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Deloitte: Consumer economics driving retail bifurcation

The so-called ‘retail apocalypse’ is a myth. But retail industry bifurcation is not — and those in the middle are in a tough spot.

That’s according to a new study from Deloitte, which found that, rather than a battle of online against brick-and mortar, retail is changing in line with consumer income bifurcation. The revenues of both higher-end and price-conscious retailers are soaring, growing 81% and 37%, respectively, while those in the middle realized a mere 2% increase in sales during the past five years.

Overall, the retail sector is showing signs of healthy growth, Deloitte said, with sales increasing 3.5% in 2017, compared to a gross domestic product growth rate of 2.3%.

"Despite the popular narrative, the 'retail apocalypse' is far from reality," said Kasey Lobaugh, principal, Deloitte Consulting LLP and the report's lead author. "Brick-and-mortar retail is not on or near its deathbed. In fact, we're seeing retailers open new stores at an astounding pace, and physical retail is growing alongside digital.”

The study shows a dramatic change in line with the impact of consumer bifurcation along economic lines. “While specific retailers may see an apocalypse, others see opportunity,” Lobaugh said.

Based on a survey of more than 2,000 consumers and an analysis of a large collection of US-based publicly traded retailers, "The great retail bifurcation: Why the retail "apocalypse" is really a renaissance study examines a growing disparity between consumer income cohorts and highlights the impact of this bifurcation on retailers. Incremental income generated since the recession has disproportionately gone to high-income households, with virtually all income growth between 2007 and 2015 going to the top 20%.

Key economic findings from the study include:

• Only one-in-five surveyed consumers (20%) are better off in 2017 than they were in 2007 in terms of disposable income, with little to spend on discretionary retail categories. Overall, 80% have fewer funds for traditional retail segments such as apparel. Alongside this trend, high-income consumers are 10% more likely to report spending more over the last year.

• Rising costs: Faced with stagnant levels of income, lower-earning consumers have seen the costs of nondiscretionary items skyrocket: health care expenditures have risen 62%, education 41%, food 17% and housing 12%, according to Deloitte's analysis of reports from Bureau of Labor Statistics.

• New expenses: Modern consumer essentials like mobile phones and data plans now take up an increased portion of discretionary spending, stealing share from traditional retail categories. Low-income consumers feel the brunt of the impact, spending 3.6% of their income on digital devices and data, compared to just 0.71% or high earners.

"Households have diverged along economic lines and now people's respective income levels are steering their behaviors and dictating the success of retail segments," said Robert Stephens, senior manager, Deloitte Consulting LLP and co-author of the study. "More affluent shoppers have fueled high-end retail as their income and net worth have grown, while lower-earning consumers, faced with growing expenses and dramatically less disposable income, have turned toward price-conscious stores. Retailers that try to court all consumers will likely be challenged as income bifurcation leaves different shoppers with differing motivations."

In line with consumer bifurcation by income level, Deloitte found the retail market is also bifurcating along economically-driven divides. Deloitte defined three retail cohorts: premier retailers that deliver value via premier product and experience offerings; price-based retailers that deliver value by selling at the lowest possible prices and clearly communicating that proposition to customers and balanced retailers that deliver value via a balance of price and/or promotion.

• More stores are opening than closing: From 2015 to 2017, price-based retailers gained 2.5 stores for every store balanced retailers closed. There have been more than 4,500 store openings from price-based retailers since 2015.

• Revenues have grown: Premier retailers have seen 40 times more revenue growth than that of balanced retailers over the last five years, with revenues soaring 81% versus a mere 2% increase for balanced retailers. Price-based retailers, meanwhile, have seen their revenues steadily increase 37% over the same period.

• Sales climb overall: Premium (8%) and price-based (7%) retailers' sales rose in the past year, while sales of balanced retailers declined by 2%.

According to Deloitte, income bifurcation has triggered the following differences in consumer shopping behavior between economic groups:

• Preferred formats: Low-income consumers are 44% more likely to shop at discount retailers than other groups. These consumers are also more likely than others to shop at supermarkets, convenience stores and department stores.

• Channel choices: The majority (58%) of low-income consumers are choosing to shop in store, while 52% of high-income consumers prefer to shop online.

• Shopping around: In-store spending fragmentation – or the number of retailers a consumer regularly shops - is 17% higher amongst high-income consumers. Fragmentation is even more exaggerated online, as affluent consumers are 40% more fragmented for online retailers than consumers in the lowest income cohort.
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