Retailers still haven't caught up to millennials

The children of baby boomers don't seek personal fulfillment through shopping

Last month I wrote up my annual tirade about the National Retail Federation holiday sales forecast. The NRF’s track record — it uses a deeply flawed methodology — is terrible. The group makes a silly prediction, I make fun of it, they call me a Grinch, a good time is had by all.
 
Except for the retailers. Retail stores are on the front lines of an industry undergoing enormous and wrenching change amid huge shifts in consumer behaviour. The simple complaint that online retailers are stealing sales from brick-and-mortar stores is unsatisfying. Online shopping may be convenient, offer an endless array of products, make price comparison easy, provide fast and cheap or even free delivery and so on. Yet despite these advantages, online sales amount to but 10 percent of all retail sales. What is really going on?
 
American society has undergone a titanic secular transformation. Retail stores are the first to suffer the effects of this economic disruption. Generational change is affecting how consumers behave; not just how America shops, but for what, and for how much and even why.
 
Two broad economic trends set the backdrop: too much retail and too little gain in wages. America has built way too many stores and malls. Second, wages adjusted for inflation have been little changed for three decades; this has squeezed the middle class. Let's consider these shifts:
 
Millennials versus boomers
 
For most of their lives, baby boomers were the biggest demographic age cohort in US history. The generation born in the years after World War II had an enormous impact on the development of US retail, from specialty stores and malls to big box stores and discounters. Alas, the prime spending years of the boomers are now behind them. Now in their 60s and 70s, thousands of them retire every day. Their next big purchases are likely to be travel or health care. The new shopping kings are the millennials who passed the boomers in size last year, although they are a smaller share of the total US population than boomers were at their peak. This demographic, still in their prime spending years, is coveted by advertisers. Yet retailers still don’t seem to understand how this group behaves as consumers.
 
Experiences versus materialism
 
The fall of materialism and the emergence of the experience economy explain some of retail’s woes. Credit or blame millennials, along with an assist from technology. Why collect CDs or DVDs when you can stream anything you want? Who needs to pay for a car, auto insurance and parking, when Uber and Lyft can take you anywhere you want to go? Why buy a house, which requires a mortgage and a traditional paycheck, when you have a gig?
 
That raises all sorts of questions for that icon of American retailing, the shopping mall. Many of them have been repainted and renovated, but the business model is still the same: people drive to the mall, park the car, spend a few hours buying stuff, take their packages home. It isn’t very all that different from the way it was in the 1970s or ‘80s. Sure, the food court has been updated to be hipper and healthier. But the mall as a social centre where you could escape parental oversight and meet other kids isn’t what it was. Teenagers and those in their 20s and 30s simply do not engage in “sport shopping” or “retail therapy” to the same degree as their parents.
 
Service versus products
 
What does this experience economy look like? On Long Island’s North Shore where I live, local towns have been changing. From Huntington to Glen Cove to Port Washington to Great Neck, it has been out with retail stores, and in with services businesses. Gone are the antique shops, toy stores and clothing boutiques. In their place on inventory-free services: hot yoga, dance instruction, tutors/test prep, massage, spin classes and (my personal favourite) Korean foot massage.
 
Private equity as retail landlords 
 
Private-equity funds have become involved in retail as developers and landlords. In an era of low interest rates, a business model predicated on higher, steady returns is an attractive use of capital. However, what works on a spreadsheet for distressed businesses doesn’t always translate into the commercial real estate space. Storefront businesses are limited to the rent they can afford based on the revenue they generate. Lease renewals with increases of as much as 100 percent from new private equity-funded landlords do not work. If the rent increase can't be supported by the retailers, they fold the tent up.

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