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...]

The $2 Trillion American Rip-Off

There’s a growing disparity in the way some economic data have moved since the recession. On the one hand we have employment and income figures, which tell the story of a sluggish U.S. recovery with a long way to go to pre-recession prosperity. On the other hand, healthy retail sales and consumer spending have rebounded to, and even surpassed, pre-recession levels.

According to the Bureau of Labor Statistics, the population of working-age people has grown by more than 5 million since the beginning of 2008. The labor force has increased by only 1.5 million, and the total number of employed has decreased by 2 million, resulting in a steady decline in the labor force participation rate (see Chart 1).

shadow_economy_chart-1That doesn’t jive with the brisk pace of consumer spending (Chart 2), according to Bernard Baumohl, Chief Economist at Princeton, NJ-based forecasting firm The Economic Outlook Group, who noticed the sudden divergence between total personal consumption expenditures and the labor force participation rates that began during the Great Recession.

shadow_economy_chart-2

The stubbornly high unemployment rate makes even less sense in light of retail sales which, according The Department of Commerce, have been growing by 3-5% per month over the last two years on a 12-month smoothed basis, as shown in Chart 3 below. Sales of durable goods have been particularly strong.

shadow_economy_chart-3This is consistent with an unemployment rate much lower than the current rate of 7.3%, according to Baumohl, who noted: “… Not since the government first released retail sales on a monthly basis have we seen retail sales grow at such a vibrant pace with the unemployment rate so high.”

All this has been going on while, according to the Bureau of Labor Statistics, median household income has been on a steady decline (Chart 4).

shadow_economy_chart-4How are all these unemployed consumers with declining incomes able to keep shopping?

As it turns out, being unemployed doesn’t necessarily mean not working. According to research by Professors Richard Cebula of Jacksonville University and Edgar Feige of the University of Wisconsin-Madison, a significant part of the U.S. population participates in the shadow economy, an estimated $2 trillion underground market in the U.S. These folks are doing everything from giving piano lessons to running retail stores. They’re being paid off the books in cash by their employers and/or customers, and either not reporting or underreporting their income.

We’re not just talking about mob bosses or drug dealers here, but about millions of people, some (but by no means all) of them undocumented immigrant workers, with everyday jobs, many in service businesses such as child care, landscaping, and construction. Much of the underreporting of income starts as a way to make ends meet after being laid off, but ends up becoming a lifestyle.

According to Professor Cebula, the underground economy has been around for as long as income tax. Its participants range from hardcore criminals to people whose lousy bookkeeping skills cause them to accidentally underreport their income. His research shows that in the last 10 years, the ratio of unreported and underreported adjusted gross income to reported AGI has ranged between 22% and 24%. Most of the underground income, says Cebula, is earned by people in the lowest income brackets.

To uncover this trend, Cebula and his colleagues simply followed the cash. Despite the proliferation of credit cards, debit cards, smart phone payment apps and bitcoin, currency in circulation with the public totals around $3,000 per capita, hardly the trappings of a cashless society. The Federal Reserve reports almost double-digit increases in currency outstanding over the last few years, to almost $1.2 trillion, compared to $800 billion six years ago (Chart 5).

shadow_economy_chart-5The evidence is everywhere: people pulling out wads of cash in stores to pay for big-ticket items; small stores who “don’t charge you sales tax” if you pay them cash (which means they’re not reporting the revenue to the IRS); soaring demand for prepaid debit cards (which you can buy anonymously and use to pay utility, rent and other bills); the rise in underbanking and nonbanking. According to the FDIC, in 2011 the number of U.S. households with no bank accounts was 8.2%, up from 7.6% in 2009.

Why is the economy’s dirty little secret not getting more air time? Well, for starters, it’s neither politically correct nor expedient to go after the little guy. It makes government look boorish, and after all, many of the people perpetuating this fraud are voters, so politicians have every incentive to turn a blind eye.

A more important factor, however, is that much of the $2 trillion ultimately goes into cash registers, and might have kept the real economy from tanking a few times during the recovery. Which means retailers aren’t exactly unhappy about it.

The U.S. is not the only country experiencing this trend. The shadow economy in Europe will total $3 trillion dollars this year, according to an A.T. Kearney/Visa report. In Italy, where the top personal income tax rate is 45% and tax evasion is practically a national pastime, it represents a massive 21% of GDP.

So is the shadow economy a good thing? Unless you’re a fan of felony tax evasion, of course not. The impact on government revenue is staggering, with an estimated $500 billion in lost federal income tax, money that could close the budget deficit (and possibly even create a surplus), reduce the national debt, help pay for improved infrastructure, and provide public services to people. Many of the people working off the books also collect unemployment or disability, go on Medicaid, and use food stamps, multiplying the fraud.

Of equal concern is the fact that the rapid growth of the underground economy since the recession might be a result of deeper and potentially more damaging trends: an underlying distrust in government; a feeling that regulations are too stringent and complicated; a lack of confidence in financial markets; declining confidence and hope. These feelings weren’t exactly soothed by the most recent government shutdown.

The Economic Outlook Group’s Baumohl feels that although impossible to quantify, the size of the underground economy could be as high as 10% of GDP. If legally accounted for, this $2 trillion would add another 10% to disposable income data in the U.S., and add a whopping 25% to government tax revenue.

Cebula feels that it would be impossible to collect tax on these transactions, however. First, because these transactions leave no paper trail and, in many cases, are done by people that the government doesn’t even know exist, it would be hard to find them. Second, even if uncovered, the taxation would be very short-lived. “In theory, if we were to tax it,” he added, “the behavior would stop, so there would be nothing to tax. And many illegal immigrants would just leave.”

In other words, trying to go after these people wouldn’t necessarily boost tax revenues very much, but would help curtail illegal activity and reduce the illegal immigration problem? Sounds like a step in the right direction.

However, Cebula’s argument fails to take into account the fact that plenty of the underreporting is done by businesses and households who, rather than get caught and pay penalties, might decided to improve their reporting record. That includes the dog groomer or handyman who doesn’t charge you tax if you “make the check out to cash.” He’s not going to turn away business; he’ll just do more of his business on the books. Maybe his prices will go up a bit in the short run, but they’ll eventually settle at what the market will bear, or he’ll find another line of work. So, theoretically, some of the tax gap will be at least partially recouped.

People who work off the books are hurting themselves in both the short and long terms. They’re not paying into Social Security or receiving health benefits. They can’t report abusive employers to authorities. They don’t participate in financial markets to build up investment income nest eggs. This is ultimately a drag on economic growth, which will hurt the retail industry.

The underground economy disfavors law-abiding people and shifts liabilities to future generations. Allowing businesses to get away with cheating makes it harder for legitimate ones to compete. The reduction in workforce participation puts upward pressure on labor costs, and places honest retailers, who collect and remit sales tax and abide by employment laws, at a price disadvantage.

The IRS claims to lack the resources to go after the tax cheats, which only makes the problem worse. When there are fewer police cars on the roads, more people speed. But how could it not be cost-effective to enforce compliance? When such a huge amount of owed taxes is not being paid, it shouldn’t take long for an IRS agent making $60,000 a year to earn the agency back his salary. We can’t afford to not force compliance. If successful, it might eventually lead to lower income tax rates for all which, as we know from history, tends to stimulate economic growth.

We need fewer regulations and red tape for businesses and households who employ people, and better enforcement of (simpler) tax laws. We need politicians to worry less about getting re-elected, and more about increasing government efficiency. And we need a level playing field that rewards success and honesty, punishes criminals, and helps people who really need help. Without these things, neither the free market nor democracy works.

LIDL Defies Odds, Thinks America

Robin_Report_Sep2013_stock7Are they Nuts?

Could it be that that Lidl executives have taken leave of their senses? Maybe so. They’ve announced plans to plant a large number of stores in the US, notwithstanding its overseas industry peers’ wretched record of failure in the States.

Lidl is the mammoth discount food retailer based in Germany. There can be no doubt it’s a formidable force in European food retailing. With annual revenues of roughly $80 billion and about 10,000 stores in more than 20 countries in both Eastern and Western Europe, it’s probably the largest pan-European food retailer of all.

Yet, the failure of other European food retailers in the US surely must give Lidi executives pause. The most recent downfall came when UK-based Tesco threw in the towel and decided to cut short its five-year-old bid to establish its Fresh & Easy format in the western US. Tesco lost in excess of $3 billion in startup and operating losses. Tesco isn’t alone. Other European operators have tried to enter the US without any success. They include Carrefour, Auchan, Leclerc and 3 Guys. All are long gone. [Read more...]

The Home Run

photo-11 Don’t look now, but Wall Street is actually loving home furnishings retailers…finally.

Many of the stock prices of pure-play public retailing corporations that specialize in selling home furnishings —Bed Bath & Beyond, Home Depot, Pier One, Williams Sonoma, Ethan Allen—are at, or near, their recent historical highs.

Restoration Hardware, which went public only last winter after years of struggling to right itself financially, has nearly doubled in price in six months and

people are lining up for the company’s next stock offering. Even the recent poster boy of retailing disaster and disarray, JC Penney (née JCP) has seen its stock run up over the past two months by almost a third. And it’s not been on the departure of retail savant Ron Johnson or the return of Magic Mike Ullman, but on the speculative success of the re-launch of the store’s home department.

All of which begs the question: What’s up with that?

OK, first take the recent run-up in home store share prices in the context of the overall stock market. The Dow has been breaking records on a regular basis for much of the past year. Even as the overall economy continues to slowly recover and unemployment remains a huge drag on consumer spending, Wall Street is riding high as the place where people with money…well, put their money. [Read more...]

Mike Gould, Unplugged

Michael_Gould_RRAn Interview with Robin Lewis

Robin Lewis What do you think about the economy, how do you think it will be for the rest of the year?

Mike Gould I’m cautiously optimistic, but I’m always cautiously optimistic. You know, we’re in a business that if you’re a retailer and you’re not optimistic, you’re not a retailer. It doesn’t work. One of my beliefs, and one that I always tell the Bloomingdale’s team, is that my role is balancing hope and reality.

Where are our opportunities that are driving the business, and what is the reality of the moment? So to me, I think there are some really bright things in the economy right now. But I also think it goes back to the great comment by Charles Swindoll who said, Life is 10% what’s given you; 90% how you want to deal with it.”

For example, let’s take last March. It turns out to be the coldest March we’ve had in, I don’t know how many years, up against the warmest March in 100 years, a year ago. All right, that’s the 10% given us. So do we want to talk about that? Do we want to complain about it? It won’t do us any good. But that’s the 10%. So how you want to deal with it, that’s the 90%. So what do I think? I think there are so many good things out there right now. The Stock Market is obviously, touch wood, in terrific straits. The S&P is at an all-time high. The housing market has had an incredible comeback. Our car sales are at a high point over quite some period of time; so, you have to say there are a lot of good things going on. [Read more...]

The Red, White & Blue – and Green

CottonplanetThe Cotton Incorporated 2013 Environmental Survey reveals that more than 50% of U.S. consumers identify themselves to be “green”. And, although participation in basic household environmentalism has shown only incremental growth, higher income consumers constitute a markedly greater level of engagement. Survey data indicate that personal income and larger economic concerns are changing the ways in which consumers perceive and participate in environmental activities. Several factors, including a significant increase in consumers’ pursuing apparel made in the U.S.A, and apparel made from natural fibers, suggests that these are emerging as new forms of environmental engagement.

“It is clear that consumers are aware and concerned about the environment,” says Kim Kitchings, VP of Corporate Strategies and Program Metrics at Cotton Incorporated, adding that the majority (60%) of survey respondents say that they often think how their actions affect the environment. “What is less clear to them is the cost of making a difference.”

Kitchings points to five years of data showing that participation in relatively low- or no-cost household environmentalism, including recycling, conserving water, and investing in energy-efficient appliances, is consistently greater among consumers with higher incomes. The divide is also seen in the 34% of consumers who say they put effort into finding environmentally-friendly apparel; that figure jumps to 40% among consumers making $75,000 or more per year. [Read more...]