End of year recaps and future predictions are around every corner this time of year, so it gets really challenging to view an industry as closely watched as is retail without sounding pompous or ignorant. At the risk of simultaneously achieving both, I’ll share some ideas that hopefully take the conversation beyond the obvious and the expected and probe impacts of a second and third order. I’ll attempt to give a global picture; however, given the perch from which I write, my U.S. bias may be forgiven (or just tolerated). This will not be your typical or prescriptive top ten list, but one that may provoke some new ideas, raise even more questions, and ultimately enrich our collective understanding of the big picture in global retail.
In 2011, retailers had to deal with growing “customer power” whether that was in the form of greater price transparency, wide range of purchase and delivery choices, or in sharing their shopping experiences and product performance via social networks. Additionally, we can look at aggregate examples of such power vis-à-vis miscalculated corporate decisions intended to enhance revenues or profitability: Netflix dropped plans to separate its DVD rental operations from its internet streaming services; Hewlett-Packard flip-flopped on spinoff of its PC division; Bank of America nixed plans for a $5 monthly fee on debit-cards; and, Verizon reversed its decision one day after announcing a $2 convenience fee for payments made online or over the phone by that company’s subscribers. Customers initiated petitions on change.org to voice their opposition and influence corporate and government decisions. As more people – globally – turn to social activism, we ought to expect 2012 to witness more flexing of such “customer power” in this age of corporate and governance transparency. Somewhat related to this trend is another linking Tahrir Square and New York City’s Zuccotti Park in Time Magazine’s Person of the Year, The Protester.
U.S. Occupy Movement and the Middle Class
Although for most people the protests in the Middle East, Europe, and across the U.S. in 2011 were events to watch and read about and even consider as ‘fringe,’ such populist events increase awareness of social inequities (Occupy Movement), community and social unrest (protests in Spain, Greece, Italy, Russia, England,..), and even calls for regime change (Tunisia, Egypt, Libya, Yemen, and elsewhere..). They also do become all-consuming for those involved as well as tend to spill into mainstream society in unanticipated ways. The institutionalization of links between government/politics and financial institutions/big banks will come under greater scrutiny in 2012. However, specific to our purposes here is how will these effect the middle class after several years of high unemployment, continuing home foreclosure, and tight consumer and small business credit markets while at the same time news of CEO severance and retirement packages echo continued payouts in tens or hundreds of millions of dollars.
As this conversation enters mainstream narrative (consider upcoming U.S. presidential elections), what might it mean to corporations in general and retailers specifically: from challenges to traditional corporate personhood to how/where retailers’ source, distribute, and sell goods (holistic sustainability). Will this continue to also feed greater consumer awareness and focus on healthier life choices (locally-sourced goods, certified organic, non-GMO, Fair Trade, etc.)? And if so, how might retailers respond? Will this have any impact on corporate governance (half of shareholder resolutions in 2012 are expected to be sustainability-related)? How might the diffusion of the values captured by the Occupy Movement impact unfolding corporate cultures and future consumer behavior toward big brands and retailers? The debate over the middle class – the backbone of the U.S. economy and driver of that country’s GDP – will be very real and retail-relevant in 2012: “If young people don’t get good jobs with good prospects, they put off marriage, they don’t buy homes, they don’t shop for appliances and furniture. In short, they reinforce the stagnation of the consumer economy.” (Michael Hiltzik, LA Times).
Asia Rising – Chinese and Indian Mega-markets
China’s 1.3 billion and India’s 1.2 billion people represent more than 1/3 of our global population. Growth in each of these countries is translating to higher incomes with rapid growth of urban and affluent middle class, especially in the case of China. Analysts at the UK-based Economist magazine estimate that China will not only overtake the U.S. in retail sales by 2014, but will become the global GDP leader in absolute terms by 2018. China uses as much steel as the U.S., Japan, and Germany combined and has plans to build 36 million subsidized apartments by 2015 to ensure affordable housing and to cushion construction slow-down. Approximately 1% of China’s population is able to buy the usual goods of the ‘middle class’ such as cars, computers, appliances, furniture, etc. but that number can easily be doubled to cover urban-dwellers that may meet a looser definition of middle class. According to the Conference Board, today about half of the middle class is in developed countries however, over the next two decades nine out of ten of the middle class will be in developing countries with China and India capturing two-thirds of that growth.
Despite a desire to pursue modernization of its retail industry and related infrastructure, India has seesawed politically in opening up (somewhat) the country’s large and expanding retail market to non-Indian investments from companies such as Walmart, Carrefour and Tesco. In the last two months of 2011, India announced (with caveats) and then suspended decision to allow for majority ownership by non-Indian companies for multi-brand retailing due to popular push-back. The fragmented retail market in India is expected to nearly double from current levels to $850 billion by 2020. In either market, retail success will require adapting to local conditions and culinary tastes. Expect in 2012 for more investments by international mega-retailers in those two countries since lack of (or minimal) engagement will be considered a higher risk than getting in and getting on despite inherent political or economic uncertainties. In 2012, the economic power shift to the east and the developing world will pick up much steam.
Change is Inexorable
It is extremely difficult not to view equilibrium as the normal state, to expect the status quo to continue indefinitely, or to simply project the present into the future. However, Complexity and Change: the Retail Industry’s DNA we can count on in life and in business. How could one imagine in the 1940’s to early 1970’s that any other retailer could unseat Sears & Roebuck from their lofty perch atop the U.S. retail arena? By 1990, not only had Sears lost its number one position to the upstart Walmart, but it had even fallen behind Kmart (formerly Kresge’s). Today, Sears Holding (formed by the 2005 Kmart acquisition of Sears) has fallen to the number 10 position in the U.S. and continues a slow decline with poor same store comps over the holidays that led to store closing announcements. That in 2003, Walmart had become the largest global corporation (by revenue) and for the most part has maintained this position since then, dropping no further than 3rd place behind energy companies on a couple of occasions. Today, Walmart remains about 3.5 times larger than the next global retailer (Carrefour).
As I consider the grocery segment in the U.S., I continue to marvel at the disparity between the major national chains with the traditional layout, branded products, and operations versus retailers such as Wholefoods’ redefinition of supermarket food shopping or Trader Joe’s with their near 100% private label merchandise strategy. On New Year’s-eve my wife and I went shopping for some last minute groceries and stopped at one of the national chains (around 40,000 square feet or 3,680 square meters) around noon and found two registers open and three people waiting in each line. Then we stopped at Trader Joe’s, less than a mile from our first stop, and it was pandemonium: the parking lot was packed, they were almost out of shopping carts, the 8,000 or so square feet (735 square meters) were buzzing with shoppers, ten registers were open and each with three to four customers deep. How can the former compete with the latter? Change is inexorable; past successes are no guarantee of future ones. Business models, assortment decisions, and formats must be constantly re-evaluated against the day’s realities and a vision of the future shopper and the shifting algorithm for delivering value and capturing profits.
I’m reminded of the 1979 song by Neil Young and Crazy Horse, “Rust Never Sleeps,” as a metaphor that those who don’t change and bring forth new vitality will become obsolete; so similarly the path of change marches on regardless of who or what is along that path but one must take action to remain relevant. What will brick and mortar retailers do to counter ‘scan and scram’ shoppers? Can they integrate digital and physical worlds as the consumer is actively doing today, thereby improving leverage of their existing assets? How will retailers tailor their offerings to busy professionals and keep them from spending precious time searching for the ‘right’ deal? How can they make the in-store experience exciting and energizing? How will retailers pursue growth when most of that will be in developing countries with own unique local traditions and operations? Excluding Walmart, U.S. retailers do not appear in last year’s top ten list of global retailers until number 6 (Kroger); will U.S. mega-retailers begin serious pursuit of international growth opportunities in 2012 or will that continue to be the realm of European retail giants, and future Asian chains?
Some Final Thoughts
The above trends bring together various global and regional social and economic trends together as I attempted to demonstrate how these – in conjunction with the Goodbye Panic Room, Hello Wild Blue Yonder: What a Difference a Year Makes! – constitute challenges and opportunities ahead for any consumer-driven industry. Not only do retailers have to deal with global population demographics, social movements, and government policies impacting their customer base (and own operations), but retailers of all sizes continue to rely on healthy and confident financial markets for access to credit and capital needed to fuel their future growth (and survival). How will banks and financial markets view the same risks facing retailers and society? What will they find acceptable and adequate in return? In 2012, as they’ve done before, retailers will work to improve key performance measures and seek sustainable growth through investment programs in technology, systems, and people while facing once-in-a-generation social and political headwinds. Mayan end of world prophecy notwithstanding, Wall Street Journal’s online Sentiment Tracker, powered by NetBase and representing 161,000 posts on Twitter and Facebook, offers some optimism as 70% are done with 2011 and hopeful about an upbeat 2012.