Introduction to the Retail Industry
Retail, with nearly 15.4 million employees in America alone (more than one out of 10 workers), is one of the largest industries in the world. Retailing was making a strong comeback in late 2014 in the United States, after a dismal drop during the recession of a few years back, while retailing has, until recently, been a significant growth industry in emerging nations including China, India, Mexico and Brazil.
Retail sales in the U.S. totaled an estimated $5.321 trillion during 2014, according to Plunkett Research, up about 5% for the year, and up dramatically from only $4.0 trillion during 2009. Total sales were $5.068 trillion in 2013 according to the U.S Census Bureau. (Sales at stores selling general merchandise, apparel, furniture and specialty items totaled $1.2 trillion in 2013. This segment is referred to as “GAFO,” which is an important distinction. In contrast, retail sales of all types are considered to include automobiles, gasoline and restaurants.)
Factors that will impact the retail sector during 2015 in the U.S., Europe and most Developed Nations:
· Surveys show that consumers are focused on increasing their savings and paying down debt. This means that a large number of consumers wait to purchase until they can pay cash. When consumers do borrow, today’s low interest rates will be a great benefit.
· In the U.S., a significant improvement in the employment rate and an improving economy, as of late 2014, point to a good retail environment in 2015. Likewise, a much improved economy in the UK looks good for retailers.
· Consumers will benefit greatly from reduced gasoline prices worldwide. For example, U.S. households that drive their cars substantial amounts could enjoy reduced gasoline expenses of $500 to $1,500 or more yearly. At the same time, consumers in nations that rely greatly on oil exports will be hurt (e.g., Russia).
· High stock market values and recovering house prices have created a “wealth effect,” that has improved consumer confidence.
· A continuing slow economy in much of Europe points to a tough time for retailers there. The former fast-growth markets of China, India and Brazil are likely to face slower economic growth and difficult retail environments.
· Price-sensitive consumers will continue to be more conservative. When they do spend, they want to feel like they are buying merchandise that is fairly priced, if not a significant bargain.
· Retail purchases via e-commerce are growing at a very strong rate worldwide, as more consumers have access to fast Internet connections and e-commerce firms enhance their product offerings and delivery options. Store-based retailers will face ever-greater competition from online sites, while traffic at retail malls will be disappointing.
Source: Plunkett Research, Ltd.
Competition among retailers has never been tougher. A retailer without a significant competitive advantage doesn’t stand a chance. Superstores are battling each other on every major corner, while Internet marketers are stealing customers from stores. Some consumers are using stores as showrooms where they can touch and feel the merchandise, and then making their purchases at lower cost online at sites like Amazon.com. Online selling at deep discounts is even making inroads into major consumer purchases such as jewelry.
Growth in online shopping has been driven by two factors. First, the number of fast Internet connections in U.S. homes and businesses leapt to nearly 97 million by the end of 2014, plus 235 million wireless Internet connections, which makes buying online faster and more interactive. Next, there’s the savvy marketing of online giants like Amazon.com (with more than $74 billion in 2013 revenues, up from only $34 billion in 2010, by far one of the fastest growing companies in the world), as well as the e-commerce efforts of traditional retailers such as Home Depot and Wal-Mart. These fast Internet connections are extremely important, even at the office, since a large number of workers take time out to shop online from their desktops. Globally, the number of Internet users has passed 2.9 billion.
Analysts at eMarketer reported growth in American e-commerce sales from $263 billion in 2013 to $304 billion in 2014. (These figures do not include online travel sales or sales of tickets to events.) By 2017 sales are expected to be as high as $440 billion.
Today, both retailers and their customers are much more conservative than they were during the long-term economic boom that ended in late 2007. Stores of all types have been seeking creative ways to cut operating expenses. Methods range from reducing the size of stores to lowering the employee count to reducing inventory exposure.
For affluent shoppers, sales of luxury items have made a good comeback at many stores in America. Until 2013, luxury sales had been surging in China, where high-end stores including Tiffany & Co., Hermes and Gucci have done very well. However, new leadership in the Chinese government is discouraging extravagance. While it was once very common for business people to present luxury gifts to officials, this practice has recently been curtailed, and conspicuous displays of wealth and luxury are discouraged.
Less affluent U.S. and European consumers are focused on seeking the best possible prices. This means that revenues have been strong at so-called “dollar stores” in America, and at other outlets that are known for exceptionally low prices. Elsewhere, many retailers, including department stores, are forced to offer special prices on a frequent basis.
Sales of private-label items are generally growing quickly. Overall, private-label sales (in supermarkets, drug stores and mass merchandisers) grew 2.2% to reach $112 billion in the U.S. in 2013, according to the Private Label Manufacturers Association.
Coupons have made a big comeback. Big factors in this growth include the financially challenged consumer and the use of advances in technology. Coupon distribution via cellphones has made a big impact. Also, the fact that consumers now use the Internet to search for and print out coupons caused significant growth. Another huge boost to coupon redemption is web sites that push special offers to members, such as Groupon. The success of this business strategy has led to a massive wave of coupon site startups around the world. It remains to be seen whether they can continue to lure retailers and restaurants to offer immense discounts and then split those discounted receipts with the coupon firms.
Over the long term, the most exciting markets in retail industry growth may be emerging nations, such as South Africa, China, India and Brazil. In China, many of the world’s leading retail chains have opened large numbers of stores and new malls have been developed at a rapid clip, even in remote cities. This retail trend in China includes middle-of-the-road chains such as Nike and Starbucks, automotive centers including car dealers and tire and accessory stores such as Goodyear, as well as the world’s top luxury retailers, including Chanel, Louis Vuitton and Fendi. The government in India is taking small steps to open up the Indian market to foreign retail chains, but it remains a difficult environment due to regulatory issues and supply chain problems.
In the U.S. and Europe, many businesses outside of the luxury field have repositioned themselves as providers of high-value, reasonably priced merchandise. Household product makers are emphasizing lower-priced soaps and detergents, or high-value larger packages. Even companies that were already known for reasonably priced goods have changed strategy to some degree. Many fashion-conscious women have become more conservative about the amount they are willing to spend on clothing.
Personal spending has shifted more toward goods and services offering quality, durability, affordability and lasting value, with less focus on the purchase of trendy items for fashion’s sake. Going forward, consumers will spend their money more wisely while using debt more carefully. Successful manufacturers, home builders, services providers and retailers will embrace this trend.
Meanwhile, during 2012-14, a surge in house values and stock market indexes created a wealth effect throughout most of America, along with Canada and other developed nations. This has encouraged consumers to spend a bit more, often on big purchases that they had put off during the recent recession, including automobiles, home remodeling and appliances. When consumers spend, they want to do so with confidence that they are using their money in a smart way, and they want to pay cash instead of using credit cards.
Plunkett’s Four Keys to Successful Consumer Products:
· High Perceived Value: The product must convincingly offer a high level of value and durability for the price, and give consumers confidence that their money is well and wisely spent.
· Quality and Utility as well as Fashion: Fashion will remain important, but quality will come first in the minds of many consumers. Products that offer quality, utility and fashion will have tremendous competitive advantage.
· High Brand Reputation above Style: The brand must stand for a company that clearly puts customer satisfaction and high value above all else. If the brand also stands for a firm with great styling, high social values, such as eco-consciousness, or other ancillary attributes, that’s even better.
· Cheap Chic Still Has a Place: If a company wants to win the hearts of fashion-conscious, as well as budget-conscious consumers, it must provide exciting style at a moderate price. If an entire business model is based on trendy merchandise with a short useful life, then the company must strive to offer very high value—for example, the very affordable fashions of such retailers as Sweden’s H&M, Spain’s Inditex and Japan’s Uniqlo, a company that has been so successful at selling bargain fashions that its founder is Japan’s wealthiest business person.
Perfect examples: Apple’s iPod and iPhone
ü High perceived value at reasonable prices
ü Quality, utility and style
ü High brand reputation
ü Absolutely chic
Next, let’s look at how these values can be applied successfully to retail stores.
Plunkett’s Four Keys to Successful Retailing:
· A High Value-High Quality Product Selection: Depth of selection is less important than a reasonably sized offering of products that the merchandiser has chosen because they consistently offer high value and quality.
· Very Competitive Prices: The goal here is to give the consumer confidence that the store faithfully delivers everyday low prices—meanwhile, managing the firm so as to allow the owners a viable profit margin.
· Superior Service: In-store help, follow up service, problem-solving, installation and repairs offered easily and quickly along with the ability to make returns and exchanges must be part of the package, with an absolute minimum of inconvenience to the consumer.
· Seamless Integration of Bricks and Clicks: Successful firms integrate their online endeavors with their physical presence in a manner that provides the highest possible level of convenience to customers.
Great example: Costco
ü Reasonable product selection, including quality store brands as well as name brands that have good reputations. Costco succeeds by carrying a vastly smaller merchandise selection than its competitor Wal-Mart.
ü Consistent, everyday low prices.
ü An easy-to-find, always-staffed customer service desk. Also, rules about returns are generous and clear-cut, “We guarantee your satisfaction on every product we sell with a full refund. The following must be returned within 90 days of purchase for a refund: televisions, projectors, computers, cameras, camcorders, iPod/MP3 players and cellular phones.”
ü An easy-to-use web site with in-depth customer service information. When desired, customers may order merchandise online but return it to a store; large items, upon request, can be picked up at the customer’s home for return.
Internet Research Tips:
· The National Retail Federation (www.nrf.com) offers a wealth of information regarding the U.S. retail industry.
· The International Council of Shopping Centers (www.icsc.org) offers the latest information on shopping centers, malls and retail trends.
Video Introduction to Retail Industry