Retailers would do well to pay more attention to macroeconomic trends and work to push them in a direction that is conducive to their business.
The International Monetary Fund’s annual assessment of the U.S. economy, which was released last month, includes some findings that raise troubling questions about the long-term health of the mass market. Although the IMF concluded that overall the nation’s economy is in good shape, outperforming its counterparts in other advanced countries in Europe and Asia, it scaled back expectations for growth in 2016. After projecting in April that the American economy would expand 2.4% this year, the IMF lowered that figure to 2.2%.
While acknowledging the recent improvement in the U.S. economy, IMF managing director Christine Lagarde cited four forces — decreasing levels of participation in the labor force; declining growth in productivity; accelerating imbalance in the distribution of wealth and income; and a high poverty rate — that could stand in the way of achieving “strong, sustained and balanced growth in the years ahead.” In different ways, all of those factors touch the business of drug, discount and supermarket chains, but none is more significant than the erosion of the middle class, the motive force of the mass market and, indeed, the entire American economy.
The IMF reports that since the turn of the century more than 3% of the population has fallen into a demographic that earns less than half the median income. Flat earnings and a declining standard of living have become the new norm for those people, who, as a result, are all but certain to rein in spending. The growing imbalance (a quarter of a percent of the population moved up the income scale during the past 15 years) has reduced consumer demand by 3.5% since 1999, according to the agency.
The phenomenon becomes even more alarming when viewed from a broader perspective. In 1970 almost 60% of people in this country were considered middle class; today that number stands at less than 50%. Is it any wonder that mass market retailers have found it much more difficult to generate meaningful sales gains, especially those measured on a comparable-store basis?
The challenge confronting retailers is borne out by new research from Deloitte. The consulting firm recently reported that its Retail Volatility Index has risen 250% since 2010, resulting in some $200 billion in sales being exchanged by competing merchants. Small and mid-sized merchants are making inroads against their larger rivals, according to the study, reversing the trend that has long dominated the sector. “To increase market share, larger companies must adjust their go-to-market strategies,” Deloitte asserts, “but first they must consider: Is this volatility cyclical? Could it be structural? Is technology to blame for transforming the way we shop? Is it a lack of style innovation?”
All of the those forces are, to a greater or lesser degree, influencing the trajectory of the industry, but no business is an island. The future of mass retailing is indissolubly linked to the existence of a robust mass consumer market.
The IMF offered some ideas about what can be done to buttress the economy and shore up the middle class. Overhauling corporate tax policy, increasing the federal minimum wage and establishing paid family leave were among the suggestions offered. Whatever retail leaders and their counterparts at CPG companies might think of a specific proposal, current trends make it imperative for them to get involved in shaping an economy that works for them and their customers.