From Field to Shelf – Economic inequality and its impact on apparel demand
Our industry makes products that sell based upon discretionary spending by consumers. Clothing is essential, but it's not crucial like food or water. And we're under continuous assault from economic and societal pressures. Income inequality may seem an abstract concern for some readers, but as Robert P Antoshak, managing director of Olah Inc, explains, it comes with real-world consequences.
There seems to be growing concern over the future of capitalism – at least the American variety – so says The Washington Post in a recently published story entitled 'Capitalism in Crisis: US Billionaires Worry About the Survival of Capitalism.' The gist of the story is that the significant innovations and capital growth in recent years may have produced some unintended consequences. Behind all the headlines about topline GDP growth, and the sales successes of the latest tech gadget, wealth generation has benefitted a relatively small number of people – with large segments of the population having been left behind struggling to keep up.
One quote from the article caught my eye: "There is a sense that the kind of capitalism that once made America an economic envy is responsible for the growing inequality and anger that is tearing the country apart."
I don't think America is on the verge of social anarchy, but the effects of globalisation, technology, and changing demographics have combined to alter how American society functions and exacerbated divisions within the country, not only in terms of its politics but also from cultural and economic perspectives.
Despite the apparent political dimensions of the problem of economic inequality both within countries and across the world, I wish to steer clear of politics in favour of understanding how these economic forces affect the profitability of the global apparel business.
An uneven distribution of income
The mainstream media always highlights the political implications of such change – and they are right to do so. Economic inequality has become a political buzzword in some circles these days, but when considered in the context of social cohesiveness, it is a problem that's hard to ignore. The problem is even more acute when viewed in the context of slowing global economic growth, which I discussed in last month's column: How does slowing global economic growth affect apparel?
Nevertheless, here's the reality of the situation: over the past 30 or so years, some people have done exceptionally well economically, while the vast majority of the population has lagged, with a larger and larger percentage of Americans falling into the lower rungs of the income distribution. Moreover, the long-vaunted middle class has somehow been hollowed out despite aggregate growth across the developed world. This growing economic inequality, however, has coincided with the rise of globalisation, technological innovations, and changes in consumer attitudes toward discretionary spending on products such as clothing.
From the perspective of an industry such ours, societal change – good or bad – holds implications for our sales, product development, and our ability to innovate. Indeed, there is a substantial and observable economic impact on consumers throughout society. Even so, as a consumer-facing industry, trends that we see in our customers hold significant implications for the health of our industry going forward.
The effects at retail
Recent news of Gap Inc spinning off Old Navy is telling. Old Navy, which caters to a more price-sensitive portion of consumers, has outperformed its former parent brand. Why has Old Navy outdone Gap? Is it merely a matter of selling products at a lower price point – or is there more to the story? There are several factors at play (beginning with fashion), but I think Old Navy's success is more a case of meeting the demands of a less affluent portion of the market.
In turn, what happens to Gap? Is it doomed to failure? I don't think so, but it helps to illustrate how the brand – a middle-tier retailer – has been trapped chasing consumers in the middle of the economic pack, a segment of the market that seems to be shrinking relative to lower and higher tiers. For sure, Gap has its work cut out in repositioning its brand. I don't wish to pick on Gap, or any brand in particular, other than to make a broader point about the state of our industry: Things are changing, and much of this change is the direct result of growing economic inequality. A recent report by Deloitte helps to illustrate my point.
A changing retail business
From a historical perspective, growing economic inequality in the developed world – particularly in the United States – began to occur in the 1970s due to a variety of factors such as oil price shocks, changes in tax codes, the economic toll of various wars, and the initial introduction of new technologies in the workplace. Globalisation, which took off in earnest in the 1980s, officially christened with the founding of the WTO in the 1990s, acted as a catalyst that only accelerated economic imbalances such as income inequality in the developed world.
But back to the apparel industry. In March, Deloitte published a paper entitled 'The Great Retail Bifurcation,' where the company outlined the changes that have resulted in "shrinking revenues and footprints [that] are the result of economic forces that have been long in the making."
To summarise Deloitte's findings, which are based on statistics collected by the US Census Bureau, I've compiled two tables – one that shows the income distribution of American consumers and a second that compares sales at discount, mid-range and high-end retailers in the United States.
First off, let's take a look at the distribution of income for Americans:
US income distribution 2007-2016
Based on this data compiled by Deloitte, about 20% of the population accounts for nearly two-thirds of the total income in the United States, while at the same time enjoying an average annual increase in revenue of 4% from 2007-2016.
Perhaps more compelling is the apparent stagnation of the middle-income portion of the population. Although this segment comprises nearly 40% of all consumers and accounts for 39% of total income, the growth of that income has not grown since 2007.
And then there is the lower-tier of consumers. This segment makes up the same percentage of consumers as the middle-tier (40%) but a relatively small percentage of total spending at just 1%. Shockingly, though, this considerable portion of consumers saw their incomes decrease by a stunning -23% since 2007.
No wonder so many people at the lower rungs of the economic scale voted for a populist president in 2016. For these people, the system had let them down. Whether due to globalisation, new technologies, or other factors, this portion of the population has not shared in the overall prosperity enjoyed by others – particularly in the top 20% of consumers measured in terms of personal income.
It is tempting to dismiss the struggles of the middle- and lower-income tiers of consumers as just the nature of capitalism. There are winners and losers; some people do better than others. It's the way things are. History has suggested that on an overall basis capitalism has performed very well in the United States, resulting in the country building the largest economy in the world. Again, below the high-level numbers, a different story emerges of stagnation and struggle.
For our industry, the implications are stark. As our society has changed in recent years, so has retail, which in turn has led to changes in the apparel business. Sure, there's a high-end of the retail industry – and many firms succeed in selling jeans for $300/pair or more. But for every high-end jean sold, there are dozens of cheaply made products sold at steep discounts throughout the retail chain. In turn, such inexpensive clothing has helped to feed fast fashion, a constant churn of often poorly designed and made apparel supported by razor-thin margins and predicated on a continuous flow of lower-income customers to buy the next iteration of cheap jeans, T-shirts or blouses.
The retail business has tracked quite closely to the changes described above. See what I mean with the following table:
US retail revenue growth 2013-2018
Look at what's happened over time! In terms of growth, the laggard is clearly in the mid-range store category – department stores, mall stores, etc – which is in stark contrast to the revenue growth enjoyed by high-end stores since 2013. Further, the discount portion of the retail market has also posted decent gains since 2013. For mid-range stores, though, growth was a paltry 2%. No wonder this segment is under pressure. It's almost as though mid-range stores, which had been populated by the traditional mall-based department store and clothing retailers, are being left behind by much higher growth at either end of the retail market.
Should a changing retail business be a surprise? No
But should this be surprising? Not when the income figures above are taken into account. Now, I don't consider debt in this analysis – and goodness knows there are lots of Americans up to their eyeballs in debt. Debt, of course, plays a central role in overall economic activity. But for this analysis, I want to focus on a simple (and somewhat obvious) point: there is a direct correlation between retail sales performance and the relative economic health of customers.
So, our industry has mimicked what we've seen with society as a whole. The top is doing well, while the middle is stagnating if not shrinking, while the bottom is growing. It's like our industry is splitting into a business catering to the haves and have-nots – with the implications that overall growth and profitability may be under continuous assault from economic and societal pressures that will change the very nature of our business over time.
Again, our industry makes products that sell based upon discretionary spending by consumers. Clothing is essential, but it's not crucial like food or water. As a consequence, many factors, as we've discussed above, can directly affect the viability of our industry – or at the very least change our industry's character and profitability. Discussions about income inequality may seem an abstract concern for some readers, but it comes with real-world consequences – and our industry standing in the balance.