total of $287 billion, remains sluggish despite the improved stability in the housing market. The lack of consumer interest in the category has been a source of tremendous frustration for retailers in this space. Perhaps a good bit of the softness in spending is due to the extremely competitive and promotional marketplace – prices have been declining for these products, and consumers are taking advantage of the available deals to spend less.

RRSpending3

Level 4: Having Fun (Esteem)

We’re approaching the top of the spending pyramid, where some of the most discretionary of the major consumer purchase categories reside, specifically entertainment. Key categories include recreational activities spending, at $450 billion, products like toys and sporting goods, at $367 billion, and spending on food outside the home, at $746 billion. Of the three, eating out is the only one with accelerating growth. In the hierarchy of needs, it reflects confidence and achievement that consumers have choice to reward themselves with a slightly more expensive option than cooking at home. And the fact that we’re spending moderately on recreation says that we’re having some fun.

RRSpending4

Level 5: Self-Improvement (Self Actualization)

At the pinnacle of all these spending categories are the self-actualized pursuits of spending on education and financial planning. Amazingly, it looks like these areas are growing at above-average rates; we’re actually spending more to improve our ability to succeed in the future. Education spending, at $282 billion, is one of the fastest growing categories in consumer spending (after pharmaceuticals). And not all that surprisingly, given the volatility of the financial markets, spending on financial services is growing quickly as well, at an annualized $890 million according to June 2014 figures. This data would suggest that we are optimistic about the future, interested in self-improvement and searching for, and funding, solutions.

Despite what is happening in the economy or in Washington, people are living their lives and hanging on to their dreams.

RRSpending5

Whole Foods Market: Conscious Capitalism or Unconscious Greed?

wholefoods_webSo are we adding a luxury food brand to the “designer derby” of racers seeking more growth (for its own sake) by reaching down to consumers who are reaching up? Or is the CEO of Whole Foods, John Mackey, spreading his high-end food among the masses at prices they can afford, simply out of the goodness of his democratic heart? I’m speaking of the Whole Foods launch of pilot stores in more down-tier areas of Detroit, New Orleans and Chicago’s South Side. And about this strategy, Mackey made this rather magnanimous and altruistic statement: “For every penny we cut off the price, we reach more people who can afford to shop with us.”

What a wonderful thing to say. And, what a wonderful thing to do for the less well-heeled people living where the stores are being launched. And I suppose it will be a wonderful thing for new growth, at least for the foreseeable future. [Read more…]

Reading Consumer Behavior in a Tentative Time

Sarah_ Spendin_Rd1The global economy has entered a period of transition. After the high hopes so many had pinned on the rise of the BRIC nations — Brazil, Russia, India and China — and other emerging economies, their seemingly inexorable ascent has proved all too exorable, with global demand for raw materials slackening and internal economic indicators demonstrating a cooling in overall economic growth.

But there are other factors making for the creation of a climate of transition — and, to a certain degree, of uncertainty. The existence of both exogenous and endogenous forces, not least of which are the seeming return of great power geopolitics in Eurasia and the South China Sea, the discovery and exploitation of new energy sources within the U.S. — thus creating a new source of instability in the Mideast — and the continuing struggle to make an integrated Eurozone a reality — all contribute to the atmosphere of watchful waiting. [Read more…]

Who Are the HENRYs and Why Are They Important to You?

Pam charts Rd2After a lot of retailer nail biting this past December, the Department of Commerce has reported the numbers and, all in all, the sales year didn’t turn out as badly as expected. So while we sigh with relief, nobody reading the news or talking with consumers is delusional enough to think that retail is out of the woods yet. Consumers remain extremely cautious about spending; the average US household’s income is currently $71,274, down more than $4,500 from its high in 2006 of $75,810. The reality of this extended post-recession period is that the American middle class has lost much of its spending power, leaving retailers that have traditionally targeted this customer holding the bag and needing to find new consumer segments for growth.

If the middle-income customer is scarce, the logical place for retailers to look for new customers is one step up the income ladder: the affluent, which are defined as the top 20% of US households based on income which starts at around $100,000. With nearly 125 million American households in total, the affluent segment numbers just under 25 million households. In most any spending category, the affluent top 20% account for about 40% of total consumer spending, according to the Bureau of Labor Statistics Consumer Expenditure Survey. That means the absolute spending power of the affluent household is twice as big as the average middle class spend.

Of course, all affluent households aren’t created equally in spending power either, with the top 2%, or the ultra-affluents, roughly 2.5 million households (incomes starting at about $250,000) with much more discretionary income. But between the ultras and the middle-income consumer segments, there is an often overlooked group that, quoting Rodney Dangerfield, ‘gets no respect’ – the lower-income affluents or HENRYs (High Earners Not Rich Yet). These are the new mass-market affluents with incomes $100,000 to $249,999 and they number about 22.5 million households.

Tale of the Tape –The receipt tape, that is.

Every three months my company,Unity Marketing, surveys 1,200+ affluent consumers who recently purchased any high-end or luxury goods or services in 21 different categories, including home goods such as furniture and major appliances; experiential services such as travel and dining; and personal items such as fashion, jewelry, and beauty. In that survey, data is collected about those recent purchases including how much people spent. [Read more…]

Millennials: Double Trouble for Retail

Robin Millenials_FINAL imageFor those of you out there who think the Millennials are the “next big thing” for your business, think again. They may not be as big as you had hoped. And for the likes of the three “As,” (A&F, American Eagle Outfitters and Aeropostale), and others who primarily target this cohort, you better start strategically repositioning your brands and your messaging to adapt to the “double trouble” of dying malls (which used to be huge teen hangout destinations) and Millennial shopping behavior, which is shop-until-you-drop…but don’t buy.

As I pointed out in my recent article The Great Retail Demassification, there are several reasons mall traffic is suffering, directly impacting store traffic, particularly in the B and C malls:

  • Every store in the world is literally in Millennials’ pockets; they can hang out with their friends, sip lattes and shop online – all at the same time. So why spend all the time and effort traveling to, and traipsing through, big, old, largely boring malls with a limited number of cool stores that don’t offer any great experience in the first place? [Read more…]

Robin Lewis on CBS Sunday Morning

Check out the complete article “A dying breed: The American Shopping Mall” on the CBS Sunday Morning web site >>

Made in USA: Myth or Reality?

American FlagOn a recent afternoon I was stopped in the mall by a foreign tourist looking for American gifts to take back home. All the clothing and accessories in the stores were made elsewhere, she said, so they weren’t really American.

U.S. consumers are starting to feel the same way. Groups with names like Made in the USA Foundation and Buy American are launching advertising and social media initiatives to encourage Americans to buy domestically made goods. They’re reacting to a groundswell of sentiment that blames the sluggish job market on imported consumer products. Large companies are reportedly looking at their product lines to see whether even a little domestic sourcing is feasible. Several fashion startups are touting the fact that their stuff is made in the USA, and in some cases even successfully using crowdfunding to get their businesses off the ground. [Read more…]

China Seeks Low-Cost Production

china_factory_main.top copyIn the United States

Beware of what you wish for. For all of the “pollyannas” who have been rooting for manufacturing jobs returning to the good old USA from low-cost countries such as China, they may just be getting their wish; but not in the way they intended.  It will end badly.

In a perverse kind of irony, it appears that the United States may be evolving into a low-cost country, wooing China-based manufacturers to set up shop here — at least in the textile and yarn industries — which the US lost to Asia and the Far East in the 70s and 80s.

In fact, several Chinese yarn and textile manufacturing businesses have already moved to the United States, primarily in the southern states where the manufacturing skills still reside and where most of those textile jobs were lost to lower-cost countries. The region also has state and local governments eager to boost their economies and decrease unemployment, and willing to provide significant tax breaks, bonds to defray project costs, grants, and job-development credits. [Read more…]

Darkness at Dawn

iStock_000012485261SmallThe closer you get to the Equator, the more dawn and dusk become switches rather than transitions. It’s dark, it’s light.

I’ve learned as a global traveler to keep the curtains open at night, my goal to be in bed shortly after sundown and up at first light. Recently, I had a corner room at a hotel with floor-to-ceiling windows on two sides. The view of Paulista and the rest of São Paulo turned on a little before six; the cell phone towers, the park below and the high-rise buildings looked like uneven stubble on the contours of a Brazilian chin.

I was picked up at 7:00 AM by my colleague, the CEO of a publicly traded shopping mall company, in his Land Rover and we headed across town to the private airport to catch our turbo-propped Sky Master. We were headed for Brasilia. The traffic was heavy, and as we inched our way around a traffic circle, I lowered the window on the passenger’s side to stick my hand out and help get us to the outside lane. The driver gasped and I realized the window was almost two inches thick. Bulletproof. I struggled to get the window back up. The stupid Yankee had comprised the moving security perimeter. It took two security guards at the airport to tease the window back to its original position. [Read more…]