Mind the Gap

Some people read tea leaves to predict the future. In retail, all you need to do is read the sales results and profit announcements. Reports from both the U.S. and Australia in the first few months of this year clearly show the emerging shape of the retail landscape. 

In the U.S., as retail slowly recovers post the GFC, many merchants posted positive like-for-like results in February. But when you drill down, a more interesting picture starts to emerge.

At the value end of the market, sales at Discount Department Store Target were up 1.8%, and off-price apparel retailer Kohl’s rose 5%. At the other end of the spectrum, premium department store Saks was up a huge 15.3% on 12 months ago.(Luxury is definitely back. CNN recently reported that sales of luxury goods were up in the U.S. 10-12% last year, compared to retail overall at 6%.) So how about the middle market? Well, department store sales as a whole were down 2% on last February, and Gap Inc’s numbers dropped 3% (taking in Gap, Banana Republic and Old Navy).

What we are seeing is the continuing polarisation of retail, or what some commentators call “the barbell effect”. Consumers are happy to shop “high” or “low”, “value” or “specialty” (and often both ends), but spurn the middle ground. As CNNMoney neatly put it in an article last week: “We want Gucci or Target. Forget the Gap.” (During the GFC, arguably we saw more of a “bellbottom” than a “barbell”, with shoppers preferring extreme value to premium. But that now seems to have balanced out.)

In Australia too, we are witnessing a similar trend. In February, mid-market department store Myer issued a profit downgrade after what CEO Bernie Brookes called “a significant, unexpected and rapid decline in January sales”, while value electronics brand JB Hi-Fi confirmed its likely full-year profit and at the same time Supercheap Auto boasted of a 3.4% first half comparable store sales increase. Perhaps this is indicative of the “post-department store era” in retailing (or at least “post middle-ism”).

The take-out from recent results is that any retailer still occupying the middle ground is in increasingly dangerous territory. To return to Gap as a case-in-point, the brand that once clothed a generation of Americans in chinos and polos is now desperately trying to sharpen its act. Gap is setting out to target a younger demographic (their current customer has aged with the brand), and a more ethnically-diverse shopper, as well as reducing their store fleet and increasing web sales. Just last year they also tried to overhaul their brand identity, with disastrous effect.

The way forward in retail is clear: go value or go specialty. But mind the gap.

Jon Bird is CEO of specialist retail marketing agency IdeaWorks (www.ideaworks.com.au). Email jon.bird@ideaworks.com.au. For more retail insights and inspiration, visit www.newretailblog.com.

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