While some blamed the rise of e-commerce — specifically, Amazon and Walmart’s dominant online presence — for selling toys online and undercutting prices, others pointed to private equity for milking profits without investing in the business. Millennials have also been blamed for preferring experiences to material goods. But rarely is there a single, clear explanation for why retailers fail — more often, it is the result of several factors that end up driving large-scale changes, and there are several ways to prepare.
Take Notice of Shifting Demographics
One of the key factors prompting the death of Geoffrey the Giraffe was the vanishing middle class. When Charles Lazarus founded Toys “R” Us in 1948 after returning from World War II, he noticed that people were starting families, which meant toys were becoming a recurring purchase for consumers. This astute observation allowed Lazarus to align his business with the economy, and ride the wave of the rising middle class.
Fast forward 70 years to 2018, and the middle class has shrunk, with huge numbers moving to lower incomes while the wealthy are gaining substantial spending power. Although the economy has grown significantly since 2008, 80 percent of the population is worse off when the rising costs of non-discretionary expenses are factored in. In fact, the bottom 40 percent had less discretionary money to spend in 2016 than they did in 2007. This shift has had a profound impact on retailers.
Deloitte recently released a study showing that the five-year revenue growth for low-priced retailers was up by 37 percent, and growth for premium retailers was up by 81 percent. While the high and low ends thrived, mid-priced retailers only grew by 2 percent. This is a reflection of the polarized economy, where lower income households must stretch their dollars, and therefore frequent the likes of Costco, Walmart, and Dollar Stores — outlets with the lowest-price products. Meanwhile, upper income families spend their money at Apple, Whole Foods, and Ulta — retailers offering high-end goods and luxury services. Retailers pricing goods in between these extremes have a shrinking customer-base, which is evident by their lack of revenue growth.
E-Commerce: The Problem and Solution
While the shrinking middle class is one explanation for this retail decline, many view digitization as the underlying agent driving the change. The “winner-takes-all” dynamic of the digital economy has been a point of concern for retailers big, small, and in between. With more options and cheaper prices than ever online, all companies are feeling the heat of increased competition, and some, like Toys “R” Us, have not been able to keep up.
While e-commerce has outpaced some retailers, it can also empower small businesses by connecting them to more extensive global markets. The digital economy is disrupting traditional retail, but that does not mean all of Amazon and Google’s competition will go extinct. In fact, according to Deloitte, the net store-opening rate among U.S. retailers between 2015-2017 was positive, due to new openings specializing in low-priced and premium goods. E-commerce retailers of all sizes can launch their company and thrive by offering clients the seamless convenience of digital business.
Price It Right
Regardless of the cause, the realignment of retail has not been kind to retailers that fall in the middle. In addition to closure of the beloved Toys “R” Us, bankruptcies in 2017 included Wet Seal, The Limited, Radio Shack, and Gymboree — all retailers that did not appeal to low-price or luxury shoppers. Retailers in that category experience greater competition, leading to the survival of the fittest — or in this case, those that can best adapt to meet today’s consumer demands.
So how do retailers know where to price goods in stores and online that will perform best in the face of such fierce competition? Technology can help with that, too. By leveraging digital tools, not only to put goods online but to price them accordingly, retailers can respond to economic and demographic changes as they occur. Price technology can ensure competitiveness in the marketplace while eliminating manual entry for sales order details, bills of materials, and routings — making business a whole lot faster and cheaper.
As the middle class continues to dwindle, retailers need to invest in ways that address customer needs. To succeed in the modern digital world, retailers must keep a pulse on how socioeconomic factors affect consumer habits, and leverage technology accordingly if they want to stay profitable. While mid-priced retailers should embrace digitization and explore what e-commerce has to offer, they must also consider shifting toward pricing at the extremes — either embracing lower-cost or higher-value products.
David Dorf is vice president of converged commerce for Infor.
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