Sea-change in Consumer Behavior: Retailers Need to Catch Up

By David Moin

January 13, 2016

It’s a new year and fashion retailers are in deep analysis.

After getting pounded by warm weather, stock market gyrations, diminishing tourism, consumer lethargy and furiously discounting to clear excess inventories, they’re fretting over the impact on fourth-quarter margins. Sales numbers may tally up at expected modest levels or under in some cases, but profits could be a sadder story that comes to light when quarterly results are reported next month.

It’s unanimous that holiday 2015 was tough and served as a wake-up call for how to approach the future and how to compel fickle consumers to buy apparel again. There’s no question that after a difficult year, retailers will make serious adjustments that include the re-examination store fleets, technology initiatives, real estate holdings, product offerings, inventory levels and head-counts.

Here, in broad strokes, key industry figures give recommendations on how to think about the future, cope with the accelerating pace of change, and reshape the business model for better results.

Terry Lundgren, chairman and chief executive officer, Macy’s Inc.: “Department stores must be a place for customers to come and get away from the everyday challenges of their lives, and to be entertained when they shop.”

Stephen M. Ross, chairman and majority owner, The Related Companies: “All retail has hit a wall. Retail is probably the greatest form of entertainment. It has to be a place where people feel they are being entertained. So much buying is done online today, so you go [brick-and-mortar] shopping as a form of entertainment. If you can’t do that well, you are not going to succeed. We are going to have a lot fewer malls. ‘B’ and ‘C’ malls have got to be wondering what’s the alternative use. At places like Hudson Yards or Time Warner Center [both Related developments] we do very well and compete very well with online.”

David Jaffe, ceo, Ascena Retail Group: “For retail, agility is an increasingly important competency. Agility enables a company to create the right product, the optimal inventory levels, and create a customer journey that leverages the convergence between all channels.”

Jerry Storch, ceo of Hudson’s Bay Co.: “It’s important not to confuse transient factors with ongoing long-term trends. The weather, tourism, the strength of the dollar, the weakness in the oil sector — those will all change. Many are confusing those short-term factors with long-term sea changes like the ascendance of the Internet, which is the most important change. That is why we have embraced the Internet and have made the Gilt Groupe acquisition. It reinforces our all-channel presence.”

Britt Beemer, chairman and ceo, America’s Research Group: “The biggest lesson that jumped out to me is something consumers have been saying for the last 10 years, that there is nothing really new to shop for. ‘Nothing new’ has clearly affected retailers. Staff reductions are biting these mall retailers in the butt. Consumers can’t find anyone to ring up their purchases. Nobody realizes how time-short Americans are. Women are complaining that the stores don’t make the effort to put things back in the right order, in the right sizes. That’s career women saying that. Their time is precious.”

Steven B. Tanger, president and ceo, Tanger Factory Outlet Centers Inc.: “The fact remains that consumers still have the weight of the economy on their minds, evidenced by the complex retail spending environment we saw over the holiday season and expect to see in 2016. Looking forward, we will continue to remain focused on delivering a best-in-class collection of brands and designers in friendly and innovative shopping center environments that make shopping for deals enjoyable for our customers. Traffic was strong throughout 2015 at our centers nationwide.”

Walter Loeb, retail analyst: “The 2015 holiday season made the major shifts in consumer buying patterns very clear. Consumers don’t want to own as much. The rise of Internet shopping and growth of off-price retailing are megatrends. Retailers who want to survive will have to respond by restructuring. Retailers have to close stores and reduce the number of senior executives that run organizations. It’s time to cut back. It’s a question of creating a more efficient operation like TJX Cos. has. Near-term sales weakness in apparel and general merchandise is adding to the pressure. Young customers are prioritizing the purchase of new technology over other goods, and the unseasonably warm weather has left many winter coats, boots and sweaters on retailers’ shelves awaiting even deeper markdowns. I believe that many retailers did not anticipate the change in buying patterns and the negative momentum it would bring to their stores. They did not see the rapid shift to online shopping, which often occurs in the middle of the night when customers have ample leisure time. Nor did they see how the demand for new technology would cause a shift away from ready-to-wear apparel. I am worried about the future profitability of many leading retailers. They are now on the defensive against the leading Internet and off-price retailers such as Amazon and TJX.”

Karen Murray, president of VF Sportswear Coalition: “It’s become more than just about running a business or being creative. It used to be easy. You would put products in a store and sell them. Now it’s about innovation, strategy, business development, and really understanding where your business is and where it is going. You have to deal with so much more — the in-store [display], online, fast fashion, technology, all of these things.”

Jack Kleinhenz, chief economist, National Retail Federation: “Last year was puzzling. We won’t be able to write the story until we really see how the dust settles. Consumers are in a good position financially but they are conservative. The Great Recession has impacted people. There’s been a spending shift to services over and above goods. Retailers are going to have look very closely at inventory expectations going forward, how far in advance they need to get inventory and shortening the supply chain in some cases. But that is going to cost something. In some ways, retailers will have to integrate services in their stores, make it a place to shop for a shirt but also where you can get a haircut. They are in an unenviable area, on the front line of the economy.

Lou Amendola, chief merchandising officer, Brooks Brothers: “I don’t think brick-and-mortar will go away, but we’ll have to re-engineer the model. That may be scary for some, but every few years the industry has to change. There’s a new reality among consumers. They only buy when they need something. If they don’t need something, they wait. The new year will bring an adjustment to how we react to this changing environment.”

Kevin McLaughlin, cofounder and creative director, J. McLaughlin: “People are looking for experiences, rather than just a product. People want to learn how to kayak or travel. Those things are competing for the retail dollar.”

Tom Schoenwaelder, chief commercial officer at Doblin, the innovation and design arm of Deloitte LLP: “The retail industry has a propensity to jump on bugaboo bandwagons or issues, like building innovation labs, and lose sight of the bigger picture — improving their core operations and figuring out what they actually are and plan to be for the customers and how to build really unique experience for their customers. They should learn how to integrate and innovate in a multifaceted way. When we studied innovation patterns, we have found companies and industries that focus on unilateral innovation — a single product or channel — end up innovating in ways much easier for competitors to replicate. If you innovate on a broader basis, in a multi-faceted way, you create systems that are much harder to emulate by competitors. Ikea set up a really innovative system 75 years ago — flat-packing the furniture, home assembly, to bring costs [and prices] down. There is actually a good level of quality in their price points. They become anchors in locations not [initially] popular among retailers and ultimately they bring other retailers to the area. They do put the customer through some hardship, forcing you to snake through the showrooms before picking up the purchases and then you’ve got to assemble the stuff at home. But Ikea basically offers things that the customer really wants, and is savvy enough to say we don’t have to be everything to everyone.”

Lynne Coté, ceo of Cabi: “Retailers can sell tons of skirts and sweaters, but if they are not incorporating a relationship and service-based experience that makes their customers’ lives better, then they are just selling ‘stuff,’ and anyone can sell ‘stuff.’ People long for human connection in every area of their lives. Why would retail be any different?”

Thomas McGee, president and ceo, International Council of Shopping Centers: “The big piece of advice I give is, listen to the consumer. What’s really becoming increasingly important to the consumer is experience. They want more experiential offerings. You see the growth of restaurants, entertainment and services. I also say embrace and understand technology, make sure to integrate technology in the shopping experience. I actually think it was a strong shopping season. All of the information from our member surveys indicate a strong holiday. Certainly, there has been a lot of press around the growth of online. It’s a little bit overblown. The reality is as a percentage of total retail sales, it’s not a huge part. It’s has been generally flat at 6 to 8 percent of total retail. It’s not a story of bricks versus clicks. The more interesting is bricks and clicks.”

Rick J. Caruso, founder and ceo, Caruso Affiliated: “The year 2016 will be marked by opening first-to-market retail stores, flagship tenants and launching exclusive pop-up shops across our retail portfolio including The Grove and The Americana at Brand. In addition, we will continue to work alongside our retailers to surpass consumer expectations by adding and enhancing amenities and services such as delivery, in-store pickup, social media interaction and customer service. The ability to create more time for our guests through this service offering will only increase our value.”

Faith Hope Consolo, chairman of The Retail Group of Douglas Elliman Real Estate: “It’s all about instant gratification. It’s about having it now. Same-day deliveries. With online competing with brick-and-mortar, consumers want it to be in their hands before they even finish the order. Same-day delivery is the big push. So are givebacks. Money cards. It’s not just points anymore. Or friends and family. Retailers are giving cash certificates and immediate discounts when you check out. It’s all about the here and now. We are in this ‘need it now’ lifestyle. Everybody is in a big rush. It’s not about personalization. It’s about gratification.”

Consumers Win as Retailers Cut Holiday Prices

Retail sales for November — excluding automobiles, gasoline and restaurants — were up 0.5 percent over October and 3 percent from a year ago. That’s a welcome increase, but less impressive than what we had expected. While we have been comfortable with our estimate of the direction of sales, the November numbers mean we are going to be watching the next two weeks — including this weekend’s Super Saturday — very closely.

So what’s happening?

A closer look at the numbers reveals that while fewer dollars are coming in than expected, that doesn’t mean consumers are shopping less. In fact, unit volume appears to be up. The issue is that prices are down. And that means the same number of sweaters, toys or electronic gadgets sold brings retailers less revenue.

The Bureau of Economic Analysis’ price index shows that general retail prices were 2.9 percent lower in October than a year earlier. A number of factors are behind the lower prices — inventories are stable but elevated, in part due to the flood of merchandise that came into the country earlier this year after the labor dispute that brought West Coast ports to a crawl ended. Warm weather has reduced demand for seasonal items like coats and sweaters. Much of the extra money freed up by lower gasoline prices has gone to services such as travel and restaurants rather than retail merchandise. In addition, most consumers have seen little in the way of wage increases. Rent, health care costs and even the amount spent on communications like smartphones, tablets and broadband Internet service are all up.

More than anything, perhaps, is that consumers have become conditioned to expect discounts and promotions. As the TV commercial says “nobody pays retail anymore.”

All of this has combined to create a very deflationary atmosphere the past year or more, meaning retailers have needed to be competitive and drop prices to keep products moving off the shelves.

While prices may be down, demand is certainly up. November sales were generally solid, with strength seen in sales of electronics, food and beverage, clothing, sporting goods, general merchandise and on-line and other non-store sales. Weakness in furniture and building materials was seen, but both had been strong in October.

“Lower prices might be bad news for retailers. But they are good news for retailers’ customers, who are getting great values for the prices they pay.”
NRF Chief Economist Jack Kleinhenz

Economist Richard Curtin, who compiles consumer sentiment data for the University of Michigan, stated recently that overall buying attitudes were solid due to the lower prices. He noted that purchases of durable goods were at the highest level since 2006. He says consumers are willing to spend but, as has been the case since the end of the recession, they will continue to dig for discounts and sales.

What’s the bottom line? Lower prices might be bad news for retailers. But they are good news for retailers’ customers, who are getting great values for the prices they pay. And, in the long term, what’s good for consumers is good for retail.

Jack Kleinhenz

December 15, 2015

National Retail Federation


When it comes to the U.S. economy, one can’t help but feel a sense of déjà vu. Similar to last year, unseasonably cold weather and lingering caution among budget-conscious consumers have dampened economic activity since the first of the year. However, as we head into the second quarter, I expect we’ll see that the consumer is actually more in the driver’s seat compared to this time last year. Lower energy costs, rising home equity, job and income gains and increased buying power from the stronger U.S. dollar will all continue to positively contribute to greater consumer spending ability — a key factor for further economic gains.

Other positive factors that will continue to influence improved growth in consumer spending include growth in real disposable income, which has grown 4 percent on a year-over-year basis ending in February — the fastest rate seen in two years — and stock market gains that are about 12 percent above this time last year. Additionally, housing price appreciation and decreased household debt burdens are at their lowest in at least 35 years, contributing to bigger gains in consumer confidence.

Economic expansion in the United States is expected to continue, but the burden of carrying the world economy on its shoulders could be an obstacle on the path toward stronger U.S. gains.

This month’s full report includes these highlights:

Retail Sales

Retail sales (excluding automobiles, gasoline stations and restaurants) reversed course and increased 0.5 percent in March after dropping 0.4 percent in February.

Consumer Sentiment

The University of Michigan consumer sentiment index beat expectations in the first half of April, increasing to 95.9 from March’s average of 93.

Consumer Prices

The March headline Consumer Price Index rose 0.2 percent between March and February. This was the second positive reading in five months.

Gross Domestic Product

The third estimate of fourth-quarter GDP reflected no change to the 2.2 percent rate from the second estimate.


Single family starts rebounded by 4.4 percent to 618,000 units in March and homebuilding is off to a good start. Weather appeared to play a negative role earlier this year not only on starts but on completions.


Job growth slowed in March as private payrolls rose an anemic 129,000. Overall employment (public and private sectors combined) increased 126,000 in March.

Retail Jobs and Openings

Total retail employment across all industry segments increased 25,900 to 15.6 million in March. There were 463,000 job openings in the retail industry on the last business day of February.

Personal Income and Spending

Personal income rose by 0.4 percent in February while personal consumption inched up only 0.1 percent.

Chicago Fed National Activity Index

The economy was growing even slower last month according to the Chicago Fed National Activity Index which recorded activity dropped to -0.42 in March from -0.18 in February.

Download the full report (PDF)