Retailers Struggle as “Experience Economy” Grows
It’s a tough time to be a retailer in America. As of December 11, 21 major retailers have filed for Chapter 11 bankruptcy protection in 2017, ranging from Payless ShoeSource to RadioShack. Why? Jewelry and apparel purveyor Charming Charlie’s rationale for filing can be applied to almost every company in this group: “[the brand] failed to establish sufficient scale to compete in a highly fragmented market that has been tested by the rise of internet shopping and rapidly changing consumer tastes.” Even relatively successful retailers have struggled, with stocks of companies like Lululemon, Urban Outfitters, and American Eagle hitting their lowest prices in years. 2017 was one of the worst years on record ever for retail closures, second only to 2008, during the Great Recession. In April 2017, the number of 2017 bankruptcies already equaled the total of retail bankruptcies in all of 2016. Retail sales excluding autos fell 0.3%, while sales declined 1% at department stores and 2.8% at electronics stores, the most since March 2010. Retail salespeople number 4.85 million, making it America’s most common job, and retail jobs account for 10% of all employment, making the state of retailing of critical interest to those concerned with the national economy.
A weak economy cannot account for these troubles. GDP is on its 9th consecutive year of growth, US unemployment is at a healthy 4.1%, and wages have been growing for middle-class Americans. Indeed, in May 2017, S&P Global Ratings anticipated 2017 retailing defaults on bonds would surpass those in 2009, during the Great Recession. Overall spending also continues to increase. So why are America’s traditional retailers floundering? Three explanations dominate.
First, online shopping has grown dramatically. In the first half of 2016 (the most recent full year for which numbers are available), e-commerce sales grew by 16%, compared to 2% for total retail. The number of online shoppers between 2015 and 2016 grew by almost 20 million. While the retailers who filed for bankruptcy had e-commerce presences, they were unable to compete with online behemoths like Amazon, which is growing increasingly stronger in apparel, the largest e-commerce category. The move to online shopping and away from malls has also hurt traditional retailers by making customers less likely to make impulse purchases at the various stores of a mall, as online shoppers are more likely to order from one retailer at a time.
Additionally, there is a growing consensus that America is now seeing the bursting of its retail bubble. As Richard Hayne, the CEO of Urban Outfitters, told analysts, “Retail square feet per capita in the United States is more than six times that of Europe or Japan. Our industry, not unlike the housing industry, saw too much square footage capacity added in the 1990s and early 2000s. This created a bubble, and, like housing, that bubble has now burst. We are seeing the results: doors shuttering and rents retreating.” The heydays of traditional brick-and-mortar stores raking in profits appear to be over.
Third, while customers continue to spend, there has been a shift in spending, away from goods and toward services, vacations, and restaurants. This trend was first recognized by B. Joseph Pine II and James H. Gilmore in their landmark 1998 Harvard Business Review article “Welcome to the Experience Economy.” The authors describe the phenomenon as “an experience occurs when a company intentionally uses services as the stage, and goods as props, to engage individual customers in a way that creates a memorable event. Commodities are fungible, goods tangible, services intangible, and experiences memorable.”
The “experience economy” has grown ever further since the Great Recession, as The Atlantic posits. Prior to the recession, spending on material goods was high. Since then, however, spending on experiences has dramatically increased. Domestic airlines have flown an increasing number of passengers every year since 2010, and since 2005, sales at restaurants have grown twice as quickly as all other retail spending. Barclaycard, which processes half of all British credit and debit card transactions, saw a 20% increase in spending in pubs in April 2017 as compared to April 2016. Similarly, spending in restaurants increased 16% and spending in theaters 13%, while department store spending dropped 1%, vehicle sales 11%, and spending on household appliances 2.5%. Did the Great Recession cause consumers to tighten their wallets and spend less on material goods, and have they simply never regained interest in shopping? Potentially.
Another reason is that the rise of social media seen since the recession has led shoppers to shape their spending habits around what lends itself most easily to social media. “These sorts of questions— ‘what experience will reliably deliver the most popular Instagram post?’—really drive the behavior of people ages 13 and up. This is a big deal for malls,” opines Barbara Byrne Denham, a senior economist at Reis, a real-estate analytics firm. “It used to be that our car, or handbag or wallet showed our status. Now we post Facebook pictures from a chairlift in Chamonix or the latest music festival,” says trend forecaster James Wallman. “Social media is supporting this change. Posting pictures of what you just bought is gauche; posting pictures of something you’re doing is fine.”
The most avid social media users are millennials, those born in the 1980s and 1990s, and they are driving this experience economy. A 2017 GfK report shows that millennials value experiences more than possessions more than older generations. A survey of Internet users conducted in 2016 showed that 59% of 20-to-29-year-olds and 57% of 30-to-39-year-olds agreed that “experiences are more important than possessions,” as compared to 53% of 40-to-49-year-olds. Millennial homeownership is also down compared to older generations, so millennials are also less interested in buying furniture for homes and accumulating myriad possessions.
Retailers are hoping to reverse this trend by in two ways. First by selling experiences, and second by harnessing the features of experiences that consumers are attracted to, thereby turning shopping into an experience. In terms of the first solution, chains like Costco are now selling vacations and theme park tickets, hoping to draw in more customers by selling experiences, and hopefully sell goods to them in the process as well.
Second, brands are hoping to create “brand experiences.” Articles with titles like “3 Things Retailers Need to Learn From Apple About the Experience Economy” and “How Beauty Brands Can Win With Affluent Millennials In The Experience Economy” abound. The overarching narrative of these articles is that brands need to foster genuine connection with their customers and offer a unique experience that cannot be easily duplicated.
Salon chain Drybar, which offers blowouts as well as its own line of hair products, has been successful in this regard. CEO John Heffner states, “Drybar was built on an experience, one that emulates luxury and personalization from the moment you walk in. It’s the signature scent of the products, it’s the iconic buttercup yellow color, it’s the witty branding, it’s the movie playing while you get your blowout, it’s even in the coffee or champagne offered by the bartender.” This unique experience has led customers to return time-and-time again to Drybar, and also allowed it to be successful in selling its own products, which are also sold in stores like Sephora.
Apple has won acclaim for revamping its stores as community-driven and focused “Town Squares,” “places where people can come together, learn and experience, as well as places to buy product.” Through redesigning its stores to create a more home-like feel, Apple hopes to “transcend the idea of the four walls of the physical store from a place to display products in anticipation of a sale into an environment where people will gather.”
Malls, 25% of which are forecasted by Credit Suisse to close over the next five years, are getting into the game by turning the act of shopping at the mall into more of an experience. For example, this Black Friday, two Roanoke, Virginia, malls boasted DJs, selfie stations, and custom hash tags. Mall manager Louise Dudley used today’s hip parlance in describing why she chose to include these features: “So many people come to the mall to shop and have fun and it’s an experience,” she said. “You can’t get that online.”
It seems hopeful that consumer spending will continue to grow, but the verdict is still out on whether traditional retailers will be able to recoup their losses by satisfying consumers’ increasing tastes for experiences over mere material products.