View
from the States: A Sense of the State
of the U.S. Retail Market
Reading the U.S. retail market is a
bit like the weather in the Midwest (the part of the
country in which I live). If you blink, it changes!
The
U.S. retail marketplace has indeed gone through some
stormy weather that has brought about significant
changes as we come up on the end of Q1 2008.
Here is my take on where the market was and where
it is going this year.
2007: Where It Was
Mark
Dollinger offers his perspective on aspects of doing business in
the United States. Mark often participates in trade shows, accompanies clients
on road shows and trips, and represents clients at meetings.
Just like the month of March, 2007 came in like a
lion and left like a lamb.
Retail was strong throughout the
first half of the year, as it has been for an historically
long period. During the crucial holiday season (late November/
December), it lost much of its "power," and limped home
to the end of the year.
Drivers behind the retail market: an
eroding U.S. economy; declining home values, rising unemployment,
and a general sense of a weakening economy. All of these
weighed heavily on the U.S. consumer.
Continuing to Consolidate
Retail continued its trend
toward consolidation. I defined a concept last year I called "the
Law of Two" to
help understand the retail landscape in the United States.
The
Law of Two posits the following:
A healthy
retail sector contains two dominant retailers that account
for more than 80%
of the sector.
For example, look at the mass merchant category, there's
Wal-Mart and Target; in home centers, Home Depot and Lowe's;
and in wholesales clubs, Costco and Sam's.
When a healthy category contains more
than two players, it will consolidate to
two players.
For
example: The office supply sector currently
contains three major players (Staples, Office Depot, and
Office Max). When a sector contains a single
dominant retailer, this sector is in distress and will likely be eliminated
from the retail landscape. In 2007, that was precisely what
occurred in the computer supercenter sector with the demise
of COMPUSA.
2008: Where It's Going
This year entered quietly (like a "lamb").
It doesn't seem likely that a recovery will occur
within the calendar year. There are a number of factors
driving the current lamb-like economy:
The housing
"crisis." Foreclosure rates are
increasing. (A foreclosure occurs when a home owner
cannot meet his or her mortgage payment and returns
the home to the mortgage holder).
Record high energy
prices. Gas (petrol)
has reached more than $3.00/gallon. I know this does not
sound expensive to Israelis, British, and other Europeans,
but to an American, these are very, very high prices.
The end of the "China effect." For
a generation, inflation was kept in check by the movement
of production to China. In 2007,
costs in China began to escalate meaningfully.
Concerns about job creation. The
U.S. economy is consumer driven.
When Americans are concerned about their jobs, they slow
down in their buying.
What Does All This Mean for U.S. Retailers?
I think that the Law of Two will
rear its ugly head in the following sectors in 2008:
Traditional
department stores. This sector consolidated
to one major retailer in 2007 with the acquisition of
May Company by Federated Department Stores (Macy*s).
"Middle"
retailers
are
now squeezed by the soft retail environment with traditional
department store customers "trading down" to
off-price retailers such as TJ Maxx or migrating to mass
merchants and wholesale clubs. Watch Macy*s for possible
"signs of suffering" in 2008.
Consumer electronics. My
prediction brings good news and bad news. The
good news: There are currently two core retailers in the
category -- Best Buy and Circuit City. The bad news:
Circuit City is sliding badly and could end up
in "reorganization" in
2008 (Chapter 11 bankruptcy). If this occurs, then this
sector will turn into a one-retailer sector, which might
indicate a red flag.
The Broader Implications
So how should you read my "gloom
and doom" predictions for 2008? The answer is very
simple. If you have innovative product that "makes sense" for
the U.S. marketplace, the time is now!
In our more than 30 years of working in the U.S.
retail market, we've come to understand that sometimes
the best time to introduce new
and innovative products is in down markets. Why does
this make sense?
When the economy is strong, a retailer
does not need to take risks to succeed. Simply offering
the consumer what is currently selling will suffice.
However, when the economy weakens, consumers become
more selective. They buy what they "need" (for example,
a replacement cookware set) and what
makes them "feel good," a novel product
that catches their imagination.
One of our clients in the frozen food industry
entered the market in the past six months. Working
on a market strategy/business development project in conjunction
with the company's management, it was decided that
the U.S. was ready for the company's novel product range
in spite of the weak economy.
The
result: In the first four months of the U.S. effort (headed
by a U.S. sales manager), the company has placement
in more than 1,000
locations!
Take-Away Message
A soft U.S. economy is often an ideal
entry point for a novel product range. When the economy
is strong, retailers do not need to take risks. They
are "fat
and happy." Good retailers understand that the
time to look outward is when the retail landscape softens.
