Last week, the Talented Blonde wrote a piece for the Bloomberg Brief looking at the relationship between the large retailers fortunes and the U.S. Economy.
Find the entire document here.
Large Retailers’ Plight May Reflect Shift in U.S. Economy
The recent decline in the fortunes of several large retail chains mirrors the hollowing out of the middle class following the 2007-2009 recession. Lost jobs, falling wages and shifting preferences among consumers reflect increasing income inequality and a bifurcated retail market. The difficulties faced by these mass market retailers, such as J.C. Penney Co. Inc., Target Corp. and Wal-Mart Stores Inc., may be indicative of a greater shift underway in the retail sector and the U.S. economy.
While Hurricane Sandy, lackluster holiday retail sales, and the increase in the payroll tax have presented ready-made excuses for retailers to explain away their woes, the larger issues are lost jobs and falling real wages. According to the National Employment Law Project about 60 percent of jobs lost during the recession can be classified as middle-wage occupations. Meanwhile, 58 percent of jobs created since 2009 have been in low-wage occupations while middle-wage jobs have risen only 22 percent. This has induced a shift in consumer behavior that mass market retailers have yet to adjust to or acknowledge.
The nominal gains seen in retail spending over the past few months are mostly due to spending by upper income earners. The top 1 percent of earners have seen an 11.2 percent increase in incomes while the bottom 99 percent have seen a minus 0.4 percent decline. The inequality in income gains combined with the rebuilding of overall wealth that has occurred since the recession ended in 2009 have restrained consumer spending for all but the upper income earners.
In contrast with the modest increase in nominal sales, earnings for retailers tell a different story. J.C. Penney Co., lauded as a turnaround story early in 2012, ended the year with a fourth quarter loss of $2.02 per share, a same store sales loss of 31.7 percent, a sales decline of 28.4 percent, a 34.4 percent decline in online sales and a 17 percent decline in traffic.
Last year it seemed J.C. Penney had all the makings of a rising retail powerhouse. It had a new CEO, Ron Johnson, fresh from Apple Inc. and who before that had been responsible for turning Target Corp. into the ‘saving-is-sexy’ discount temple it is today. Sergio Zyman, an ex-Coca-Cola Company marketing guru, was brought in to lead J.C. Penney’s multi-channel glossy re-branding campaign. Johnson also added a cadre of sexy new fashion brands, including Jonathan Adler, Oscargown designer Georgina Chapman, and Canadian fast-fashion brand Joe Fresh. This isn’t your mother’s Penney’s.
Yet, the data shows consumer are not connecting with these bold moves. The company’s performance, as well as its equity share price – down almost 20 percent year-to-date – is likely a reflection of severe economic pressures on the middle class and a shift in behavior among consumers.
Penney’s is by no means alone in this plight. Target Corp. has also taken a hit. The company’s fourth quarter same store sales of 0.4 percent were accompanied by negative traffic of 1 percent, the first negative quarterly traffic report since the second quarter of 2009.
Retail behemoth Wal-Mart actually led the bad news, albeit in an awkward way, when Cameron Geiger, Wal-Mart’s vice president for merchandise replenishment, in leaked internal emails, lamented “Where are all the customers?”, “Where is their money?” and referred to February sales as a “total disaster.” Wal-Mart expects its first-quarter sales in the U.S. to be flat year-over-year, compared with 2.6 percent this time last year.
So where exactly has the middle class consumer gone? This cohort has probably traded down to dollar stores due to the loss of income and changed economic status. Consumers initially traded down to Wal-Mart and Target following the 1990-91 and 2002 recessions. They’ve now sought out the next level of trade-down.
Traditionally consumers frequented Dollar Stores as a “treasure hunt” to find deals on gifts and household décor. Due to changing economic circumstances, these consumers are now frequenting these outlets for basics and consumables as a de facto grocery store, creating a sweet spot for dollar stores that target households with incomes of $30,000 to $50,000 per year. As a result, investors may see a continued rise of smaller footprint drug stores and dollar stores continuing to pick up market share from large retailers.
It’s increasingly likely that the customers the large retailers are targeting have moved on and may never to return. Middle class consumers may have fled to greener – and less expensive – pastures.
(Kristin Bentz is executive director, PMG Venture Group)
