The Times They Are A Changin’*

One of the benefits of having worked in the predictive analytics industry for more than 40 years is the ability to put current retail trends in perspective. There has been a significant amount of press during the past two years concerning the ongoing impact of e-commerce and other economic trends on the health of the retail and shopping center industries. Current headlines aside, how do these trends compare to prior events that have impacted the retail industry? Is this much ado about nothing, or a truly evolutionary (or revolutionary) period for retail?

The answer – this is by far the most challenging period in the past 40 years for the retail industry. There are several primary contributors:

  • e-commerce. No surprise here… e-commerce represents a fundamental change in the way that U.S. consumers gain access to a wide range of goods and services. The share of total retail sales (excepting automobile and gasoline service sales) accounted for by e-commerce has increased by more than 1,300 basis points over the past ten years (from 6.6% in 2006 to 19.8% in 2016). Given the traditionally thin margins present in the retail industry, e-commerce alone is an enormous game-changer.
  • Economic Bifurcation. The U.S. consumer base is becoming increasingly segmented into the “haves” and “have nots”. This has been a relatively slow trend, but is having a big impact on those retailers appealing to middle-income Americans. 

The reader should bear in mind that current retail challenges are occurring despite the fact that the U.S. has enjoyed an 8-year stretch of economic expansion (and counting) – the third longest such expansion in the past 70 years. The addition of a recession would prove even more challenging for today’s retailers.

Past challenges to the established retail industry pale in comparison. In particular:

  • 2007/2008 Economic Recession. The financial crisis that began in late 2007 was the most significant economic downtown since the Great Depression. However, despite the turmoil in the financial, housing, and automotive sectors, retail sales were not greatly impacted. When automobile dealers, non-store retailers, and food service operators are excluded, retail sales increased every year during the downturn except for 2007-2008, when retail sales dropped 3.8%.
  • Late 90’s Dot Com Outbreak. During the late 1990s, the explosion of “dot com” retailers was accompanied by predictions that brick and mortar retail was doomed. The internet site “etoys.com” had a capitalized value 35% greater than Toys ‘R’ Us the day after its IPO in May 1999, despite the fact that its sales constituted less than 1% of Toys ‘R’ Us sales. Most dot com operators during that period perished or were acquired (with the exception of a small startup called Amazon). In hindsight, the impact of e-commerce during that period had no immediate impact on U.S. retailing.
  • Energy Crisis. The combination of tightened petroleum supplies pursuant to the Iranian Revolution and tight U.S. monetary policy contributed to an economic downturn that lasted more than 1 year. While the resultant “stagflation” (economic stagnation + inflation) contributed to Ronald Reagan’s ascension to the White House, the impact on the U.S. retail industry was short-lived.

(The growth of chain retailers [and corresponding impact on independent operators] likely represents the previous trend that had the greatest impact on the U.S. retail industry. However, despite my kids’ claims to the contrary, I was not around to witness the beginning of that trend during my professional career.) 

* with apologies to Bob Dylan