Our retail market reflects the state of the consumer, and today’s consumer has pivoted significantly from the beginning of 2020. Let’s look at how certain market factors in early 2020 have combined with the COVID-19 pandemic to create today’s retail conditions.
Overall, consumer spending accounts for approximately 70% of the U.S. GDP. Of that, 64% is spent on services—healthcare and housing rank first and second. The Bureau of Economic Analysis released a report on April 29 that indicated a drop in consumer spending in addition to a large shift in disposable income now going toward paying down debt such as mortgage, student loan, auto loan or credit card debt.
Simultaneously, wages have not substantially risen since the previous recession, which means consumers today have less discretionary income. That in turn means that the retail landscape is more competitive than ever before, as retailers must chase consumers’ elusive disposable dollars.
Shifting Consumer Behaviors
Consumer behaviors driven by demographic shifts between generations have historically contributed to the retail landscape. An example is Amazon’s rise in popularity, driven by tech-literate Gen X and older Millennials. Over the past 15 years, we have moved from category killers (large junior box retail stores such as Bed Bath & Beyond or Barnes & Noble that sell specialty goods and previously drove retail community and power center development) that began to falter as Amazon introduced online purchasing via a single channel format.
Interestingly, over the past five months alone, COVID-19 accelerated shifts in consumer behavior that would have typically taken three to four years. Online shopping went from popular to crucial, and thus exposed a weakness in Amazon’s single-channel format: delivery failures. Customers could not get their orders for sometimes up to several months, as Amazon couldn’t accommodate the influx of orders in a timely manner. Customers became frustrated with Amazon’s lack of available customer service support, and at the same time the company received negative press coverage from its treatment of delivery and warehouse workers. Amazon’s dominance began to wane.
The Omnichannel Opportunity
In the light of Amazon’s challenges amid the pandemic, a new retail strategy has begun to rise: omnichannel.
The omnichannel strategy puts the consumer at its center through brand loyalty and works across all platforms to implement a seamless and robust supply chain. Everything, from logistics to marketing to product design, is tailored to what the consumer wants. To best serve the consumer, a product may have multiple points of access including drive up/pick up, online order for customer pickup, local store delivery or order online with traditional delivery.
An example of omnichannel strategy is the increase in retail purchases via mobile phones. Adding PayPal to a store app or website increases retail sales significantly due to ease of ordering; otherwise, the retailer has a 70% chance of losing the sale because customers leave items in the shopping cart if they have to find a credit card. Omnichannel strategy makes the process seamless for the consumer to order, buy and receive items.
Millennials and Gen Z
While the Bureau of Economic Analysis estimates that the GDP contracted in Q1 and Q2 of 2020, the good news is that Creditntell research indicates everyone, across every demographic, still loves to shop at brick-and-mortar stores. The biggest opportunity for retailers that can effectively harness omnichannel strategy is the Millennial and Gen Z shoppers.
Though they may have the least amount of money, Millennials and Gen Z spend the most money across all generations (via credit), and thus they are the largest population that affects consumer trends. Additionally, they are nearly always on technology (from work to Instagram or both at once), so they see shopping as a social event and a chance to take a break from their virtual world. All of this adds up to a big opportunity for brick-and-mortar retail stores, especially if they successfully target the Millennials and Gen Z.
Retailers should also take note of a few factors that differentiate Millennials and Gen Z from their Gen X and Boomer predecessors. First, these generations carry substantial debt from student loans. In fact, student loans edge out credit card debt, sitting 21% of their debt load while credit cards represent 20%. Millennials and Gen Z are also the most ethnically diverse generations demographically, so retailers will need to adjust their marketing and ethos to reflect their younger customers’ needs and wants.
Unfortunately, many retailers that were too large and slow to pivot in the face of changing customer values and COVID-19 have filed for bankruptcy, and the Chapter 11 fallout is not over yet. We should expect to see a continued softening in the retail market for Q3 and Q4 with further retail store closures.
However, this opens opportunities for nimble entrepreneurs who can adapt to the changing environmental factors brought about by COVID-19 and continued demographic shifts. We look forward to tracking how the market will rebound in new and creative ways, and as history has often shown, the recovery will hopefully be faster, steeper and more dynamic than the economic market decline, resulting in an abundance of opportunities for well-positioned real estate owners, investors and tenants.