At long last we have released our full 2015 Retail Trends Report.
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Retail Trends and Planning Report 2015
By Gary A. Wright
Holiday sales in stores should be on track for an increase of 4% over last year.
Consumers are in better shape financially. A declining unemployment rate and rising incomes are improving consumer confidence. Consumer debt is down and net worth resulting from a rising stock market and higher home values is up. Interest rates are still very low. The decline in prices of gas and heating oil will provide extra disposable income. And, pent-up demand will motivate consumers to spend more money this year.
Next year in 2015 we should see continued growth at a faster pace than 2014. The economy continues to recover. Overall leading indicators are trending up.Expect the Gross Domestic Product to be up 3.5% in 2015 from 2014.
Consumer sentiment is rising but is still considerably below previous levels in both 2000 and 2007. Inflation will advance but stay relatively low giving the Federal Reserve the latitude to keep interest rates low. Interest rates are expected to remain at current levels until the middle of 2015 when a slow rise is likely.
The value of the dollar is strengthening. This is resulting from economic expansion in the United States and relative weakness in many foreign markets. A strong dollar may result in opportunities for better pricing on foreign sourced goods.
Continued economic expansion makes businesses optimistic about the future. High profits have resulted in the accumulation of excess cash. Borrowing costs are still at record lows but executives also see an end to low rates. These conditions have combined to make improvements and capital spending now look prudent even though current sales may not justify the investment.
Economic conditions have tended to favor big business and are relatively more difficult for small business, less able to deal with new regulation, higher taxes and the health care law. Small businesses with less than 500 employees historically contribute all net new employment growth. The number of business start-ups has been declining in recent years. This is an indication of longer term challenges for the economy.
Trends that may hold back the expansion in retail sales are; rising healthcare costs, rising rents and mortgages, underemployment, slow wage gains, rising food prices and demographics. Demographic trends will be discussed more extensively later in this report.
Government spending is currently slowing. However, government spending will begin to grow again in the years ahead unless entitlement spending is curtailed.
The number of retired people is climbing. As workers retire their incomes decline, they reduce expenditures and begin to draw on entitlement programs. This problem will gain steam as the number of baby-boomers leaving the workforce accelerates. By 2029 it is likely to create a severe crisis. For the next few years, however, the economy should continue to grow.
Of course, several developments could derail this recovery. These may include inflation causing the Federal Reserve to raise interest rates rapidly, a larger than anticipated stock market correction, escalation of problems in the Middle East or Ukraine, an economic crisis in China or some completely unpredictable event. While these don’t currently seem likely, the risk is always present.
The retail business is changing constantly. Large chain retailers have been closing stores at an accelerated pace. Closings are driven by consumer demand. Internet shopping is one driving force. Changing demographics is another. Overall shopper traffic in retail stores is down about 5%.
Many large retailers stock a popular item in the store but refer customers to their website to view other similar items. Of course, this moves a customer onto the Internet where there are any number of options available and an even greater selection from multiple competitors. So, is the referral of the customer to a company website really enhancing the inclination to shop the Internet first, look at the competition and go to the store as a last resort?
The fact that some Internet companies can avoid charging sales tax is another incentive for consumers to shop online.
The price check program offered by Amazon is allowing consumers to check competitive prices in the store just by scanning a bar code with a cell phone. Then the customer not only checks price but looks at product ratings. This is discouraging many in-store purchases. Other price comparison sites are Nextag and PriceGrabber.
The importance of brick and mortar may be demonstrated by Amazon opening it’s first physical store location in New York City. They seem to recognize the importance of a face-to-face relationship with the customer and the many other advantages of a traditional store. Expect other Internet retailers to begin opening stores.
A number of retailers are now experimenting with allowing customers in-store pick up of orders placed online. The store is the most powerful selling environment. Using the Internet as a tool to build store traffic is a viable strategy.
Demographic shifts in society are having a far reaching impact on the economy and retail. The Baby Boom generation, born between 1946 and 1964, is retiring at the rate of 10,000 per day. This is still the largest generation.
As people age they tend to become more diverse in their lifestyle choices. They are less influenced by fads and mass market advertising than are younger consumers. They need fewer products since they are well past the household formation period of life when they needed everything at once. This results in market segmentation and reduces the influence of the mass market retailer.
Baby Boom retirements will not peak until the period between 2023 and 2029. Today the majority of this generation are still working, at the peak of their careers and are relatively wealthy, compared to the following generations. Their children are out of school and on their own. They’re moving from the suburbs into or near cities. Their expenditures in stores tend to be for higher quality products and service. This is resulting in a shift in opportunity for small retailers who are service oriented, sell high quality products, cater to a market niche and are in or around cities.
The Baby Boom is a wealthy generation but still worried about having enough money to last through their lifetime. As they retire and lose income they understandably reduce expenditures in retail stores. Expenditures in retirement tend to be for healthcare, travel, entertainment, eating out, and services rather than products.
By 2029 the majority of Baby Boomers will be retired but still alive causing a big problem for entitlement programs. Society will be faced with higher taxes, fewer entitlements or both and, of course, less will be available for consumption of consumer products.
Generation X, the baby bust generation born between 1964 and 1982, is significantly smaller and less wealthy. Their careers are peaking as they take over the top jobs from Baby Boomers but there are not nearly as many of them. They cannot be expected to replace sales lost as the previous generation stops spending. They are also worried about supporting the Baby Boom generation and not having enough for their own retirement. By 2030 there are projected to be only two working Americans for each person in retirement. In 1960 it was five working for each in retirement.
Generation Y, the Millennial Generation, born from 1982 to 2000, are slower to marry, slower to move out of parent’s households, slower to get jobs and more likely to have one parent households than earlier generations. This is a large generation. It is slightly larger than the Baby Boom, more tech savvy and likely to take advantage of the Internet for shopping. This generation is beginning to move into peak consumption years but is unlikely to replace sales in brick and mortar stores of past generations. It is producing babies and this will fuel growth in the children’s business for many years to come.
We are becoming a more racially mixed society. By 2060 estimates indicate the country will be only 43% white. Immigration rates are high and immigrants are generally less educated and affluent. However, it is interesting that the average income of Asians surpasses that of Caucasians. The number of interracial marriages is growing and becoming accepted in all parts of society. This is having an impact on retailers as they must adjust to growing diversity or pursue a focused niche in a diverse society.
An objective look at demographics leads to the conclusion that the market environment for brick and mortar retailers may be as good today as we can expect for a number of years to come. We have a window of opportunity that is likely to close as we begin to get near the time of peak Baby Boom retirements about 2026.
Copyright 2014 G.A Wright Sales, Inc.
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