United States

Spending trends: Cyclical or evolving?


Improving economic indicators have brightened the outlook for many retailers, as more disposable income has led to sales increases in some sectors. However, companies can't rely on past strategies for future success, as customer demands and spending trends are rapidly evolving. RSM director, consumer products industry, former industry analyst Jeffrey B. Edelman, takes a look at shifting consumer trends and how retailers can take advantage of a more positive economic environment to develop customer loyalty and boost sales.

Consumers are likely to increase spending activity: Economic headwinds appear to be easing, as job creation and lower energy costs are likely to translate into higher consumer income. These events are generally the stimulus to increased spending; however, how and where consumers spend, and on what, appears to be different than past years.

Consumer spending patterns are evolving differently than in past cycles: A low rate of employment growth is holding down income growth; nevertheless, there appear to be a number of factors altering changes in the secular spending trends. Consumer confidence is more or less in line with historic norms, although recent data suggests increased concern and uncertainty. This is not that surprising when considering political and international concerns. Interestingly, economic uncertainty does not appear to be one of the top consumer concerns, although that appears to be holding back investment spending by businesses, which in turn, tends to hold down increases in payrolls.

Several factors could be impacting spending trends: Demographics are thought to be having a significant impact on spending patterns, as the aging population appears to be more focused on health and related items, and to a lesser extent frivolous luxury products. On the other hand, millennials have a much different set of spending priorities than their elders. They appear to be more concerned with the environment and experiences rather than material status; most evident is their lack of interest in logo products in favor of merchandise that reflects their self-expression.

Apparel sales increases have been minimal at best. Deflation is estimated at 2-3 percent, reflecting consumers' increased focus on value, validated by market share gains of off-price, factory outlet and fast fashion stores. In many cases, these increases are due to the ability to purchase a label or fashion, not necessarily the same merchandise, at a lower price. Consumers will, however, pay up for new, unique and differentiated merchandise, often creating the want to purchase within the luxury sector.

Just as consumers' priorities are changing, perceptions of value are emerging differently than in past years. The value equation is becoming more variable depending on the age group as it relates to fashion, quality and price. Expenditures on apparel have lagged income and overall spending growth for quite a while now, reflecting a channel shift in purchasing options and lower average unit prices, freeing up discretional income to be spent in other areas.

There is also a shift in spending activity: The auto sector, for example, is currently experiencing one of its strongest periods of growth in recent years. This is likely to continue as the average age of automobiles in the United States is 11.5 years, with sales growth spurred on by low gas prices and financing costs. These might become less of a driver going forward, but for now, pickups and SUVs are growing at the expense of more economical midprice cars. Premium luxury has been one of the star performers. The growth rate will likely taper off, but the category could continue to capture a little larger share of consumer income.

Other durables are also showing impressive growth: These increases have been enhanced by the current rate of housing turnover, as well as new and exciting product introductions. One potential negative over the near term is an apparent maturation of the smartphone and tablet markets. Additionally, sales gains have been deflated by sharper pricing on the Internet. Many large bricks and mortar retailers are price matching and offer the immediate pickup option along with the opportunity to compare more products in the physical space.

Restaurant sales are also capturing a larger percentage of consumer's spendable income: This is also likely to be reflective of demographics. As mentioned before, millennials appear to be placing higher emphasis on travel and experiences. Food consumption away from home remains in a growth mode as does increased consumer focus on health and natural foods.

A rising tide will not lift all ships and not all will sink when the tide goes out: Key to success will be the ability to provide a pleasurable experience and develop loyalty to the brand and retailer that will ensure repeat visits. The loyal customer is more profitable than the casual buyer across all product lines and services. The winners should be able to create the want to purchase, rather than just satisfying the need to purchase. The latter generally is more price generated and less profitable. 

The bottom line: It is not a question of whether and when the consumer will spend, but rather where and on what. Increased knowledge of the target customer will widen the spread between winners and losers. Social media and market research are invaluable tools for increased exposure and ultimately, more profitable sales.

Jeffrey B. Edelman is director of consumer products industry services for RSM, and is located in the firm's New York office. He routinely advises senior management of companies operating in the consumer and retail sectors on strategic, sourcing, financial, marketing and distribution issues. He also works closely with internal teams on matters such as new business development, transactional advisory, including due diligence and tax. Jeff can be reached at 212.372.1225, or via email at jeff.edelman@rsmus.com.


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