Consumers rule retail

Opportunity is knocking. Are retailers ready?

Happy young couple with shopping bagsIt’s no secret that in the retail race, the consumer is driving. Consumers want what they want when they want it, and retailers have worked hard over the years to know what that is and fill those needs.

The year 2018 has presented exciting new factors that could have a profound impact on consumers and the retail industry. Last year’s tax legislation is a big one, resulting initially in more disposable income for consumers and more confidence about spending. The new tax law not only lowered individual’s taxes, but has led to wage increases and unprecedented bonuses from employers to a large number of employees. The stock market, too, has upped 401k savings and left consumers with a sense of security and more willingness to spend. Are spending patterns, indeed, going to be dramatically different from the past?

These considerations leave retailers with a lot to think about in the wake of the strong, heartening 2017 holiday season. And they may need to adapt quickly if interest rates rise and new tariffs result in a trade war, as some predict. Right now, retailers may well be pondering questions such as these:

  • Are they going to do anything differently to gain more market share, banking on an uptick in spending?
  • What, if anything, must they change right now (spring season), and how is the strategy for the fall season and beyond affected?
  • Are they positioned to capture a change in spending? Even consumers’ increased income does no good if a retailer can’t deliver.

“Retailers have invested over the past few years in omni-channel capabilities, building their infrastructure and cutting expenses,” said Kevin Kelly, partner and National Retail Industry leader at Grant Thornton LLP. They’ve also invested heavily in studying customer patterns and preferences, he said. “Retailers connecting with their customer base should continue to reap the benefits of all the investments they’ve made so that optimism and performance will continue into 2018 and beyond.”

The tax cuts could present a spending boost that helps retailers. In fact, “the tax cuts and recently increased spending increases from Congress will push GDP growth close to the 3% threshold in 2018,” according to Grant Thornton’s Chief Economist Diane Swonk in her February Monthly Economic Outlook report. Swonk says consumer spending will accelerate in response to rising wages and increased access to credit. Yet in her March report, she said tariffs and the threat of a trade war could undermine tax-cut gains – again indicating that savvy retailers must be attentive to developments.

So what are retailers to do to take advantage of forces impacting their business in the near term? “Pay close attention, get smart and get creative” says Kelly. Sometimes retailers need to get back to basics and focus on the product, its availability and the execution of a strategic vision.

Here are but a few examples of things retailers, small and big, should be considering:

Merchandise planning and flexibility are key At the core of a retailer’s ability to take advantage of this new consumer purchasing power is how it will use available information to make merchandise decisions in the immediate, short and long term. For example, early sales and customer analytics could be used during the spring season to effectuate changes in pricing, marketing and promotional plans. In some cases, accelerating merchandising receipts and possibly reordering merchandise and/or chasing merchandise receipts to optimize open-to-buy spend on merchandise to which consumers are responding could be achieved.

Says Kelly, “We are seeing a number of retailers focusing on their merchandising plans by increasing planned retail prices and going deeper and wider in merchandising assortments.” Retail price markdown plans should also be modified as appropriate, which is a normal activity throughout the season. Similar merchandising considerations should take place as the fall and 2018 holiday seasons unfold. The difference here is that there will be more information to be evaluated and more time to accomplish changes in merchandising plans. In addition, merchandising plans and buying activities for spring 2019 can be adjusted in the normal course of annual planning activities for next year.

Hone spending plans, invest wisely  Additional changes in 2018 plans should also be examined. Marketing spending plans (including spending on multiple channels, like social media, mobile and display) should be addressed as appropriate to connect with customers in a more aggressive way. Investment in store labor also figures into the ability of retailers to execute on a strategy to differentiate themselves with great customer service. Real estate decisions, although longer term, may also help retailers to maximize their sales across all channels given the relationship to stores and online.

“I do think we will continue to see more store closings,” Kelly says. “Many leases are naturally coming due this year, next year and the year thereafter, and retailers are making prudent decisions to walk away from locations that don’t perform well, or renegotiate lease terms. And if they don’t get terms they’re looking for, there will be more closings.” As noted above, if performance in early 2018 and 2019 improves as anticipated, how will retailers respond when further evaluating their long-term views on real estate?

Kelly doesn’t view more closings as entirely bad news. “The level of real estate and stores per capita in the U.S. is so far beyond other developed countries. It’s so disproportionate that even with the uptick, there’s still going to be more store closings,” he said. “But that’s healthy. The stronger stores are going to survive and do well, and many locations will be downsized just to be more efficient and effective as retailers optimize their real estate portfolios.”

Retailers make decisions each and every day that weigh risk and opportunity. “One CEO referred to retailing a few years ago (in a tongue-in-cheek way) as like going to a casino every day and placing bets,” says Kelly. New-found consumer spending capacity and confidence may improve the odds this year and beyond for retailers, particularly those coming off solid 2017 performances. Studies have shown that retailers overall are feeling bullish about the future. Kelly believes stores remain invaluable, commenting, “They offer an immediacy and a sensory experience, as well as an authentic, personal connection that online sales can’t match.”

Kevin Kelly
Partner and National Retail Industry leader
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