How Price Conscious Consumers are Changing Retail
While it’s easy to get lost in a sea of headlines about the rise of eCommerce there are other forces at play in the retail sector. One of the underlying trends casting the fate of many retailers is simple economics. As the Payscale Index writes: “since 2006, wages have risen 17.4% overall in the United States. But when you factor in inflation, ‘real wages’ have actually fallen 8.5%. In other words, the income for a typical worker today buys them less than it did in 2006.” This disparity means that for many it’s hard to find enough money to put food on the table.
While many are suffering not everyone is feeling the pain. As the old saying goes, “the rich keep getting richer.” Since the 2008 recession most of the wealth generated in the United States has gone to the wealthy. For example, in the stock market approximately 80% of the wealth is typically owned by the top 10% of households. If you own stocks then 2020 was likely a very good year for you with the S&P 500 up by more than 16%, reaching record highs.
Taking a look at employment levels it is even easier to see the income divide. By the end of last year the employment rate was actually higher, up 2.9% for Americans earning more than $60,000. For people earning less than $27,000 the employment rate was down 21% from the period just before when the pandemic started.
Source: www.tracktherecovery.org
If consumers were already struggling before COVID-19 hit the pandemic only served to make things worse. Pew Research Center found that: “one-in-four adults have had trouble paying their bills since the coronavirus outbreak started, a third have dipped into savings or retirement accounts to make ends meet, and about one-in-six have borrowed money from friends or family or gotten food from a food bank.”
This stark reality for many is also creating exceptional gains for a certain class of retailers. Here’s a list of retailers considered to have had great performance last year.
% YoY Third Quarter 2020 Revenue Increase:
1. Amazon +37.3%
2. Target +21.3%
3. Dollar General +17.3%
4. Costco +16.9%
5. Walmart +5.2%
(Note: Costco’s increase is based on it’s 1st quarter 2021 results)
These are not the only retailers that garnered a lot of attention last year. You could add lululemon, Home Depot and Best Buy to the list but overall the trend is clear, in general low priced retailers are winning. It is easy to say that retailers like Costco did well because they sell essential goods and that certainly helped. But all of these companies have also been among the most successful retailers in the United States for some time. With the exception of Dollar General the five retailers above all rank within the top 10 in the United States in terms of sales and Dollar General ranks in the top 20. While everyone loves an overnight success story in reality that is simply not the case.
Retailers like Walmart and Target have steadily taken share away from retailers stuck in the middle of the pricing spectrum. We all know these retailers, their prices aren’t too high or too low. Many of these retailers are department stores like Sears.
Now let’s take a look at some of the largest bankruptcies in 2020. In 2020 JCPenney, J.Crew and Ascena Retail (owner of Ann Taylor and Loft) were among some of the largest retailers that went bankrupt (Sears filed bankruptcy for in 2018). While all of these retailers suffered because of their focus on a declining category, clothing, consumers are still buying things to wear. But they are choosing different retailers to fulfill their clothing needs.
In 2020 Target said it gained $6 billion in market share and clothing is one of the categories where it had success. “Apparel has been one of our strengths, [and] certainly from a market share standpoint, one of the real highlights for our business throughout the quarter, and we certainly see that continuing as we finish up the year,” said Brian Cornell, Target’s CEO last year. Again a key underlying trend is the thrifty consumer. If you are struggling to make ends meet you are going to choose “cheap chic” over “kind of expensive”.
Early last year Target launched an activewear brand called All in Motion. Most of the items are under $30 which is approximately less than 75% of the price of competitor products. That brand has now surpassed $1 billion in sales. In the third quarter of 2020 Target’s apparel sales increased by close to 10% which is eye opening given the double digit sales declines in the clothing category.
The shift towards low priced retailers is creating the final blow to many department stores. $6 billion in market share is a staggering about of market share to gain in one year and many consumers that used to shop at retailers like Kohl’s and Macy’s are finding that Target is a great place to shop.
As you can see retailers that do not have a great value proposition saw strong declines in foot traffic relative to other retailers last year. Even Nordstrom which has long catered to high end consumers is doubling down on its off-price channel, Nordstrom Rack. Nordstrom expects Nordstrom Rack to contribute up to half of the company’s revenue in the future up from about a third in 2019.
Similar to the fate of large retailers playing in the middle, small retailers are also suffering because of an inability to compete with the likes of Walmart. Even when the pandemic is over smaller retailers are still going to have to contend with big box retailers that continue to improve their selection while at the same time offering unprecedent value.
With a smaller paycheck coming in each month or no paycheck at all for many, consumers are going to buy from whichever retailer offers the best value for their money. It is not the end for small retailers as they are an integral part of society but there will be less of these retailers going forward as more money and power consolidates in the hands of a small number of large retailers. Small retailers also have to deal with the fact that many consumers started shopping at retailers like Target for the first time during the pandemic (it had to get its market share gains from somewhere) and may continue to shop there in the future.
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Dollar General’s performance also illustrates the power of low prices. When you walk into a Dollar General you would never think it was a $27.8 billion retailer. It feels kind of like a mom and pop shop but less homey. But why do people shop in a small often cluttered store that leaves a lot to the imagination in terms of decor? It’s cheap. But the difference between a Dollar General and a mom and pop store is pricing power.
Last year during Dollar General’s third quarter earnings call Todd Vasos, Dollar General’s CEO said this: “our data suggests an increase in new customers this quarter, as compared to Q3 of 2019. These new customers skew younger, higher income and more ethnically diverse, further underscoring the broadening appeal of our value and convenience proposition.” “We feel that we're very well positioned. The sweet spot, I would tell you, we do very good in good times and we do fabulous in bad times.”
On their own these thrifty consumers may not have a lot of spending power but collectively they are playing an outsized role in who wins and loses in the retail sector.