Natural Selection

If there is one constant in retailing, it is that trends usually stem from consumer-driven changes. Demographics, generational values and life stages are powerful influencers of behavioral change: Retailers need to respond to them. And they do, often making minor adjustments and sometimes developing new concepts. Rarely, though, do they make major adjustments in strategy or respond in a significant way, which is why most trends evolve slowly.

Nevertheless, major trend-shifting events do occur in the marketplace, caused mostly by external factors. During these critical periods of trend-shifting, or “turning points,” markets fundamentally change. If retailers fail to recognize or respond at these critical points, it can spell disaster. Retailers who recognize these signals and formulate a response will prosper. Those who don't will struggle to survive or simply disappear.

But projecting where retail is headed is a challenging task — as difficult as predicting the next major turn in the business cycle. We do know, however, that we are currently at a critical point.

The Power of Demographics

Demographics are powerful predictors of consumer behavior. They shape when, what, how, why and where consumers shop. Several macro-demographic trends have been driving consumer behavior for the past 25 years, and will likely continue for another 25 years. These well recognized and important trends include:

• Aging Population — In 1980, 56 million people in the United States (25 percent of the population) were over 50 years old. Today, 90 million people are over 50. One thing we know about people as they age: They become extremely demanding. They've purchased most everything several times in their lives; they know what they want and what they don't. Ads mean little to them; brands are important. Service is important and so is information. Not an easy group to please!
• Changing Households — Today, 75 percent of eligible adult women are in the work force, and single heads of households now outnumber married households. Many women don't have enough time for traditional activities and chores, including shopping. Add to this the growing number of smaller, fragmented households, and retailers are left with a clear challenge: rethink formats, products and services to better meet the needs of working women as well as non-traditional households.
• Exploding Ethnicity —In 1980, 20 percent of the American population belonged to four key ethnic groups : Black, Hispanic, Asian and American Indian. Today, that number is 32 percent. Hispanics represent the largest portion (roughly half), and are the fastest growing segment of the population.
• Polarization of Income — The disparity in buying power between the “haves” and “have nots” has increased significantly over the last 25 years. Real growth in income in the U.S. over this period has been concentrated in the top quintile of households, with most of that increase in the top 5 percent. The rest of the households in America are living on the same budget they faced some 25 years ago. As a result, consumers seek products that provide equal or better quality at a lower price.

Demographics and life stage are major contributors to behavioral changes. Societal factors and generational values also play a key role. Analyzing these trends, we see several major changes having a significant impact on retail. Many of these changes will linger, become more important or mutate into new trends in the future. The big five trends in consumer behavior today include:

• Market Polarization — Consumer preference for premium offerings on one hand and no-frills offerings on the other are squeezing out middle-of-the-road products and services. Who we think of as the “average” middle class consumer is disappearing. Mass luxury items have become affordable, and shoppers “trade up” on items in which quality/prestige is key. They also “trade down” where saving money is more important.
• Time Compression — Many Americans feel their life is a race against the clock. It's more than just a lack of time, it's the challenge of managing time in small segments. Convenience, simplification and complete solutions are priorities, as is utilizing the Internet to balance time demands. Retailers offering personalization, convenience and easy multi-channel shopping experiences will keep shoppers satisfied (and coming back).
• Control — Consumers, especially Boomers, want to be in control of their lives and shopping experiences, and the Internet has opened the door for them to establish control in many retail settings. Consumers can obtain complete knowledge about virtually any product, and compare and contrast their options online. Consumer advocacy, customer ratings and customer experience are perceived as more credible.
• Shifting Preferences — Today's most compelling products and services facilitate experiences rather than just delivering function. Women and Gen Y consumers, in particular, prefer benefits and solutions over features and functionality. Consumer preferences in retailing are shifting from goods to services, from mass to individualization, items to solutions and from products to experiences.
• Wellness — Society at large has an increased focus on the pursuit of wellness. Attention to weight loss, anti-aging, vitality and beauty is growing as people are getting older, living longer, and looking for ways to enhance their lives. This offers a tremendous opportunity for retailers and service providers.

Strategic tipping points are normally caused by an external catalyst that forces change to the status quo. Ongoing trends shift direction. Developing insights into what causes these shifts is critical to preparing for the changes that follow. Potential catalysts in the retail marketplace include:

• Technology — The speed of implementation of new technology today is phenomenal. As a result, technology has become the most significant catalyst of the past 10 years. The Internet has completely changed the way people shop. By 2010, it will influence nearly half of all U.S. retail sales. While some older shoppers may resist technology, younger shoppers expect it in the retail environment. Retailers must straddle the generations.
• Innovation — In retail, innovation comes in cycles. And after a slow period in the '90s, we're seeing a number of innovative ideas in the marketplace. New formats, new experiences and new services are required as part of the next cycle of innovation.
• Geopolitical Events — Every society faces potential threats that radically alter consumer behavior and disrupt trends. Examples of recent unknown threats are terrorism and natural disasters. Global warming may be a candidate for the future.
• Societal Change — Consumer attitudes are constantly changing, and dramatic shifts can accelerate or disrupt current trends. Attitudes currently being tracked include corporate accountability, environmental concerns, consumer demand for authenticity and self-invention or self-actualization (as a corollary of wellness). As society mutates, so must retailers.
• Economic Bubbles — A number of economic bubbles exist in the U.S. (and the world) today that could significantly impact consumer expenditures — the key driver of retail sales.

Not all market catalysts can be predicted or planned for, but successful retailers study and monitor them on an ongoing basis. Good ones have contingency plans to deal with special situations as they arise.

Retailing has changed, and the consumer is the key driver of that change. Shoppers have more control than ever over where, when and how products and services are purchased. What was once a relatively homogeneous middle class has segmented into individuals who prioritize self-expression over conformity. The result is both proliferation and blurring of retail channels. The old rules no longer apply.

We see a number of potential trends that may eventually hit tipping, or inflection, points:

• Retailers Becoming Active Agents of Change — One inflection point occurred several years ago, when retailers recognized that they could become brands themselves. The idea that retailers can determine, control and communicate what their brand stands for has lead to a breakthrough in capturing consumers' hearts, minds and share of wallet. (See “What's in a 'Store Brand,' Anyway?” Gifts & Decorative Accessories, July 2007.) Yet with this new power comes new responsibilities, such as the way management and employees behave as an organization … toward each other, customers and the community at large.
• Customization at Retail — Another inflection point occurred when we moved from mass retailing and marketing to mass customization. Treating different segments of society in different ways via format, media, offer and services has improved the customer experience. But even several sizes do not fit all. As the demand for customization grows, the challenge will be to provide experiences that satisfy each consumer while achieving acceptable growth and return on investment. This will require retailers to be more selective in their hiring practices, to develop an adaptable organization and to provide information and systems support (probably mobile) that helps meet customers needs on an individual basis. Can retailers execute, cost effectively, in one-on-one retailing?
• Interconnected Economic Bubbles — In 2006, for the first time since the Great Depression, consumer savings rates dropped into negative territory. Only the top echelon of our society is experiencing real increases in income. We have huge government debts and trade deficits; our population is aging and will be demanding resources to maintain their health. The need for economic change, and its resulting impact on inflation, interest rates, taxes and ultimately jobs and consumer expenditures, is approaching a tipping point. Retailers need to monitor these economic bubbles and be prepared for a major inflection point in advance.

The future of retailing is both exciting and challenging. One thing that we've learned for certain is that the retail winners of the future will be constantly in motion, always changing. Being in motion doesn't guarantee winning, but standing still is a sure way to lose!