Opportunity Knocks in a Polarized Retail Market
In the US these days, we find ourselves living in a business dichotomy, where, at the best of times, every day is a rock fight. On the good news front:
- The U.S. economy has never been better
- With target inflation in sight, the Fed avoided recession and stuck a soft landing
- Unemployment is staying steadily under four percent
- Real wage growth is up
- Real consumer spending is outpacing 2023
At the same time, we are paradoxically seeing record layoffs in every sector of the economy, record store closures – from Target to Macys – and high-profile bankruptcies – from Red Lobster to Rite Aid.
This ‘Great Contraction’ is literally making the retail world smaller and more deliberate; it is a wake-up call. Leaders who recognize the dichotomy can better temper the potential whipsaw effects on their businesses. The prescription is twofold: strategic foresight and applied innovation.
Economic Misalignment
In February of this year, Jason Draho, Head of Asset Allocation Americas at the UBS Chief Investment Office, published an almost shockingly rosy report called “The CEO Macro Briefing Book: On track for a soft landing, what’s next?” The forecast reported that the U.S. economy would slow in 2024, but only modestly, around 3.1 percent, and that Fed rate cuts would ease lending conditions, raising confidence in the economy (revised and now anticipated for Q3). It also predicted: an unlock of a record amount of dry powder, which will be pointed toward a rebound in M&A deals leading to a new Roaring 20s; consumer spending should remain healthy, even with labor demand cooling; a lower supply growth relative to the past two years that should keep the labor market from getting too loose; and finally, household wealth would be at near record highs, real incomes would rise, debt to income levels would not be stretched, and debt servicing would remain very low despite higher rates.
In support of this optimistic outlook, Sam Goldfarb, of the ever pragmatic Wall Street Journal, wrote an article in April entitled “Envy of the World – U.S. Economy expected to keep powering higher as economists lift their growth forecasts in the latest WSJ survey.”
He noted, “it has been two years since forecasters felt this good about the economic outlook,” quoting RSM U.S. Chief Economist Joe Brusuelas. “We think that the American economy has entered a virtuous cycle where strong productivity results in growth above the long-term trend, inflation between 2 percent and 2.5 percent and an unemployment rate between 3.5 percent and 4 percent.” Goldfarb reported that 69 economists were surveyed who on average believe that core PCE inflation will fall to 2.1 percent by the end of next year without a recession.
Now, contrast those rosy outlooks with the latest and ongoing retail job cut headlines:
- Walmart just slashed 2,000 jobs
- Columbia recently announced pending layoffs
- VF let 500 go
- Unifi cut headcount
- Nike laid off over 700 just last month
- PVH just announced it is planning its next wave of layoffs in an attempt to fill a $50M gap
And, to be clear, it’s not restricted to the retail sector:
- Google laid off hundreds more workers in 2024 and has ended its permanent hiring practice
- Unity Software is eliminating 25 percent of its workforce
- UPS will cut 12,000 jobs in 2024
- Cisco slashed more than 4,000 jobs amid corporate tech sales slowdown
- Peloton laid off 15 percent of its workforce in May 2024
According to TechCrunch, “the tech layoff wave is still going strong in 2024. Following significant workforce reductions in 2022 and 2023, this year has already seen 60,000 job cuts across 254 companies, from TikTok to Tesla, according to an independent layoffs tracker.”
Welcome to the Great Contraction
How can two seemingly polar opposites be happening at the same time? Why the dichotomy? This perplexing contraction has forced some of our best and brightest talent into uncertainty and early retirement, ironically threatening to upset the upbeat, current economic state. This is in part caused by irrational post-covid exuberance, but more importantly, has to do with a fundamental misread of the US consumer market.
What’s happening has been foretold. Over a decade ago, Ken Duane, then President of the Heritage Group at PVH, famously and contentiously pronounced that “America was a value market and we just hadn’t figured it out yet.” But he had. What he was referring to is described by Deborah Wienswig, CEO of Coresight Research, as the Hourglass Effect.
During times of volatility and uncertainty (like now) consumers gravitate towards either value or premium products. “Middling brands and retailers face challenges as consumers either trade up (to brands they are connected to) or trade down for affordability and value. And the same consumer can – and does — do both,” according to Weinswig.
Fighting the Contraction
The opposite of the Hourglass Effect, and Robin Lewis’ classic moniker “the race to the bottom,” is trust. Brands that truly connect to consumers through great product, innovation, and engagement engender trust. Consumers look for brands that they believe know and understand them, and make them part of their lives. Patagonia, Hoka, On Running, Stanley, Lululemon (who just posted yet more double-digit quarterly gains) and Hugo Boss are enjoying category growth and pricing expansion – built on authenticity and recognizing their customers as individuals. They have transcended from transactions to relationships.
By way of example, the Hoka Cielo 21, a $275 running day shoe, sold out its Q1/24 first run on Instagram in 14 minutes through a fearless combination of high-performance digital technology and a genuine consumer experience. The dichotomy is the malaise of over-exposed and taken-for-granted Nike, who has solidly cleaved to the $100 shoe, underestimating the consumer.
Questionable Value
At the value end of the market: Walmart boasts 3559 supercenters and is adding 150 more doors in the coming years; Ross will add 90 doors in the U.S. this year; Costco will add 31 warehouses this year; and Dicks is expanding its dominance with its current 12 ‘House of Sport’ locations with 10 more planned for this year, and its seven new ‘Public Lands’ outdoors store to celebrate and protect natural lands.
The health of the value market is robust and Burlington is not the only off-price brand benefiting from lower-income shoppers who need a deal alongside trade-down consumers who want a deal.
On the flip side, those brands who don’t see America as a value market, are operating in the ‘Messy Middle’, or what some have uncharitably called “the kill zone.” These are the brands that sit at the fragile connection point in the middle of the hourglass.
This “mediocre middle” market includes companies like:
- Wolverine Worldwide: at full strength, it owned 13 brands but has now wholly divested its Keds and Sperry brands, and just last month, it licensed part of its flagship Merrell brand and continues to see its stock price tanking
- VF brands Vans and Timberland (rumored in Footwear News to be for sale), have seen dramatic declines and are in turnaround mode under Bracken Darrell’s new austerity leadership
- As already noted, Nike, never to be discounted, is also in rebuild mode after a radical 2019/2020 oversimplification of the business flattening of much of its VP-level leadership, and in the process, eliminating vital legacy, tribal brand history and product knowledge. Rudderless post-Covid, their break-up with Foot Locker has been course corrected with a clear focus on the middle lane including re-teaming with new CEO Mary Dillon at Foot Locker and a new commitment to Innovation
- Under Armour, with its leadership travails and sagging relevance to its aging core customer could also be rated in this class
And all this contraction is now expressing itself as a brand fire sale that sees savvy investors like Authentic Brands, whose portfolio of 40-plus iconic and renowned brands generates more than $25 billion in global annual retail sales. It recently acquired and licensed brands like Sperry, the Boardriders brands, and most recently Champion. These are gigantic deals further polarizing each end of the hourglass by flooding the value markets with well known brands, eviscerating the middle, and reducing middling and moderate brands and retailers to utilitarian transactions and possible oblivion.
An Alternative Prediction
The way forward in a polarized U.S. market is nothing short of opportunistic.
Big commodity brands are not only seeing expansive growth into new channels, but are also working with retailers to improve product value and introduce technology to optimize their business and their ability to connect to consumers. Walmart CEO, Doug McMillon, spoke this year at CES about his commitment to “Adaptive Retail” that is interactive, predictive, responsive and seamless. His team is currently delivering: app-based AI recommendations; scan-and-go cashier-less payment; voluntary time off; drone delivery service; and digital programs including “Shop with Friends” and “Text to Shop.” Walmart is also developing GenAI customer search interfaces built into the app partnering with Google. The adaptive retail model is launching in Houston in 2024 and will roll out into other metros in the coming years. Walmart is doing all of this because it knows it must better connect to its consumer to fuel its growth objectives.
For those brands currently successful in direct connect-to-consumer, we can look forward to an explosion of AI-driven initiatives, from rapid advances in materials sciences to the acceleration and democratization of everything from code to loyalty. The ubiquity of “text to everything” technologies, like Sora.ai just released by Open Ai’s ChatGPT, will democratize every part of the product experience from creation, imagery, words and ultimately the customer experience. Companies like Run Diffusion that provide GPU-as-a-service to transform GenAI images to commercially scalable media and toolsets with simple text prompts – and doing so at a fee of $0.50 per hour – will continue to accelerate, amplify and excite the consumer experience.
We will also see more mission-driven, audacious moves that meaningfully and genuinely connect to consumers. Patagonia is the poster child for purpose-driven retail. It changed its entire corporate structure and transferred all ownership to two new entities: Patagonia Purpose Trust and the Holdfast Collective. Every dollar that is not reinvested back into Patagonia is distributed as dividends to protect the planet in their laudable effort to save our home world. While this is the purest move our industry has ever seen, leadership also realizes there is no mission without margin. As CEO Ryan Gellert said last year: ‘at Patagonia we have to be greener than green – and make a profit.’
Source: https://rundiffusion.com/
Foresight Is Insight
The Great Contraction is a wake-up call; leaders that see the dichotomies in both economies and markets can temper the potential whipsaw effects of opportunity and threat to their businesses by acknowledging the hourglass shape of the U.S. market and leaning into it.
The prescription is twofold:
- First, embed the ability to see around corners and choose the lane that best supports the brand’s strategic initiatives. This is the case for strategic foresight as an essential discipline coupled with critical thinking.
- Second, develop the ability to grow muscle in the right places and to innovate and serve the value consumer in both physical and digital connection, without wasting intellectual and financial capital where it is not required. This is the case for applied innovation to build brand value, revenue, and profit.
Conclusion
While the reaction to this polarization of consumer behavior has been very real – with profound effects on people, supply chains and P&L’s – the opportunity for deliberate, data driven 21st century growth is also swiftly emerging. By connecting with consumers on both ends, brands can drive both value and relevance, laying the groundwork for a new era of brand health and ushering in the new roaring 20’s.
