Winning in U.S. Retail When Flat is the New Norm

Winning in U.S. Retail When Flat is the New Norm

The U.S. retail landscape, much like the media landscape, is fragmenting. Consumers have more format options than ever, and retailers are steadily re-configuring their footprints to meet the ever-evolving needs and desires of its new and prospective customers. The downside, however, is that many consumers are still reeling from the last recession, so spending and sales aren’t climbing the way retailers would like. In fact, they’re either flat or receding.

So if flat is the new norm, how can retailers make the most of the opportunities that do exist so they don’t find themselves overlooked or outscored? In short, retailers need to win with products that matter, are easily found within the store and deliver a discernable consumer benefit.

The Current Situation

First, let’s assess where we are. In the U.S., dollar sales are up just 1% over the past year, while unit sales have been flat. Before this year, sales were trending down, as dollar growth was only 4% in 2011 and 3% in 2012. In the most recent 12 months, inflation has driven most of the dollar sales increases, but that pressure is waning in most areas of the store. Meat and dairy are the primary exceptions.

Flanked by inflationary pressures over the past two years, retailers have been willing to accept manufacturer price increases because they could then pass the cost along to the consumer. As those pressures lose their steam however, retailers will need new avenues for growth.

In looking at the trends amid the tepid consumer product goods (CPG) environment, not all aisle ways are bleak. Compared with traditional avenues, many retailers have taken niche approaches that have paid off because they’ve appealed to specific consumer desires. In fact, most of the store growth since 2005 has come at the high and low end of the spectrum. Organic has sparked about half the growth over the period, while deep discounters have corralled the other half.

The move away from the middle isn’t surprising when we look at consumer sentiment following the Great Recession. While confidence in the U.S. was up 4 index points as of the second quarter, there are still many hampered by a slow-growing economy. This, along with a widening disparity between consumers with disposal and those without are having an effect on which channels consumers choose to shop.

Drivers of Shopping Behavior

Consumer confidence and income aren’t the only factors driving shopping behavior. Commodity prices, for example, have affected fresh seafood, deli prepared foods/cheese and meat sales in recent months, and the rising prices are having a push-pull effect on sales. In the first half of this year, seafood prices in supermarkets increased by 9.9%. That fueled a 6.2% jump in dollar sales, but it also caused volume sales to drop by 3.4%.

Demographics, specifically those that pertain to age and income, are steering spending patterns as well. When we look at households with incomes of $75,000 or more, for example, we see that they drive:

  • 60% of club sales
  • 43% of grocery sales
  • 36% of mass merchandiser sales

When we look at age groups, we see that older generations make more frequent trips to the store to buy food, while younger generations make fewer trips but spend more per basket. Age also plays a significant role in the channels that shoppers prefer. Given that Millennials (born 1977-1994) are early on in their careers and have less disposable income than older generations, it’s not surprising that they’re the biggest deal hunters. And by the year 2020, Nielsen expects Millennials to outnumber Baby Boomers by 10 million—a key stat that will have an effect on array of channels.

The quick-service channel is one that will take on a new dynamic as the number of Millennials grows. While traditional burger joints will remain a staple for many, a growing base of people are seeking options they perceive to be healthier—without sacrificing any more of their time.

Improvement on the Horizon

As with anything, success going forward requires paying close attention to consumer attitudes, sentiment and desires. While it all comes down to spending power—where people shop and what’s important to them—an array of niche retailers are gaining share, and discretionary spending is climbing in some categories: electronics, vacations and apparel. Food sales could also increase if wages rise by 3% or so over the next year. The upshot is that consumers will seek out and pay for products and services they find value in. And so in that vein, the road to innovation and in-market success hinges on delivering in ways the competitions isn’t.

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