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Consumer Economics Are Driving Retail Industry Bifurcation

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With retail sales increasing 3.5 percent in 2017, compared to a gross domestic product growth rate of 2.3 percent the same year, the retail sector is showing signs of healthy growth thus the so-called ‘retail apocalypse’ is a myth, according to a new study from Deloitte. The study, “The great retail bifurcation: Why the retail “apocalypse” is really a renaissance,” found that the retail sector is healthy and shows strong signs of growth. Rather than a battle of online against brick-and mortar, Deloitte found that retail is changing in line with consumer income bifurcation, with both high-end and price-conscious retailers seeing revenues soar, growing 81 percent and 37 percent, respectively, while those in the middle realized a mere 2 percent increase in sales over the past five years.

“Despite the popular narrative, the ‘retail apocalypse’ is far from reality,” said Kasey Lobaugh, principal, Deloitte Consulting LLP and the report’s lead author. “Brick-and-mortar retail is not on or near its deathbed. In fact, we’re seeing retailers open new stores at an astounding pace, and physical retail is growing alongside digital. Rather than witnessing the demise of retail, our study shows a dramatic change in line with the impact of consumer bifurcation along economic lines. While specific retailers may see an apocalypse, others see opportunity.”

Based on a survey of more than 2,000 consumers and an analysis of a large collection of US-based publicly traded retailers, the study examines a growing disparity between consumer income cohorts and highlights the impact of this economic bifurcation on retailers.

Consumer income bifurcation defies traditional economic metrics
While strong economic indicators paint a promising portrait on the surface, the study looked deeper and found massive gaps in consumers’ discretionary spending power. Incremental income generated since the recession has disproportionately gone to high-income households, with virtually all income growth between 2007 and 2015 going to the top 20 percent.

Deloitte found that the household economic health correlates to consumer spending behavior. Key economic findings from the study include:

  • Economic well-being: Just one-in-five surveyed consumers (20 percent) are better off in 2017 than they were in 2007 in terms of disposable income, with little to spend on discretionary retail categories. Overall, four in five consumers (80 percent) have fewer funds for traditional retail segments such as apparel. Alongside this trend, high-income consumers are 10 percent more likely to report spending more over the last year.
  • Rising costs: Faced with stagnant levels of income, lower-earning consumers have seen the costs of nondiscretionary items skyrocket: health care expenditures have risen 62 percent, education 41 percent, food 17 percent and housing 12 percent, according to Deloitte’s analysis of reports from Bureau of Labor Statistics.
  • New expenses: Modern consumer essentials like mobile phones and data plans now take up an increased portion of discretionary spending, stealing share from traditional retail categories. Low-income consumers feel the brunt of the impact, spending 3.6 percent of their income on digital devices and data, compared to just 0.71 percent for high earners.

“Households have diverged along economic lines and now people’s respective income levels are steering their behaviors and dictating the success of retail segments,” said Robert Stephens, senior manager, Deloitte Consulting LLP and co-author of the study. “More affluent shoppers have fueled high-end retail as their income and net worth have grown, while lower-earning consumers, faced with growing expenses and dramatically less disposable income, have turned toward price-conscious stores. Retailers that try to court all consumers will likely be challenged as income bifurcation leaves different shoppers with differing motivations.”

Retail isn’t dying, and premier and low-price are thriving
In line with consumer bifurcation by income level, Deloitte found the retail market is also bifurcating along economically-driven divides. Through an analysis of publicly traded retailers, Deloitte defined three retail cohorts: premier retailers that deliver value via premier product and experience offerings; price-based retailers that deliver value by selling at the lowest possible prices and clearly communicating that proposition to customers and balanced retailers that deliver value via a balance of price and/or promotion.

Examined side by side, these three groups offer differing narratives that align with income-driven changes in consumer behavior:

  • More stores are opening than closing: From 2015 to 2017, price-based retailers gained 2.5 stores for every store balanced retailers closed.
  • Revenues have grown: Premier retailers have seen 40x more revenue growth than that of balanced retailers over the last five years, with revenues soaring 81 percent versus a mere 2 percent increase for balanced retailers. Price-based retailers, meanwhile, have seen their revenues steadily increase 37 percent over the same period.
  • Sales climb overall: Premium (8 percent) and price-based (7 percent) retailers’ sales rose in the past year, while sales of balanced retailers declined by 2 percent.

Income bifurcation Impacts consumers’ category, channel and spend decisions
Income bifurcation has triggered differences in consumer shopping behavior between economic groups. Beyond their actual spending levels, these two groups also differ in how and where they make purchases:

  • Preferred formats: Low-income consumers are 44 percent more likely to shop at discount retailers than other groups. These consumers are also more likely than others to shop at supermarkets, convenience stores and department stores.
  • Channel choices: The majority (58 percent) of low-income consumers are choosing to shop in store, while 52 percent of high-income consumers prefer to shop online. High-income consumers were also 42 percent more likely to report an increased propensity to shop online over the prior three months.
  • Shopping around: In-store spending fragmentation – or the number of retailers a consumer regularly shops – is 17 percent higher amongst high-income consumers. Fragmentation is even more exaggerated online, as affluent consumers are 40 percent more fragmented for online retailers than consumers in the lowest income cohort.

The millennial money myth
While millennials are often lumped together and portrayed as the source of disruption, Deloitte found that for the most part, millennial behavior (by income group) is virtually indistinguishable from other generations. Low-income millennials track closely with all other generations when it comes to whether they have spent in stores recently (79 percent and 81 percent, respectively), and in the middle-income cohort, there’s no difference between millennials and other generations, with 81 percent of each group having made purchases in-store.

However, high-income millennials, who make up less than one-fifth (19 percent) of the total millennial generation and just 6 percent of the population overall, skew perceptions of Gen Y as a whole. High-income millennials are 24 percent less likely than all non-millennial shoppers to shop in a store, and may be the source of the idea that millennials are the end of brick-and-mortar retail. When averaged together, the high-income shopper’s behaviors skew the averages for the entire millennial group.

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Reforms in Latvia must result in stronger enforcement to tackle foreign bribery

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Latvia has continued to improve its framework against bribery of foreign public officials and subsequent money laundering but the reforms need to translate into further effective enforcement, according to a new report by the OECD Working Group on Bribery.

According to the Working Group, which is composed of 44 countries, Latvia’s enforcement results are still not commensurate with the country’s exposure to foreign bribery and subsequent money laundering. Since Latvia joined the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions in 2014, no foreign bribery case has been prosecuted and three foreign bribery investigations are ongoing. Proceeds of foreign bribery have been laundered through some Latvian banks and other corporate entities in at least two multijurisdictional bribery cases. However, while waiting for the outcome of recent prosecutions in court, the money laundering conviction rate remains low. The Working Group also regrets that the Minister of Justice’s repeated and open criticism of the Prosecutor General risks creating political interference into the operation of the Public Prosecutor Office.

The Working Group has just completed its Phase 3 evaluation of Latvia’s implementation of the Convention and related instruments. In order to improve Latvia’s implementation of the Convention, the Working Group has recommended that Latvia take certain measures, including that it should:

Provide sufficient resources and expertise to its authorities to effectively investigate and prosecute foreign bribery and subsequent money laundering cases;

Step up its enforcement actions against companies, especially against Latvian financial institutions and other corporate entities involved in foreign bribery schemes, where relevant;

Reinforce coordination between Latvia’s anti-corruption law enforcement body (KNAB), the State Police and the prosecutors and implement a strategic approach towards foreign bribery and subsequent money laundering investigations;

Strengthen detection of Latvian individuals and companies involved in foreign bribery;

Ensure the efficient operation of the banking supervisory body (the FCMC), to contribute to the prevention and detection of foreign bribery and subsequent money laundering.

The Report highlights positive aspects of Latvia’s efforts to fight foreign bribery. Latvia took steps to strengthen KNAB’s functional independence. Latvia also adopted comprehensive legislation on whistleblower protection and increased sanctions against individuals for foreign bribery, money laundering and false accounting offences. A lower evidentiary threshold to prove money laundering has been introduced and the number of cases prosecuted has increased. Reforms have been implemented to enhance the Financial Intelligence Unit’s operational capacity. Latvia’s efforts to upgrade its legislative and regulatory framework to prevent money laundering in the financial sector are welcome together with Latvia’s financial sector supervisor’ efforts to renew its approach to supervision of financial institutions. Whether these developments will substantially contribute to more detection and enforcement of the foreign bribery offence remains to be tested in case law and practice.

Latvia’s Phase 3 Report was adopted by the OECD Working Group on Bribery on 10 October 2019. The Report lists the recommendations the Working Group made to Latvia on pages 82-88, and includes an overview of recent enforcement activity and specific legal, policy, and institutional features of Latvia’s framework for fighting foreign bribery. In accordance with the standard procedure, Latvia will submit a written report to the Working Group within two years (October 2021) on its implementation of all recommendations and its enforcement efforts. This report will also be made publicly available.

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Growth in South Asia Slows Down, Rebound Uncertain

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In line with a global downward trend, growth in South Asia is projected to slow to 5.9 percent in 2019, down 1.1 percentage points from April 2019 estimates , casting uncertainty about a rebound in the short term, says the World Bank in its twice-a-year regional economic update.

The latest edition of the South Asia Economic Focus, Making (De)centralization Work, finds that strong domestic demand, which propped high growth in the past, has weakened, driving a slowdown across the region. Imports have declined severely across South Asia, contracting between 15 and 20 percent in Pakistan and Sri Lanka. In India, domestic demand has slipped, with private consumption growing 3.1 percent in the last quarter from 7.3 percent a year ago, while manufacturing growth plummeted to below 1 percent in the second quarter of 2019 compared to over 10 percent a year ago.

“Declining industrial production and imports, as well as tensions in the financial markets reveal a sharp economic slowdown in South Asia,” said Hartwig Schafer, World Bank Vice President for the South Asia Region. “As global and domestic uncertainties cloud the region’s economic outlook, South Asian countries should pursue stimulating economic policies to boost private consumption and beef up investments.”

The report notes that South Asia’s current economic slowdown echoes the decelerating growth and trade slumps of 2008 and 2012. With that context in mind, the report remains cautiously optimistic that a slight rebound in investment and private consumption could jumpstart South Asia’s growth up to 6.3 percent in 2020, slightly above East Asia and the Pacific, and 6.7 percent in 2021.

In a focus section, the report highlights how, as their economies become more sophisticated, South Asian countries have made decentralization a priority to improve the delivery of public services. With multiple initiatives underway across the region to shift more political and fiscal responsibilities to local governments, the report warns, however, that decentralization efforts in South Asia have so far yielded mixed results.

For decentralization to work, central authorities should wield incentives and exercise quality control to encourage innovation and accountability at the local level. Rather than a mere reshuffling of power, the report calls for more complementary roles across tiers of government, in which national authorities remain proactive in empowering local governments for better service delivery.

“Decentralization in South Asia has yet to deliver on its promises and, if not properly managed, can degenerate into fragmentation,” said Hans Timmer, World Bank Chief Economist for the South Asia Region. “To make decentralization work for their citizens, we encourage South Asian central governments to allocate their resources judiciously, create incentives to help local communities compete in integrated markets, and provide equal opportunities to their people.”

In Afghanistan, with improved farming conditions and assuming political stability after the elections, growth is expected to recover and reach 3 percent in 2020 and 3.5 percent in 2021. However, the outlook is highly vulnerable and may be affected by deteriorating confidence due to uncertainty around international security assistance, election-related violence, and peace negotiations with the Taliban.  

In Bangladesh, GDP is projected to moderate to 7.2 percent this fiscal year and 7.3 percent the following one. The outlook is clouded by rising financial sector vulnerability, but the economy is likely to maintain growth above 7 percent, supported by a robust macroeconomic framework, political stability, and strong public investments.

In Bhutan, GDP growth is expected to jump to 7.4 percent this fiscal year with the commissioning of Mangdechhu, a new hydropower plant, and the completion of the maintenance of Tala, another one. Growth in fiscal year 2021 is forecast just below 6 percent on the base of strong tourism growth and increased revenue from the existing power plants.

In India, after the broad-based deceleration in the first quarters of this fiscal year, growth is projected to fall to 6.0 this fiscal year. Growth is then expected to gradually recover to 6.9 percent in fiscal year 2020/21 and to 7.2 percent in the following year. 

In Maldives, growth is expected to reach 5.2 percent in 2019, due to a slowdown in construction following the completion of the international airport and a connecting bridge. However, with support from new infrastructure investment and the expansion of tourism, growth is expected to pick up again to an average of 5.6 percent over the forecast horizon.

In Nepal, GDP growth is projected to average 6.5 percent over this and next fiscal year, backed by strong services and construction activity due to rising tourist arrivals and higher public spending.

In Pakistan, growth is projected to deteriorate further to 2.4 percent this fiscal year, as monetary policy remains tight, and the planned fiscal consolidation will compress domestic demand. The program signed with the IMF is expected to help growth recover from fiscal year 2021-22 onwards.

In Sri Lanka, growth is expected to soften to 2.7 percent in 2019. However, supported by recovering investment and exports, as the security challenges and political uncertainty of last year dissipate, it is projected to reach 3.3 percent in 2020 and 3.7 percent in 2021.

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Oil Market Report: Back to business as usual

MD Staff

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Oil markets in September withstood a textbook case of a large-scale supply disruption as the attacks on Saudi Arabia temporarily affected about 5.7 mb/d of crude production capacity. On Monday 16 September, the first trading day following the attacks, after an initial spike to $71/bbl Brent prices fell back as it became clear that the damage, although serious, would not cause long-lasting disruption to markets. Saudi Aramco’s achievement in restoring operations and maintaining customer confidence was very impressive. This is reflected in the fact that as we publish this Report, the price of Brent is close to $58/bbl, actually $2/bbl below the pre-attack level.

Intuitively, the precision attacks on Saudi Arabia and the possibility of a repeat should keep the market on edge. There should be talk of a geopolitical premium on top of oil prices. For now, though, there is little sign of this with security fears having been overtaken by weaker demand growth and the prospect of a wave of new oil production coming on stream – Norway’s big Johan Sverdrup project started up this month and will reach 440 kb/d by mid-2020.

In this Report, for both 2019 and 2020 we have cut our headline oil demand growth number by 0.1 mb/d. However, the reduction for 2019 mainly reflects a technical adjustment due to new data showing higher US demand in 2018 which has depressed this year’s growth number. This year is seeing two very different halves. In 1H19, global growth was only 0.4 mb/d but in 2H19 it could be as high as 1.6 mb/d with recent data lending support to the outlook: non-OECD demand growth in July and August was 1 mb/d and 1.5 mb/d, respectively, with Chinese demand growing solidly by more than 0.5 mb/d y-o-y. The OECD countries remain in a relatively weak state, although as we move through 2H19 y-o-y growth returns helped by a comparison versus a low base in the latter part of 2018. Demand is supported by prices (Brent) that are more than 30% below year-ago levels. For 2020, a weaker GDP growth forecast has seen our oil demand outlook cut back to a still solid 1.2 mb/d.

The renewed focus on demand and supply fundamentals does not mean that the attacks on Saudi Arabia can be shrugged off as being of little consequence. Further incidents of this nature in the strategically important Gulf region could happen and cause even greater disruption. A key lesson from recent weeks is that the world has a big insurance policy in the form of stockholdings. The market is the first responder to a supply crisis and OECD commercial stocks in August increased for the fifth consecutive month and are now close to the record 3+ billion barrels level we saw during most of 2016. IEA members hold an additional 1.6 billion barrels of strategic stocks, and the prompt response by the Agency to consider an emergency stocks release helped to calm markets. Commercial and strategic inventories go a long way to offsetting the lack of spare crude production capacity outside of Saudi Arabia, limited mainly to 1 mb/d in Iraq, UAE, Kuwait and Russia. We might have quickly returned to business as usual, but security of supply remains very relevant.

IEA

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