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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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Asia and Pacific on course to miss all Sustainable Development Goals

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Unless progress is accelerated, Asia and the Pacific are on course to miss all of the 17 Goals of the UN’s 2030 Agenda for Sustainable Development, the Executive Secretary of the UN regional commission for Asia and the Pacific (ESCAP), told UN News at the Organization’s Headquarters on Wednesday.

Under-Secretary-General Armida Salsiah Alisjahbana was in New York to take part in the High-Level Political Forum on Sustainable Development, the main UN platform for monitoring the progress that countries are making towards the Agenda, which is the UN’s blueprint for ending poverty and preserving the planet.

ESCAP’s latest Sustainable Development Goals Progress Report shows that, when it comes to some of the Goals, the region is actually going backwards. These are the goals related to access to clean water and sanitation (Goal 6), decent work and economic growth (Goal 8), and responsible consumption and production (Goal 11).

There are, said Ms. Alisjahbana, several reasons for this: “There is water scarcity, because of the pressure of urbanization, and the management of natural resources and the environment are making the situation worse. As for moving towards sustainable consumption, that has to do with behaviour and lifestyle. With increasing wealth you consume more, but what you consume is something that is actually not sustainable.

Governments, said the head of ESCAP, must ultimately be responsible for investments in sustainable development. Investing in basic infrastructure costs money, but there is a considerable multiplier effect, that has a positive effect on the economy. Countries with smaller financial resources should look at raising money through fiscal reforms rather than looking for aid, and risking becoming dependent, she added.

The Progress Report complains about a lack of data, an important point because, says Ms. Alisjahbana, without the correct data you can’t track progress, or evaluate the best actions to take going forward. Improved data must go hand in hand with improved capacity for analysing data, which means national statistical offices, and SDG monitoring.

Despite the many challenges facing the region’s efforts to achieve the Goals, Ms. Alisjahbana remains optimistic. The situation, she believes, can be turned around, through better cooperation, as well as the abundant talent and expertise found in the region.

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Asia and Pacific Growth Steady Amid Global Trade Tensions

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Developing Asia will maintain strong but moderating growth over 2019 and 2020, as supportive domestic demand counteracts an environment of global trade tensions, according to a new Asian Development Bank (ADB) report released today.

In a supplement to its Asian Development Outlook (ADO), ADB maintains growth forecasts for developing Asia at 5.7% in 2019 and 5.6% in 2020—unchanged from its April forecast. These growth rates are slightly down from developing Asia’s 5.9% growth in 2018. Excluding the newly industrialized economies of Hong Kong, China; the Republic of Korea; Singapore; and Taipei,China, the regional growth outlook has been revised down from 6.2% to 6.1% in 2019 and maintained at that rate in 2020.

Deepening trade tension between the People’s Republic of China (PRC) and the United States (US) remains the largest downside risk to this outlook, despite an apparent truce in late June that could allow trade negotiations between the two countries to resume.

“Even as the trade conflict continues, the region is set to maintain strong but moderating growth,” said ADB Chief Economist Mr. Yasuyuki Sawada. “However, until the world’s two largest economies reach agreement, uncertainty will continue to weigh on the regional outlook.”

The growth outlook for East Asia in 2019 has been revised down to 5.6% because of slower than expected activity in the Republic of Korea. The subregion’s growth outlook of 5.5% for 2020 is unchanged from April. Growth for the subregion’s largest economy, the PRC, is also unchanged, with forecasts of 6.3% in 2019 and 6.1% in 2020, as policy support offsets softening growth in domestic and external demand.

In South Asia, the economic outlook is robust, with growth projected at 6.6% in 2019 and 6.7% in 2020, albeit lower than forecast in April. The growth outlook for India has been cut to 7.0% in 2019 and 7.2% in 2020 because the fiscal 2018 outturn fell short.

The outlook for Southeast Asia has been downgraded slightly to 4.8% in 2019 and 4.9% in 2020 due to the trade impasse and a slowdown in the electronics cycle. In Central Asia, the growth outlook for 2019 has been revised up to 4.3% on account of an improved outlook for Kazakhstan. Central Asia’s growth outlook of 4.2% for 2020 is unchanged from April. The growth outlook in the Pacific—3.5% in 2019 and 3.2% in 2020—is unchanged, as the subregion continues to rebound from the effects of Cyclone Gita and an earthquake in Papua New Guinea, the subregion’s largest economy.

The major industrial economies have had slight revisions to their growth forecasts, with the US revised up to 2.6% for 2019 and the Euro area revised down to 1.3%. The growth outlook for Japan is unchanged at 0.8% in 2019 and 0.6% in 2020.

Developing Asia’s inflation projections were revised up from 2.5% to 2.6% for both 2019 and 2020, reflecting higher oil prices and various domestic factors, such as the continuing outbreak of African swine fever in several Asian economies, which is expected to drive up pork prices in the PRC.

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How to measure blockchain’s value in four steps

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To help organizations identify the value of blockchain technology and build a corresponding business case, the World Economic Forum, the International Organization for Public-Private Cooperation, has released the Blockchain Value Framework as part of the white paper, Building Value with Blockchain Technology: How to Evaluate Blockchain’s Benefits.

Co-designed with Accenture, the Blockchain Value Framework is the second in a series of white papers for organizations to better understand that blockchain technology is a tool deployed to achieve a specific purpose, not a goal in itself. This new framework provides organizations with the tools to begin measuring blockchain’s value, including key questions to consider. It is the first visual roadmap of its kind and is based on a global survey of 550 individuals across 13 industries, including automotive, banking and retail, public-sector leaders, chief executive officers and an analysis of 79 blockchain projects.

“In our last paper, we stressed that blockchain deployment is not the end goal,” said Sheila Warren, Head of Blockchain at the World Economic Forum. “We wanted to get beyond the hype. This new framework is for those business leaders that have figured out blockchain is the right solution for a specific problem, but don’t know what to do next.”

“Organizations need to make business decisions and investments with confidence and that requires proof of the value-add and an analysis of why, or why not, they should consider something new,” said David Treat, Managing Director and Global Blockchain Lead at Accenture. “Through this new framework, we aim to educate businesses and challenge them to rethink their current business models, relationships between ecosystem partners, customers and their investments in technology. The path to blockchain adoption starts here with evaluating the technical and strategic priorities and aligning them with investments in innovation.”

The framework starts with questions on blockchain’s role and desired impact. Assessing potential pain points and areas for opportunity without thinking about the technology is essential. Next is to examine the three key dimensions of blockchain’s role alongside its capabilities. The roadmap can assist organizations in moving from current-state assessment to future blockchain opportunity, and to identify where the value will be created and delivered. Cost savings, increased revenue and improved customer experience are all possible business case results.

According to the global survey conducted in conjunction with the new framework, 51% of survey respondents identified “missing out on developing new products/services” as the number one expectation if they do not invest in blockchain technology in the near future. The other two most common answers were missing out on speed/efficiency gains (23%) and missing out on cost savings (15%). The interviews highlighted the potential of the technology to simplify and optimize complete value chains through the sharing of simplified real-time data with increased efficiency. However, the paper also cautions businesses to carefully consider whether blockchain is the best solution, relative to other technologies or other digitization strategies. As noted in the Blockchain Beyond the Hype white paper, blockchain may not be a viable solution or it may not be the correct time to pursue this avenue.

In nine of the industries surveyed, the full traceability and integrity of the data were the top two potential advantages of using blockchain technology. Most of the industries surveyed could benefit from smart contracts and automation provided by blockchain. Surprisingly, few organizations selected “new business products or services” as one of the benefits. This suggests the current focus for organizations is on improving existing products and services before considering investing in new opportunities.

“We may be moving beyond the hype, but blockchain isn’t going away. Central banks are experimenting with digital currencies and supply chain networks are piloting blockchain policies. We are also seeing companies like Facebook and Starbucks entering the blockchain and cryptocurrency space. This means practical use cases of the technology will become more widespread,” Warren said. “A draft of the framework was further validated at a multilateral session of global leaders at the World Economic Forum Annual Meeting 2019 in Davos-Klosters.”

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