By REX NUTTING
http://www.marketwatch.com

Retail goods are cheaper, but we’re spending the savings on expensive health car

The brick-and-mortar retail industry is in crisis. For many old-line retailers, sales and market share are plunging fast. The most obvious explanation for their distress is the rise of online shopping, but some analysts mistakenly point to another trend: “Shoppers are choosing experiences over stuff, and that’s bad news for retailers.”

Instead of purchasing a couch, we’re going to Paris! Or maybe buying avocado toast.

One of these hot takes in the media even came with a provocative (and completely erroneous) graphic claiming that experiences now account for 67% of spending, compared with just 3% for clothing.

The reality is more mundane: We are spending a smaller portion of our budget at the mall, but the money we’re saving is mostly going for the most expensive health care in the universe.

It’s probably true that many of us yearn for something more than a pile of possessions that will never love us back, but the cold, hard truth is that Americans are purchasing more things today than ever before — more vehicles, more clothing, more housing, more health care, more financial services, more food and more electronics. More of almost everything, including couches and trips to Paris.

If you’ve heard these stories about the shift away from material things and toward experiences, you might be shocked to learn that retail spending hit a record $1.4 trillion in the second quarter. Retail spending has increased in 30 of the past 33 quarters. We still love to buy stuff.

The problem for traditional retail isn’t that we’ve fallen out of love with filling up our lives and our houses with things. (It’s still true, as comedian George Carlin said, that the meaning of life is finding a place to keep your stuff.)

The problem for retailers is that prices are falling for many retail goods such as clothing, electronics, appliances, furniture, tools, luggage, toys and many other things. That is killing the bottom line for traditional retailers, who get less revenue per unit sale but still have to pay the fixed costs of rent and payroll.

For consumers, on the other hand, falling prices are a godsend, because we can buy even more stuff and still have some money left over to spend on other things.

It would be great if we really could afford to shift our spending from the boring things we need to the fun things we want, but in reality most of the money we are saving due to cheaper clothes and cheaper gasoline is going for goods and services that no one would call fun: hospital bills, financial services, rent, and prescription drugs.

$1 trillion a month
An incredible amount of money is spent on personal consumption — more than $1 trillion every month. A little less than half is spent on stuff at retail stores, and much of the rest is spent on housing, health care, financial services, education, communication and other services.

Over the past 20 years, there has been a revolution in our spending patterns. Since 1997, Americans have shifted a significant portion of their spending from physical things like autos, clothing and petroleum to services like health care, rent and internet access.

Twenty years ago, for instance, 5.4% of total personal consumption expenditures went for motor vehicles and parts, but today that accounts for just 3.6% of consumer spending. Clothing was 4.5% of our budget in 1997; today it’s 3%. We spent 6.6% of our budget on groceries in 1997, but only 5.3% today.

On the other hand, spending on health-care services was 14.5% of consumer spending in 1997 but has grown to 16.9% today. In addition, prescription drugs have gone from 1.5% of spending to 3.4%.

We are spending a bit more on foreign travel, entertainment and eating meals at restaurants compared with 1997, but these categories still represent a tiny fraction of our total spending.

It’s quite true that annual spending on the experience of foreign travel has risen by $104 billion since 1997, but spending on home furnishings like couches and washing machines has increased even more — by $110 billion. And spending on prescription drugs has risen by an incredible $374 billion.

At the margin, we are spending a little bit more on having fun than we did 20 years ago, but most of our money still goes for necessities, not experiences.

Published in Retail News

The retail world will change more in the next twenty years than in all of the history of modern day retailing. This is driven by the seismic shift in consumers’ shopping habits: they’re filling smaller baskets during each trip to the store; different categories drive consumers to different types of stores; and the ability to shop online for groceries is more prevalent than ever before, with the advent of services like Amazon Fresh and retailers boosting their digital fulfillment efforts.

On the retail front, channels are converging. What was once your traditional drug store may now be viewed as a convenience destination. Up against the likes of Blue Apron and Amazon’s filing for a meal kit patent, traditional supermarkets are crafting their own ways to compete in the meal kit game. Big box mass merchandisers are now competing with discount and dollar stores.

As the U.S. grocery industry continues to navigate the complexities of emerging channels like discount grocery retailers, it’s worth noting how these dynamics played out in Europe and assess if their success across the pond is a precursor to what we might see stateside. Across the pond, nearly three-fourths of market share was consolidated into the region’s top four retailers. And what’s more, over the last eight years, the top four’s share eroded from 73% to 67%, while the newer discount retailers that encroached on the market nearly doubled their share.

However, the European market where the likes of Aldi and Lidl dominated and reigned success is a very different world than the U.S., which is facing a different set of challenges.

Discount grocery retailers are typically smaller format than traditional supermarkets, though their U.S. counterparts are twice the size of their European stores which estimate 10,000 square feet. Still smaller than traditional stores, that means a limited assortment of products on the shelves. Despite this limited shelf space, discount grocery retail stores are growing. Between 2011 and 2016, store counts increased 17.6% across the U.S. Though not apples to apples, the growth of discount retailers in Europe could serve as a precursor to what we might see in the U.S. in the near future. Some may be wondering whether this channel could potentially rise to capture a significant percentage of the U.S. grocery marketplace, putting pressure on other retail channels on how to compete.

The growing presence of discount grocery retailers is sure to create (or add onto) the domino effect that is causing traditional grocery retailers to rethink their growth strategies to remain relevant. As the industry continues to navigate these effects, there are five key questions that retailers should be asking themselves today to prepare for tomorrow:

Retail Channel Dynamics: Where Are Consumers Shopping?
Gone are the days when consumers shopped for all of their groceries at their neighborhood supermarket. Today’s on-the-go consumer can now pick up deli prepared meals at the drugstore or purchase all natural beverages and snacks at convenience stores, something that was once limited to niche natural specialty stores.

According to Nielsen Homescan panel data, grocery shopping trips grew the most at discount grocery retailers (2.9%) compared to other brick and mortar channels in the last year. However, basket sizes at discounters slightly declined 0.3%.

This decline in spend per trip could be the result of many factors, one of which is consumers’ on-the-go lifestyles and the growth of sprawling urban areas where households may not have as much physical space to store packaged items. Retailers must focus on what drives consumption—including product variety, package sizes and store formats—in order to remain competitive.

Pricing Pressures: Combating Price with Value-Adds
Downward pricing pressures are lowering the growth ceilings for all retailers, driven in part by the looming threat of discount grocery and online retailers. That being said, value is about more than just the lowest price. According to a Nielsen 2016 retail growth strategies study, consumers rate high-quality produce (57%), convenient location (56%) and product availability (54%) as more influential in store-selection decisions than the lowest price.

Consumers are looking for good deals regardless of their economic circumstances. And indeed, for many consumers, deal seeking is the thrill of the chase. Sixty-eight percent of Americans say they enjoy taking the time to find bargains, and discount grocery retailers have hit the nail on the head to provide the bargains they are seeking at price points that meet their wallets.

Investing in Store Brands: Private Label Driving Highest Growth in Discount
For many retailers, but particularly deep discount retailers, store brands (or private label) play a strategic role for winning over shoppers from other channels. Compared to other major retail channels, discount grocery retailers have more than twice the share of store brand dollars (51%), compared to only 15% store-brand dollar share in mass merchandise and 20% in supercenters. read more

Chris Morley, CONTRIBUTOR
www.forbes.com

Published in Retail News