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TRADE DOWN

Two indefatigable consumer groups come to grips with their loss of prosperity.

It doesn't seem that long ago that Abercrombie & Fitch was the hottest apparel retailer around. In the past decade it trotted out three new concepts — Hollister Co., Gilly Hicks and RUEHL No.925. But 2009 has been brutal for the once white-hot chain. Its year to date plummet in same-store sales of 29.0 percent is jaw dropping, even amid a sea of declining sales reports coming from retailers these days. In fact, Abercrombie & Fitch's number is quite a bit worse than the 6.4 percent drop by the apparel sector as a whole. And the new concepts are sagging, too. Abercrombie & Fitch threw in the towel on RUEHL No.925 earlier this year.

As recently as 2007, the mall-based chain was a darling of the retail industry, cited by consumer behavior experts as an example of how apparel sellers can best appeal to Generation Y. Retailers have been salivating over the potential sales to be made by serving the 113 million Americans born between 1979 and 1997. Winning their attention — and keeping it — was seen as the long-term key to success. And Abercrombie & Fitch's emphasis on self-expression and its uber cool store experience, was hitting Gen Y-ers in all the right spots. That's no longer the case.

At the other end of the retail universe, a similar pictured has developed. Many retailers seek the potential gold mine represented by the 78.2 million baby boomers born between 1946 and 1964. Boomers have long been one of the country's most profitable shopper demographics and that trend was only supposed to strengthen as boomers retired, emptied their 401ks and cashed in on their homes.

As with Gen Y and Abercrombie & Fitch, Talbots Inc., whose classic style targets boomer women, has been struggling, too. Prevailing ideas of boomer psychology say Talbots' core business idea is sound. The store carries clothes designed to fit an aging body with sizes that go up to 24, but emphasizes offerings that are both modern and youthful. Yet for the second quarter, Talbots reported an Abercrombie-esque 24.9 percent decline in same-store sales.

So what's going on? Why are Abercrombie & Fitch and Talbots, retailers seemingly at the opposite ends of the demographic spectrum experiencing such similar runs of ineptitude?

The problem lies in the fact that the consumer behavior experts that directed retailers into the Gen Y and boomer niches never imagined the depth of the recession or how deeply it would affect the shopping habits of these massive groups of shoppers.

Boomers had been able to spend their way through past recessions. Today they are facing the triple storm of a difficult job market, a decline in home values and decimated 401ks. In February, the Washington, D.C.-based Center for Economic and Policy Research reported in a research paper that the net worth of households headed by those aged 45 through 54 declined 45 percent in the five years since 2004, to $94,200. The net worth of households headed by people aged 55 through 64 dropped 50 percent during the same period, to $159,800.

If boomers were to sell their houses, the paper noted, anywhere from 15 to 30 percent would have to use their own money to cover transaction costs. Add in the fact that many boomers have to help grown children who have yet to achieve financial independence and it becomes apparent why they are not shopping with the same gusto as before.

Meanwhile, most Gen Y-ers are too young to have accumulated significant stock holdings or own homes, so they have not felt the pain of this recession as keenly as their parents, notes Brad Sago, professor of marketing at Whitworth University, in Spokane, Wash. But they see the impact on friends and family and that affects their spending outlook.

With a national unemployment rate of 9.7 percent, older Gen Y-ers are having trouble finding full-time work, while many teenage Gen Y-ers no longer have the pocket money they once accumulated from part-time work and summer jobs. In August, the unemployment rate for workers between the ages of 16 and 19 reached 25.5 percent, according to the Bureau of Labor Statistics. From 2003 to 2007, the August unemployment rate for this group was about 16 percent. And going forward Gen Y-ers will have more limited access to credit than their parents did, which could significantly reduce their ability to spend, notes J. Walker Smith, executive vice chairman and president of Yankelovich MONITOR, a Chapel Hill, N.C.-based research provider.

All the financial turmoil does not mean boomers and Gen Y-ers will stop shopping. It does mean that they've become more conservative and better informed shoppers who are focused on price and quality more than a few years ago. In order to get them to spend, retailers must convince each group that they are offering value, both in terms of prices and in providing unique merchandise.

“Consumers have gotten better at being recessionary shoppers and now it's up to the retailers to make sure they are delivering to the customer on multiple fronts,” says Corinne Asturias, vice president and consumer strategist for baby boomers with Iconoculture Inc., a Minneapolis-based consumer research firm. “In the past, boomer women were always looking to spend a lot of money on clothes. That really hasn't changed, but they now say, ‘If I can get a quality piece for less, I'll do that.' Talbots represented more expensive purchasing choices and it's harder to justify [shopping there] when there are less expensive alternatives available.”

Value driven

While boomers and Gen Y-ers have become more value-driven, they demonstrate this new mindset in different ways. An August 2009 study by TNS Retail Forward, a Columbus, Ohio-based consulting firm, found that 46 percent of surveyed boomers bought only the things they needed this year, compared to 34 percent of Gen Y-ers.

In addition, 41 percent of boomers reported buying fewer things, compared to 28 percent of Gen Y-ers. Boomers are shopping less overall partly because they have accumulated plenty of clothes, books and electronic gadgets over the years, say researchers. Gen Y-ers, on the other hand, are still buying discretionary items, but looking for less expensive versions.

As a result of their necessity focused mindset, whatever shopping trips boomers do take are likely to involve visits to supermarkets and drug stores, mass merchants, office and pet supply stores and home improvement stores. Roughly 22 percent are shopping more at value and discount stores, compared to 14 percent of Gen Y-ers. Moreover, boomers say they are likely to hold on to their frugal ways even after the economy rebounds, according to the survey,

“They will be in a saving mindset until they feel better about their personal spending power,” says Tim Henderson, senior director and consumer strategist with Iconoculture. “It's hard for me to imagine that someone who lost their job is going to feel more confident about their spending just because [Fed Chairman Ben] Bernanke said, ‘We are out of the recession.'”

Members of Gen Y, on the other hand, continue to shop for what TNS calls “self-expression,” in addition to buying necessities and hunting for bargains on durable goods. Self-expression involves consumption of lifestyle goods like books, CDs and games, which bodes well for those retailers. Examples of retailers that offer self-expression include Nordstrom, Victoria's Secret and the Gap, according to TNS.

Brave new world

What does all of this mean for retailers? For one, it means certain chains will continue to have a natural advantage going forward. Target, Wal-Mart, Costco, BJ's Club, JCPenney, Kohl's, TJ Maxx and Marshalls were perfectly positioned for this downturn, offering what customers perceive as quality products at a fraction of the prices of specialty retailers. And since boomers will be in a saving mode for some time, they will likely continue to shop at those stores.

“If you look at past [economic] recoveries, particularly after September 11, most of the people that traded down very quickly bounced back and resumed their normal shopping habits,” says Craig Johnson, president of Customer Growth Partners, a New Canaan, Conn.-based consulting firm. “Here, we believe there will be much more of a permanent change in shopping behavior. Wal-Mart isn't going to retain all its new customers, but we think it will retain at least 50 percent.”

That doesn't mean, however, that specialty retailers are doomed to flounder. Such chains will simply have to find new ways to offer customers value, experts say. Grocery chain Trader Joe's has thrived under new market conditions in spite of its gourmet reputation by offering a wide variety of private label products, which are often more affordable than mass brands but equivalent in quality. The chain guarantees that all products sold under its private label are made using non-genetically modified ingredients so customers feel they are getting a great deal for less. Plus, they don't have to spend as much time comparing products from different brands to figure out which one is better, notes Asturias.

To sell discretionary goods, retailers might have to labor harder, especially when it comes to boomers, who don't need many discretionary items, says Ann A. Fishman, president of Generational Targeted Marketing LLC, a New York City-based marketing firm. She advises apparel retailers to target potential customers with marketing materials that show how one item can be used in different ways, creating the idea of more value for less money.

“I get an awful lot of emails from stores that say, ‘Come see the five must-haves for fall,'” Fishman notes. “That doesn't relate to today's society — there is nothing that you have to have fashion-wise if you don't know how much money you are going to have. So if you are Gap and you have a baby boomer's email address, send them an email with pictures of the fall line that would show five different ways to wear [the same item] that would be kind to different body types.”

Fishman also advises mall owners to hold free-of-charge fashion shows targeting different age groups to induce impulse buying. The shows can take place in mall common areas on a weekly or a monthly basis, each time showcasing products from different stores. For boomer audiences, she advises using regular people as models and emphasizing the versatility of advertized pieces.

For Gen-Y members, who have highly segmented fashion sensibilities, Fishman recommends mixing apparel styles within the same show, sending out sweat shirts followed by prom dresses. To take advantage of their thirst for bargains, retailers can offer discounts when Gen Y-ers bring their friends to shop at the store — for example, they can get 5 percent off when they bring in one friend, along with 5 percent off for the friend and 10 percent off each when they bring in two friends.

“This group is really big into word-of -mouth marketing, so what you have to do is please one of them and the rest will follow,” Fishman says.

What retailers should not do is get bogged down in the idea that a customer's perception of value will be related to price alone, say Henderson and Asturias. The socially conscious baby boomers, for example, might not replace their household appliances, waiting to buy new ones until old ones are no longer working. But when they do buy, boomers will pay more for an energy-efficient version.

Female boomers might have shopped for clothes at discount stores in the past year or two, but they might be willing to pay more for certain apparel items if they feel they are more durable than what the discounters are hawking. The Gen Y shoppers might no longer be willing to pay $80 for a t-shirt from Abercrombie & Fitch, but they will go into uncool stores like JC Penney if they feel they can find a fashionable outfit in a size that fits them, says Kenneth Gronbach, principal of KGC Direct, a Haddam, Conn.-based consulting firm and author of “The Age Curve: How to Profit From the Coming Demographic Storm.”

“In 2008, because consumers were driven by fear, value became a matter of price,” says Henderson. “Now, consumers have learned ways to save. In 2009, value does mean there is going to be a price component, but there will be other measures, as well. It can be the quality of the merchandise, it can be great customer service. So define for that consumer what value means in current terms.”

A longer version of this article appears at retailtrafficmag.com/features.

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