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Hanging Around

Bumper-stickered minivans, rusty compact cars, posh luxury sedans and massive SUVs line up side by side in the Costco parking lot on Chicago's Clyburne Avenue, a commercial strip a few miles north and a bit west of downtown.

Inside the store, the customers are as diverse as the vehicles they drive. Off-duty cops, working-class families, well-heeled women, recent immigrants and gay couples mingle, all of them chasing merchandise at discount prices. A couple of blocks away at the local Target, the scene is much the same.

Discount shopping is a trend that has taken hold of many classes up and down the demographic scale. But the debate over how long it will last has largely been answered — retail experts say to expect the discount phenomena to continue.

“In the past 10 years, we've seen a tremendous shift down in what consumers are willing to spend,” observes Britt Beemer, founder and chairman of America's Research Group, a consumer behavior research and marketing firm in Charleston, S.C. “The 1980s was a decade in which people bragged about where they bought and how much they spent. In the 1990s, they bragged about how much they saved. And 2000 plus has been about how much more they've been able to save.”

Dan Llewellyn, vice president of business development for BIGresearch LLC, based in Worthington, Ohio, says a new consumer has emerged who is price-driven and practical. This consumer is migrating to discount retailers such as Wal-Mart, Target and Kohl's and to warehouse clubs such as Costco Wholesale Corp., Sam's Club and BJ's Wholesale Club. As the economy sputters, the stock market gyrates wildly and uncertainty on the political and global scenes persists, the American populace will continue embracing these bargain outlets. (see chart on Market Pulse page 4.)

Trading down

BIGresearch is also finding that 70-80% of consumers are focusing their purchases on needs — practical spending — versus wants. For instance, 75.6% say they only buy things that are needed, 67% say they compare products for price, use, value and safety.

“People are saying ‘we're going to buy, but not at the level and price you were charging before,’” says Joe Pilotta, BIGresearch's vice president of research.

Retail strategists and analysts say monitoring and understanding consumer behavior, needs and wants is still the only way to deliver the right brands, products, service and price to attract ever-pickier consumers. “Consumers are shopping at fewer stores since September 11 and if you're not the first store in your marketplace where the customer shops, you're probably a casualty,” warns Beemer.

Heirs apparent

One beneficiary of the new consumer is the wholesale warehouse club segment. Wendy Liebmann, founder and president of WSL Strategic Retail in New York, says it's become a legitimate place to shop regularly. Her firm conducts the annual study, “How America Shops.” She credits Costco with redefining the way American consumers shop. “Costco has been able to take what used to be a department store or mall experience and create a sense of adventure with a core shopping experience,” she says. “It's almost like going to a carnival because there's an entertainment quality to it.”

Wholesale clubs are getting the thumbs-up from the financial heads too. Legg Mason Wood Walker Inc., in its summer 2002 research report on the membership warehouse club industry, found that during the past seven years, the category has steadily gained share of total retail sales, and the industry's past and current strategies have created a solid foundation for continued growth.

It projects BJs' long-term earnings growth at 17-18% annually, driven by annual square footage increases of 10%. It anticipates comparable-store sales growth averaging 3-5%. Over the long haul, it also estimates that Costco's earnings will grow by 15% annually.

And securities firm WR Hambrecht + Co., in its look at discounters says, “As consumers become increasingly defensive in their spending patterns and become more and more willing to go out of their way to pinch pennies, discount stores and warehouse clubs should be able to capitalize on consumers' tighter budget and continue to drive good top-line momentum leveraged by full margin sales and permanent cost reductions.”

Not surprisingly, discounters are drawing away market share from traditional department stores, specialty retailers and luxury stores. According to American Research, apparel specialty stores suffered most, with shopping levels dropping from a high of 31.7% in 2000 to a new low of 19.9% in 2001. Moreover, two to three years ago major department stores took in one-third of back-to-school shopping business. Last year, the figure dropped to 11%-14% and this year's numbers are expected to be similar.

But sales figures show that consumers are shopping, and they're taking their business to the discounters. While major department stores posted significant same-store sales declines in July 2002 (Sears down -4.9%, JCPenney down -2.2% and Federated Department Stores down -5.2%), discounters were making hay — Wal-Mart sales were up 4.5%, Costco sales up 5% and Target Stores up 2.2%.

Long-term thrift

When the economy rebounds, don't expect shoppers to shun discounters. The theory is, once consumers have gone discount, they don't go back to full retail because discounters offer benefits beyond lower prices that will remain important to American consumers.

For instance, in BIGresearch's June survey, 33.5% of consumers say their shopping habits have changed for the long term. “I don't see them losing market share if the economy rebounds,” says Nancy Aversa, retailing analyst for Victory Capital Management. “They're aligned with lifestyle and where people want to spend their time and energy. Those things exist regardless of what the economy is doing. Discounters are here to stay and there's always going to be a place in consumers' wallets for them.”

Beyond competitive prices, discounters offer convenient drive-in and drive-out locations, easily navigable stores, speedy, centralized check-out, no-hassle returns, quality and in-stock merchandise when consumers need it. “In our 2002 study, we found it's not purely about price anymore,” says Liebmann. Convenience has become a prime reason consumers choose a store. In the immediate term, that desire for convenience isn't going away.”

The addition of food offerings, too, is proving helpful in capturing a new segment of shoppers and keeping them in stores longer. Pilotta points out that even stores such as TJ Maxx and Marshalls, places people typically associate with discount fashion first, are stocking gourmet foods.

Not everything in the discount retailers' world is idyllic, however. To continue thriving (for more on what discounters need to do to flourish, see sidebar “Maintaining Momentum”), such stores have to deliver not only on prices but also on service. Beemer points out, for instance, that consumers of late are aggravated by long checkout lines, specials that are out of stock, and a paucity of employees to answer questions and provide direction.

Llewellyn sees retailers experiencing something of a culture shock right now, especially since they've just come off a period where they could succeed and grow by adhering to the adage, “build it and they will come.” He believes there's a fundamental shift taking place — successful retailers will need to understand consumer needs and respond to them in a proactive way to gain a greater share of the wallet from existing consumers.

“The consumer has changed under everyone's nose and the question is how are retailers going to understand what's happening right now with consumers to create marketing strategies for growth. The only way to influence behavior and grow same-store sales is to anticipate where the consumer is going and gear the ship accordingly,” he says.

Target and Kmart are taking the fashion high road, showing customers that low price doesn't mean low style. Following the smash success of its Michael Graves housewares line, Target is bringing more big-name designers into its stores, hoping to build consumer loyalty so that after tyhe recession, consumers will still flock to the store to pick up exclusive Phillipe Starck, Mossimo and Todd Oldham merchandise. Kmart, stung by slowed Martha Stewart product sales, is stocking its shelves with Joe Boxer-branded apparel to pick up the slack.

As Aversa points out, most retailers have been on a rapid growth trajectory and it will be hard to keep up that pace. Those faced with a slowing growth rate have been creative in figuring out how to address consumers' needs and create profit for themselves. Wal-Mart, for instance expanded its Supercenters (stores that combine a full grocery and general merchandise in one spot), which gives customers the convenience they're seeking and gets them to shop more frequently.

One store's loss, another's gain

While other retail segments practically beg for shoppers to step through the doors, discounters continue to grow, not only in sales but in physical space as well. Take Wal-Mart's expansion plans — for the fiscal year that began Feb. 1, 2002, it is adding 50 new discount stores and between 180 and 185 new Supercenters. It says the expansion represents an acceleration of its Supercenter unit expansion and reflects the strong consumer acceptance and financial results from the format. It anticipates expanding its Neighborhood Market concept by adding 15-20 new units, and Sam's Club will open 50-55 domestic clubs.

“The planned square footage growth for the coming year represents approximately 46 million sq. ft. of new retail space, which will be the largest square footage increase in the company's history and a 9% increase over the fiscal 2002 total,” says Lee Scott, Wal-Mart's president and CEO.

Discounter/department store hybrid Kohl's plans to expand by opening 80 new stores during 2003. The Southwest region will see about 40 stores and the company will enter the Los Angeles market in the spring and the Phoenix and Las Vegas markets in the fall.

Others are test-driving new concepts. Costco, for instance, is planning to open a furniture and home furnishings store, called Costco Home, in Kirkland, Wash., sometime later this year. Costco president and CEO Jim Sinegal told the Seattle Post Intelligencer in July if the concept is a success, more stores could be rolled out in other markets.

Rethinking the mall

This discount phenomenon is likely to spell the rebirth of strip and power centers, leaving malls as the place for once-in-a-while special visits versus regular weekly trips for essential merchandise.

“It may require some serious rethinking on the part of mall developers in terms of how they can make malls more convenient, group stores differently and add new points of access,” says Liebmann.

The new interest in discount retail and the convenience it offers likely will affect future designs. “We listen to tenants' needs and if the need is for more access and there's a way to accommodate it, then it's something that will probably affect the way you see a shopping center in the future,” says Ron Fullam, senior vice president of mall development for CBL Properties.

Another possibility is more melding of traditional department stores with discount retailers in the same center, something many developers would welcome to help them ride out all economic times with greater ease. The comingling of uses would bring new cross-shopping opportunities for both sets of tenants.

Pilotto wouldn't be surprised to see retailers tweaking the internal structure of the store to ease the selection process as they add different merchandise and create new cross promotions, for instance. Some could look to the Kohl's model as inspiration. Its interior design eases circulation; consumers can see immediately from the lobby how to get to the departments they seek; check-out is centralized; and signage clearly indicates where people can find merchandise-both store and name brands. “There's a sense of it being accessible and convenient,” says Liebmann. “There's an ease of shopping at every level of the experience.”

Reusing existing real estate creatively is another possibility. Target, for example, spent $700 million to acquire 35 former Montgomery Ward locations, many of which didn't fit the retailer's typical footprint. “Many were two-story stores, but Target has done a good job making the space work,” says Aversa. “It's a great example of the creative use of real estate to capitalize on attractive properties and make them as productive as traditional stores.”

Target isn't the only retailer benefiting from the ill health of competitors. Kohl's has acquired lease designation rights for seven closed Kmart properties around the country. And Kmart competitors likely will gain market share because of its store closings in certain markets.

Wal-Mart is expected to be the biggest beneficiary, given that its customer and store bases overlap significantly with Kmart's. In the past, when a Kmart closed, a nearby Wal-Mart typically captured approximately half of its sales, according to Morgan Stanley. Aversa says consumers probably also are migrating to other specialty retailers — home furnishing stores including Pier 1 Imports and Bed Bath & Beyond — for designer items such as the Martha Stewart products they're no longer buying at Kmart.

Analysts point to fear of a continued weak economy as the greatest potential impact on the retailing industry. Trepidation is rampant that weakening consumer confidence will eventually affect consumer spending and certain retailers. “If something like that does happen and consumers really pull back, the discounters are in the best position to weather the storm because they have the value proposition people will be focusing on,” Aversa says.

Elyse Umlauf-Garneau is a Chicago-based writer.

Consumers keep belt-tightening…

BIGresearch's Consumer Intentions & Actions Survey monitors shopping habits of more than 5,000 consumers monthly. It's clear from the company's June survey that consumers are in a belt-tightening mode:

  • 41.6% said that over the next three months they intend to focus on paying down debt
  • 37% indicated they're boosting savings
  • 32.1% want to cut their overall spending.

Moreover, not everyone is optimistic about a speedy economic recovery. Polled before the stock market's scary July slide, these consumers showed little confidence in a quick economic recovery. When asked about when they expect the economy to get back to normal:

  • 35.6% said they think it will take more than one year
  • 26.3% said six months to one year
  • 10.4% said three to six months.
  • 5.4% expected a rebound in less than three months.

Maintaining Momentum

Bargain lovers will stick with discounters that deliver

Even when the economy goes boom again, retail watchers expect discounters to retain much of the marketshare they've gained during the hohum times we're experiencing now. But they have to keep delivering.

Here are some recommendations on how to capture new shoppers, hold on to current ones, and continue growing:

  • Find out the categories that drive shoppers in the front door and be the first in the marketplace to break the price barrier on those items to drive new and existing customers into the store.
  • Become a community leader in supporting high-profile local charities. Beemer had a client, a dry cleaners, who sponsored 16 girls' soccer leagues when no one else in town would. A few years later the client's business was 3.5 times bigger because of the good will he built up in the community. Such localized good-deed concepts can work for large retailers too.
  • Be more creative than your competitors and assume a leadership position in your market. Another Beemer client closed his store during Easter weekend, landscaped his parking lot with $15,000 worth of materials and invited his best customers to bring their kids for an Easter egg hunt. He then let the customers take home all the landscaping materials at the end of the weekend. “This is his third year doing the promo and he never felt the downturn after Sept. 11 because he had so much momentum going from the previous April,” says Beemer.
  • Abolish things consumers find annoying — long lines, promotional merchandise that is out of stock, and no personnel available to answer questions.
  • Develop a niche and have a reason for surviving. Experts, for instance, point out that Kohl's distinguishes itself on great prices on name-brand items. Target is hot on stylish, cool apparel and trendy household goods (take a look at the Philipe Starck-designed merchandise including electronic toothbrush and food storage containers), and BJ's does a fine job in being customer friendly and providing low prices, but also options beyond buying 64 rolls of toilet paper at a shot.
  • Build loyalty on issues beyond price, convenience and selection. “With fewer large retailers competing for core consumer dollars, retailers need to create a unique, compelling brand image — just as Nike or Coca-Cola do — so shoppers will come everyday, all day and view it as their store,” says Liebmann.
  • Reach out to customers personally. “They're looking to be recognized and invited into the store,” says Pilotta. “Customized mass marketing through E-mail would build and sustain relationships. TV advertising doesn't seem to impress most consumers right now and they often think that the more TV advertising, the higher prices the goods will be. The more glitz they see, the more they think prices go up.”
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