J.Crew, Neiman Marcus, JCPenney. In May, the whispered demise of some of America’s most storied retailers abruptly became a reality with a final push from Covid-19.
With the coronavirus pandemic ravaging US apparel and accessories retail sales (in April revenues fell 88 per cent according to the US Census Bureau) and traditional bricks-and-mortar retail already struggling with too many stores, heavy debt loads and little digital presence, the future of the middle market is likely to be radically different.
While luxury stores like Barneys and cheaper fashion chains like Forever 21 have struggled, the mid-market sector has seen a particularly strong decline. According to Deloitte, between 2012 and 2017, revenue at US premium retailers and at price-based retailers increased 81 per cent and 37 per cent respectively. In the same period, mid-market retailers saw a mere two per cent increase. Specialised direct-to-consumer brands, in the same price range but more aligned with consumer tastes, have eroded the relevance of traditional mid-market retailers among customers, says Dana Telsey, CEO of Telsey Advisory Group. Other mid-market retailers have resorted to excessive discounting, undermining their image and value.
So what will the future look like?
Market consolidation and emphasis on value
While Covid-19 will worsen America’s wealth divide and significantly accelerate the bifurcation of retail and spending, mid-market as a price category will continue to exist. But it will face a shrinking and more discernible consumer base.
One of the trends expected by Bobby Stephens, partner and principal analyst for Deloitte Digital’s retail and consumer products practice, is more consolidation, with big and diversified enough players making the most of the downturn. “There is probably still room for one or two of those retailers to survive, assuming that the vast majority of their competition closes their doors,” says Steve Dennis, founder of SageBerry Consulting. “But, you are talking about grabbing a lot more of market share in a shrinking pie.”
The traditional mid-market retailers left, lacking a clear value proposition, are unlikely to catch much of the dollars that consumers will decide to spend, even when the situation normalises. “I don’t think that the bang for your bucket is there,” says JB Osborne, co-founder and CEO of brand agency Red Antler. “People will be more likely to buy one quality item or a bunch of cheaper items versus a few things that are pretty good but not as exciting.” In particular, he sees customers investing in brands with a mission story behind them or a “more thoughtful idea of why they exist”. Similarly Vic Drabicky, founder of media company January Digital, sees customers choosing to spend on brands that aligned with their values during the crisis, by supporting health workers for example, if the economic situation allows for it.
Robert Burke, founder of consulting firm Robert Burke Associates, points to Vince as a brand that has seen good results by investing heavily in direct-to-consumer retail. The California “understated luxury” brand, whose dresses rarely pass the $450 mark, increased gross margins from 46 to 50 per cent in the last three years as a result of its direct-to-consumer investment.
A question mark remains around models like resale or rental, which have seen a growth in popularity pre-Covid-19 but could now be penalised by health and safety concerns. “There is still a health versus price or convenience trade off there that I just don’t think anyone is ready to make a real prediction on,” says Deloitte’s Stephens. For Osborne, resale and rental are both perfectly situated for a recession economy, allowing consumers to add new items to their wardrobe with less impact on their wallet.
“The brands that are really positioned to capitalise on these new consumer behaviours are the ones that have meaningful stories to tell and can deliver a great product at a more affordable price,” says Osborne. “That is really dialled in for where the economy is going.” He points at sustainable footwear brand Allbirds, whose shoes are priced between $95 and $135, as an example. (The brand is Red Antler’s client.)
A shrinking middle-class consumer
Debt, discounting, slow digital adaptation and changing consumer habits all played a role in the decline of the American mid-market retailer, but the main cause of the sector’s demise might lie in straightforward economics and the slowly hollowing out of the US middle class over the last decade. “There has been really no discernible discretionary income growth for 80 per cent of US consumers in the last 10 years,” says Stephens.
Much of the income growth in US households has been absorbed by high-income households, with the top 20 per cent seeing its income growing 1425 per cent more than the lowest ones in 2016, according to Deloitte. At the same time, non-discretionary spending on healthcare, education, food and housing has increased the most for those at the lower end of the spectrum, squeezing the amount left for discretionary spending.
While a selected few consumers at the higher end of the scale have moved upmarket, committing to fewer purchases with higher value, most consumers, increasingly concerned with price, have shifted towards off-price, fast fashion and budget retailers. “We have really seen most of the US consumer base having to make some choices around where they are going to spend their discretionary income, which had a profound impact on mid-market, slightly upmarket apparel and fashion,” says Stephens.
Coronavirus and its devastating economic effects are likely to accelerate this process. Since March, more than 38 million Americans have filed for unemployment as non-essential retail remains closed in multiple states and jobs are affected by the health crisis. A lack of income and economic uncertainty have led consumers to curtail spending and up their savings, with the saving rate hitting 13.1 per cent in March, the highest rate since 1981. GDP fell 4.8 per cent in the first quarter of the year, with personal consumption dropping 7.6 per cent. JP Morgan expects real GDP to fall 40 per cent in the second quarter.
With the recovery of the US economy unlikely to materialise before the end of 2021 and income uncertainty growing, most consumers will continue to cut discretionary spending altogether or reallocate it to lower-priced options. “When discretionary income is constrained for the majority of consumers, it tends to push people down the price point ladder,” says Dennis.
Deloitte’s Stephens sees the consumers continuing to shift towards off-price, established online pure players and mass-market retailers, especially the ones that combine private labels with “essential” goods as they allow them to make all purchases in one trip. Gabriella Santaniello, founder and CEO of independent retail research firm A Line Partners, believes consumers will continue to hold off spending even as retailers reopen in the country.
“We are hearing from all different retailers that people seem to just be holding on to their money for the most part right now as there is a lot of uncertainty,” she says.
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