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Yaromir Steiner on the shrinking middle class

Despite a decade of sustained economic growth, retail turbulence persists. Consolidation, closures, and realignments. The emergence of new retail concepts. The clash between brick-and-mortar, online, and mobile retail channels. All this has contributed to a feeling of uncertainty across the industry.

Media and analysts attribute this turmoil to the impact of online and mobile sales. Experts suggest brick-and-mortar retail is overbuilt by 20%. While conventional wisdom suggests a connection between these issues, I believe it’s an incomplete explanation for what’s really happening. More stores are opening than closing. Research from IHL Group shows that “North American retailers will open 12,663 stores and close 8,828 stores in 2018, for a net increase of 3,835 store locations.” Discussing excess retail space requires important context.

Most excess space is in traditional malls, a struggling sector comprising 15% of the market. In other words, this isn’t industry-wide oversupply, it’s supply-and-demand imbalance. Power centers and grocery-anchored centers are in higher demand than ever. Asymmetry is an issue, but it’s not a crisis. Imbalance also offers a silver lining: a better understanding of the power of well-executed mixed-use projects. A carefully curated retail mix enhances corollary uses.

What’s behind so-called shifting consumer demands? The biggest issue is a dramatic decrease in available discretionary income, which can be directly attributed to a shrinking middle class. The trend is alarming.

Between 1945 and 1980, the bottom 90% of Americans claimed 70% of all declared income. Beginning in the 1980s, changing economic policies had altered income distribution. By 2015, that bottom 90% claimed around 50% of all income—a 20-percentage-point reduction! That decrease largely came from those who traditionally spent a large portion of their paychecks on retail. Meanwhile, the top 10 % have boosted declared income by more than 65%, but their increased retail spending is comparatively minimal.

Against that backdrop, the rise of discount retailers makes perfect sense. Like an ocean liner, industry momentum takes time to change course. The ‘80s and ‘90s saw continued construction, even while middle-class demand waned. With 10-year leases standard, it’s easy to see how outdated brick-and-mortar concepts kept going forward until marketplace gravity exerted its inevitable tug.

Middle class shrinkage is harder on traditional retailers than it is on online competitors. Digital accounts for just a fractional percentage of all retail sales, and the impact of digital dollars is more complicated than is often portrayed. Online-only brands rarely compete directly with brick-and-mortar, and some competitive losses are offset by brick-and-mortar brands enhancing their own online and mobile platforms. With traditional brick-and-mortar brands getting better at price-matching, streamlined delivery, and convenient pickup, true omnichannel retail is moving from theory to practice with remarkable speed.

The current of innovation flows both ways. Growing numbers of acclaimed online-only successes now recognize that they need brick-and-mortar locations to maximize their potential. Lifestyle brand Marine Layer, shoe startup Allbirds, and mattress retailer Casper are recent examples. Formerly online-only brands creatively leverage brick-and-mortar locations, with “showroom” or fitting room concepts—using physical locations to connect with new markets and audiences.

As this “channel-neutral” approach spreads, it’s become clear that Amazon isn’t killing traditional retail. It’s prompting it to evolve. Online and in-line aren’t in competition. Indeed, they are increasingly interwoven.

Excluding mail-order and brick-and-mortar online numbers, true online-only sales account for around 4% of overall retail sales. While that may double in the next decade, the impact should be negligible.

Retail developers should proactively adapt to new demographic and industry realities. New consumer-facing technologies make it easier to shop brick-and-mortar. Target and Walmart have been reorganizing themselves as essentially in-store distribution centers. Last year, most of Target’s online holiday sales shipped from stores, not warehouses. It’ll be interesting to see how that store-network model evolves alongside the very different Amazon warehouse model.

Retailers are identifying their function as efficient merchandise distributors and/or suppliers of unique/customized experiences. This emerging self-awareness inspires new concepts and forces retail developers to adjust their thinking about the environments they create. From fluidity and uncertainty comes inspiration and innovation. The future is bright and exciting—for those who embrace change.

Yaromir Steiner is the founder and CEO of Columbus, Ohio-based Steiner + Associates.
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