Independents' Day: An Opportunity in U.S. Retail

Explanations abound: fashion miss-steps; unfavorable press; market saturation; out-maneuvering by competitors; efforts expended on troublesome foreign markets; store traffic disruption due to remodels; gas prices; and even the weather. Undoubtedly, each of these factors has played a role in explaining the slow sales growth of the mammoth retailer.

Age and Income Shifts

Yet, these factors don't account for substantial age and income shifts that strike at the foundation of the retailer's growth. During the 1990s, Wal-Mart experienced rapid growth, aligned with 1.8% compound annual gains (CAGR) in the critical 35-44 bracket, and 4.2% CAGRs in the 45-54 bracket. The Boomers were raising families, and Wal-Mart offered an affordable option for time-pressed soccer moms. Yet, from 2000 to 2010, the 35-44 age bracket will actually decline by 0.9% on a CAGR basis, and the 45-54 bracket's growth will slow to only 1.7% compound annual growth. As the Boomers age (the 55-64 bracket will grow by 4.0% on a CAGR basis from 2000–10), the appeal of a price-focused mass merchandiser with immense store footprints declines.

Moreover, the income picture is changing. Global Insight forecasts real disposable income to grow an average of 3.5% annually through 2010 (versus average annual growth of only 2.4% from 2001–06). Though the number of households earning less than $60,000 grew slightly in the first half of this decade, their numbers will actually decline through 2010. At the same time, those earning more than $90,000 per year are expected to grow by more than 5% on a CAGR basis through the end of the decade. All other things being equal, this shift in the proportion of households that are in the upper income brackets does not support growth for discounters.

The changing age and income profile of the American shopper suggests that structural, demographic factors are instrumental in understanding the root of Wal-Mart's marketplace issues.

The End of the Efficiency Cycle

The retail landscape is littered with retailers, both large chains and small independents, who were swept under Wal-Mart's tide of efficiency gains in the 1990s. Through the power of data and software-enabled supply chain optimization, Wal-Mart translated reductions in operating expenses into savings when shoppers compared prices to less-efficient competitors for the same products. With some exceptions, those who didn't file for bankruptcy were acquired in waves of consolidation.

American retailers in 2007 have incorporated the vast majority of operational efficiencies that Wal-Mart implemented so successfully. These more nimble, flexible, and well-managed retailers are, ironically, the beneficiaries of Wal-Mart's supply chain practices. Moreover, they have also learned how to more successfully compete against Wal-Mart. Broadly speaking, this has meant a greater focus on customer service, upscale and customized product offerings, and strategically ceding price leadership on selected categories where differentiation could allow for higher prices and an emphasis on other equity drivers.

In short, this has meant that, with efficiencies built-in, retailers can focus on effectiveness and innovation—on selling and marketing to consumers instead of commoditizing and cheapening their product offerings. Business models that emphasize cutting costs in order to achieve cheap prices are off-cycle in this "new wave" in retail.

An Opportunity for Independents and Smaller Players

This shift to an effectiveness cycle, combined with the age and income changes discussed earlier, suggests that American consumers will be seeing a more differentiated, customized shopping landscape with trade-up opportunities at the very same time they are seeking and able to afford them.

This suggests that many smaller retailers who can capitalize on shoppers' desire for lifestyle experiences, unique items, local "feels," and specialized services will benefit. Local independents, once thought dead in American retail, may experience a resurgence as older, wealthier shoppers shun price-focused, cookie-cutter formats that have not traditionally emphasized customer service. It is as if the pendulum is swinging back a bit, as consumers reconsider the cost of low prices on the quality of their shopping experience and the products they buy.

We expect that even the larger players will increasingly emphasize smaller formats, unique and more flexible footprints, localized assortments, and a lifestyle orientation that consumers will expect and pay for. This balance between efficiency and effectiveness will challenge larger retailers, who have traditionally banked on the former to grow sales.

We expect that those retailers who emphasize the qualities and services that smaller, independent players excel at will win in the years to come. If not Independents' Day, then at least a revival of some old-school retailing skills may be underway.