of years later, I began referring to this phenomenon as “retail’s great bifurcation”9—a title later borrowed for an excellent Deloitte study, which I will discuss below.
Figure 4.1 Net Store Openings, 2015–2017 (Deloitte)
Source: Deloitte10
What we see, on the one hand, is that many retailers that are strongly focused on the value end of the spectrum—i.e., great prices, extensive merchandise assortments, and a highly convenient and efficient buying experience—are growing both sales and number of stores. At the other end of the spectrum, many brands that focus on offering unique products, more personalized service, and a more upscale and distinctive shopping experience are also gaining share and continuing to open more locations.
As the chart above illustrates, the problems in physical retail (and in troubled brands more broadly) are highly concentrated among those retailers trapped in what I call the boring, undifferentiated middle, or what Deloitte labels, somewhat charitably, “Balanced.” More recent research suggests just twenty retailers account for about 75 percent of 2019 closures.11
The notion that physical retail is dead for the brands that consistently meet real customer needs through a compelling value offering—and execute well against it—is simply not the case. Ditto for many brands at the other end of the spectrum that deliver a more upscale and experiential experience for the right target consumers.
The differences between retail’s haves and have-nots are, however, clearly diverging. The market continues to bifurcate, and the collapse of the boring, mediocre, undifferentiated middle only seems to be accelerating.
Demographics Are (Often) Destiny
To get a better understanding of what’s driving change, it’s typically useful to unpack customer trends. Unfortunately, retail marketers often tend to rely too heavily on demographics to inform their strategies. Sweeping statements like “Millennials don’t like to own things” may have a ring of truth, but common sense tells you that Millennials are hardly all alike. Applying these general principles to marketing strategies can often cause a retailer to widely miss the mark.
Yet when we look at the ongoing collapse of the middle, certain demographic factors are important drivers, at least in the United States. In their 2018 study “The Great Retail Bifurcation,” Deloitte examined several root causes affecting the overall health of retail and other consumer sector outcomes. Big-picture indicators like GDP growth and stock market performance, along with broad consumer behaviors, point to a generally healthy outlook. Many retail categories are performing quite strongly, both off- and online.
The study features a deeper dive into shopping behavior based on examining consumers’ economic well-being. This look takes into account factors like total annual income, net worth, and discretionary cash. This more detailed and nuanced view paints a rather different picture—and one that helps explain the ongoing collapse of the middle. What Deloitte found was that high-income households have captured a disproportionate share of income growth in recent years. Indeed, the rich are getting richer, as the top 20 percent captured over 100 percent of income growth between 2007 and 2015.
How did they have over 100 percent income growth? You guessed it: everyone else had negative growth—that is, they lost ground. More recent data generally confirms that this trend continues.
For most Americans, however, the outcomes are quite different. They are downright depressing. For 80 percent of households, income growth has either declined or remained stagnant, while costs of non-discretionary expenses like healthcare, education, and other household essentials continue to increase, often markedly. For those with the lowest incomes in the study, non-discretionary expenses now exceed disposable income. Making matters worse, most lower-income households do not own stocks and often do not own their homes. As a result they have not benefited from the robust growth of the economy and the spike in asset values over recent years. For the majority, Deloitte called it “an abysmal decade.”
The implications for retail are significant. As both discretionary income and overall wealth have risen sharply for the affluent class, many are spending their gains on both products and services, often trading up to ever more expensive items. At the other end, for the other 80 percent who are getting squeezed harshly, total spending power has declined. As a result, their sensitivity to prices and stretching their dollars even further has greatly increased.
It’s easy to see how these diverging trends have directly affected the winners and losers in retail. Constrained spending power and price sensitivity among the lower 80 percent is driving spending strongly toward stores that offer more value. Many consumers that once preferred more expensive options are now, for all intents and purposes, forced to trade down to less expensive ones. This is a major contributor to the outsized growth being experienced by off-price retailers, warehouse clubs, discount mass merchants, or value-oriented grocers like Aldi and Lidl.
Conversely, affluent consumers are driving growth and profits in the premium echelon of stores, some of which is clearly being taken from more moderately priced retailers. The growth of specialty beauty players like Ulta and Sephora is a prime example, as is the continued strength in the luxury sector. This trading-up phenomenon contributes to the troubles among the boring, undifferentiated middle.
The chart below illustrates how both revenue growth has been strong among retailers at either end of the spectrum, yet has failed to keep pace with inflation among those in the middle.
Figure 4.2 Revenue Growth of Different Types of Retailers, 2015–2017 (Deloitte)
Source: Deloitte12
The Fault in Our Stores
Long-term trends, demographic, technological, and otherwise, have clearly exacerbated the issues for those retailers that find themselves stuck in the middle. But we shouldn’t lose sight of the fact that many troubled retailers are suffering from wounds that were largely self-inflicted over a period of many, many years.
Far too much of retail is still filled with tired old ideas and an abject failure to pursue innovation. Many of the retailers filing for bankruptcy or closing large numbers of stores have barely changed in over a decade. The same old mistakes, particularly an over-reliance on deep discounting, are repeated over and over again. Tour most regional malls or drive through a typical suburban shopping area, and you’ll find all the usual suspects and a veritable epidemic of boring, a maelstrom of mediocre.
During my career—and particularly during the past few years as a keynote speaker and consultant—I have traveled around the world and been exposed to a wide variety of different markets and retail concepts. One finding that is consistent, whether I am in New York, Los Angeles, Beijing, Sydney, Tokyo, Mumbai, or Dubai, is that an awful lot of retail looks and feels pretty similar. Virtually identical storefronts and websites. Look-alike promotional signs. One-size-fits-all marketing campaigns. Merchandise presented in an uninspiring way on a sea of racks and tables. Lackluster customer service, if there is any service to speak of at all. And as for product offerings, they’re often all the familiar name brands with wide distribution, plus quite a few obvious knockoffs.
Department stores in particular have been swimming in a sea of sameness for decades. Now they are drowning.
The retailers that are struggling typically have both strategic and executional issues. From a business design standpoint they often sit
