Retailing - Industry Overview

Total retail sales, estimated at $1.9 trillion in 1992, will be Over $2 trillion in 1993, an increase of more than 5 percent in current dollars. Sales in the food retailing industry will be about $407 billion in 1993, an increase of only 2 percent in current dollars.

The retail trade sector (SIC 52-59) is one of the major sources of jobs in the US. economy, consistently accounting for more than 20 percent of all jobs in the private sector. Retail establishments are primarily engaged in selling merchandise for personal or household consumption.

Retailing consists of building materials, hardware, garden supply, and mobile home dealers (SIC 52); general merchandise stores (SIC 53); food stores (SIC 54); automobile dealers and gasoline service stations (SIC 55); apparel and accessory stores (SIC 56); home furniture, furnishings, and equipment stores (SIC 57); eating and drinking places (SIC 58); and miscellaneous retail (SIC 59). In general, retail establishments sell durable goods in the first four Standard Industrial Classification (SIC) codes and nondurable goods in the latter four SIC classifications. The Census Bureau designates the several different types of retail stores according to principal merchandise lines or usual trade designations. In 1991, retail stores selling mostly nondurable goods accounted for 60 percent of all retail sales; those selling mostly durable goods accounted for the remaining 40 percent.

Before reading this chapter, please see "How to Get the Most Out of This Book" on page 1. It will answer questions you may have concerning data collection procedures, forecasting methodology, sources and references, and the SIC system. For other topics related to this chapter, see chapters 31 (Food and Beverages), 32 (Apparel and Fabricated Textile Products), 35 (Motor Vehicles and Parts), 36 (Household Consumer Durables), 38 (Wholesaling), and 43 (Drugs and Biotechnology).

The first part of this chapter will concentrate on the trends and underlying forces that influence the current and near-term demand for nondurable retail merchandise, including department stores, eating and drinking places, and apparel and accessory stores. Food retailing will be covered separately in the latter part of this chapter.

NONDURABLE GOODS MERCHANDISE

Sales Performance

Retailers of nondurable goods tend to sell products that are less sensitive to changes in general business conditions than those sold by durable goods retailers. During the 1990-91 recession, total retail sales of nondurable merchandise lines increased 2 percent in current dollars, while total retail sales of durable merchandise declined more than 1 percent.

In 1992, total sales of retail stores exceeded $1.9 trillion, a gain of about 5 percent in current dollars over 1991. However, their payroll of 19.3 million employees remained unchanged from 1991. Department store sales totaled $189 billion in 1992, up over 6 percent in current dollars from the 1991 total of $178 billion. Eating and drinking places sold $205 billion in 1992, almost 6 percent higher than in 1991. Apparel and accessory stores sold $99 billion in 1992, up over 4 percent in current dollars from 1991.

Since the early 1980's, sales of eating and drinking places have consistently set the pace for all retailers by increasing at annual rates that were above the average for the overall economy. At the same time, sales of department stores and apparel and accessory stores had annual increases in sales that were about the same as average growth in the economy. A significant but unknown portion of these different growth patterns is in response to structural changes in retailing and underlying shifts in consumer buying patterns.

Structural Changes

Structural changes in retailing have resulted in increased market shares for the newer types of retailers and decreased shares for traditional retailers. These developments seem to suggest that the type-of-activity categories under which the Bureau of the Census reports retail sales need to be updated. Traditionally, a retail establishment is classified by its principal commodity line or usual trade designation. However, in today's world of "scrumbled merchandising" and discount merchandisers, retail sales by merchandise line groupings are becoming increasingly unhelpful indicators of the trends and underlying forces that are changing the face of retailing.

Scrambled merchandising is a relatively new term for a structural change that has been taking place since the 1970's. It denotes the tendency for retail stores to become larger and more diverse in the merchandise lines they carry. For example, during the past two decades, supermarkets have expanded activities from their traditional food product lines to non-food product lines and many services, including "in house" pharmacies.

This important structural change in retailing has paralleled the migration of consumers from the central city to the suburbs. As retailers moved to the suburbs to better serve their customers, they generally built larger stores. During the 1980's, total retail selling space in the United States increased 43 percent, from 3 billion square feet in 1980 to 4.3 billion square feet in 1990. To fill this expanded floor space, traditional retailers have expanded the number of merchandise lines they handle. More drug stores now sell convenience foods and office supplies, and many gasoline service stations offer convenience foods.

The full impact of scrambled merchandising on the traditional retailer is unclear. However, the industry consensus appears to be that the added merchandise lines of a scrambled merchandiser often shift market shares away from the smaller traditional retailer.

Another structural change affecting traditional retailers is the recent rise in importance of discount mass merchandisers in response to changes in consumer buying patterns. Discount merchandisers, also known as off-price retailers, generally offer a specialized merchandise line at discount prices in large superstores or smaller regional discount stores. The small regional discount store usually sells specialty items in a regional shopping mall.

Superstores are large retail establishments usually offering at discount prices a limited product line with an extensive array of complementary merchandise. The average superstore carries an inventory of 40,000 items compared with the 25,000 items carried by an average supermarket. Examples of superstores include Staples (the office supply store), Toys "R" Us, and Wal-Mart.

A new type of superstore is the price club or warehouse store. Price clubs not only have more retail floor space than a superstore, they also offer a broader line of merchandise at discount prices. Nearly all have an "in-house, grocery supermarket. Price clubs are becoming an important part of the U.S. retail market, but data are not readily available to track their market position or their impact on traditional retailing.

A hyperstore is another type of superstore that is several times larger than a warehouse store and carries a significantly larger inventory. Hyperstores account for an important share of the European retail market, but they remain a minor part of the US. retail sector.

These ongoing changes in discount mass merchandising are mainly in response to changes in the buying patterns of consumers due to demographic changes and shifts in consumer attitudes. The largest single group of retail customers--those in their 40's--has shifted its priorities toward replacement needs for tangibles, more spending on intangibles such as education for their children and health care, and greater savings for the future. Changes in consumer attitudes include a shift away from status and conspicuous consumption toward price and value consciousness and caution about indebtedness.

Retail sales of "big ticket" items, such as furniture and autos, and discretionary purchases, such as designer apparel, have been especially affected by consumer caution, changes in consumption and savings behavior by the major retail consumer group, and little real growth in credit in 1992. To encourage more consumer spending, retailers have increased their promotion activities, boosted their inventory of off-price merchandise, and invested in sophisticated computer systems to better track market trends and control operating costs.

Technology Advances

State-of-the-art computer system technologies are being used by retailers to maximize operating efficiencies and economies of scale. For instance, registers at checkout counters, in conjunction with coded information attached to the merchandise, are able to generate information on store sales by department, product category, vendor, size, and current price. In addition, these technologies may be programmed to calculate discounts, apply special allowances without the need to update price labels on individual items, approve credit, accept credit cards, and schedule deliveries. The more sophisticated systems also monitor inventory levels and automatically reorder selected merchandise from the vendor, link subsidiary stores to one another and with the home office to give immediate readings on sales and inventory, and calculate turnover by product, store, and sales area. Such an intensive use of computers can lead to dramatically reduced selling and operating costs, and improved employee productivity.

The retailers that have already committed the capital and time needed to install and implement point-of-sale computers and integrate their operations and marketing activities into a computerized system of information indicate that computerization will ultimately revolutionize retailers' marketing and operations activities. Other retailers view computer technology as an unnecessary capital expense.

However, relatively few retail establishments have integrated their operations and marketing activities into a fully integrated system of computerized information. In some cases, the retailer lacks the capital and inclination to use point-of-sale scanners and related technologies. In other cases, the retailer has the capital but not the inclination. In either case, a significant number of retailers could benefit from further computerization of their operation and marketing activities. A review of the productivity trends of the major types of retailers points out the substantial untapped potential for reducing retail selling and operating costs, and improving employee productivity through computerization.

Productivity Trends

The latest US. Department of Labor data on the output per manhour for the major types of retail stores show that most stores improved their productivity during the 1980's. Of the 12 major types of retail stores for which this data are available, 8 showed increases in productivity during the period, and 4 showed declines: variety stores, grocery stores, eating and drinking places, and drugs and medicine stores. It is not coincidental that, except for the chain stores in each group, these four groups are among the least computerized of all major types of retail stores.

Output per manhour trends are influenced by many independent factors, of which computerization is only one. Other factors include changes in output of the specified sector, the number of employees and their hours worked, and consumer demand.

Price Issue

Retailers are actively supporting Congressional initiatives to legislate an end to the marketing practice known as manufacturer's suggested retail price (MSRP). The proposed legislation would make it easier for retailers to bring successful lawsuits against manufacturers that refuse to continue supplying merchandise to retailers that fail to adhere to the MSRP. From the producer's point of view, MSRP allows the manufacturer to better target certain niche markets with products differentiated by a combination of quality and price. Manufacturers prefer niche marketing because it allows better projections of consumer demand and, subsequently, more efficiently scheduled production runs.

In contrast, retailers, especially discount mass merchandisers, oppose MSRP practices because they may restrict consumer choice, limit off-price merchandising, and often force price increases that retailers would not otherwise initiate. Retailers believe that MSRP constrains their freedom of action and interferes with their marketing strategies.

INTERNATIONAL COMPETITIVENESS

The retail industry's international competitiveness is difficult to assess because neither the value of merchandise exported by retailers nor the value of retail services incorporated in these exports is reported. Retailers export products and services whenever they sell them to a consumer residing in a foreign country. The export retail sale may be a direct sale to a consumer visiting the United States from a foreign country, particularly Canada and Mexico. The export may also result from a mail order sale from a U.S. retailer to a consumer in a foreign country. For some products, the value of export retail sales may be significant.

For example, thousands of Canadians cross daily into the United States to purchase cigarettes and gasoline, two products heavily taxed in Canada. Others stock up on discount-priced groceries, apparel, and other merchandise sold in US. discount stores. Each of these purchases is an export to Canada and confirms the competitive edge US. retailers hold over their Canadian counterparts.

Another indication of the international competitiveness of U.S. retailers is the drive to "go global." Retailers, especially discount retailers, have already signed up to participate in privately organized trade missions to Mexico, while others are interested in trade missions to the newly industrializing countries of Asia.

Since the completion of negotiations on the North American Free Trade Agreement (NAFTA) in September 1992, many retailers have investigated investment opportunities in Mexico and Canada to establish a presence there. According to the results of a recent Coopers & Lybrand survey, those looking for investment opportunities in Canada are planning to open their own stores there. In contrast, those planning to invest in Mexico are looking for joint venture or investment partners. The retailers most interested in investment opportunities in the two markets are the discount mass merchandisers. Because the consumer markets in either country are not as large nor as well organized as in the United States, potential investors are looking at regional discount stores rather than superstores.

Some opponents of NAFTA have suggested that its liberalized investment measures will lead to intensified competitive pressures from retailers in Canada or Mexico wishing to invest in the United States. However, a majority of the respondents to the Cooper & Lybrand survey do not view this possibility as a major source of increased competition in US. markets.

Despite the interest of retailers in globalization, there are many impediments in foreign markets that will prevent U.S. retailers from fully exercising their competitive edge. Many of these barriers take the form of customary business practices, such as loyalty to local suppliers; others are nontariff measures, such as restrictive standards.

Outlook for 1993

Total retail sales are forecast to exceed $2 trillion, up more than 5 percent in current dollars from 1992. Reflecting the sensitivity of durable goods retail sales to changes in overall business conditions, the strength of the recovery in the overall economy is expected to translate into higher-than-average gains in durable goods sales during 1993. Nondurable goods retailers will account for slightly more than 60 percent of total retail sales; durable goods retailers will have the remaining share.

Retailers selling nondurable goods are forecast to have sales exceeding $1.2 trillion in 1993. About 18 percent of the total will be from sales of eating and drinking places, which are forecast to reach a record $219 billion, up almost 7 percent in current dollars from the record level of an estimated $205 billion in 1992.

Department store sales are forecast to be about $196 billion in 1993, up almost 4 percent in current dollars from the estimated $189 billion in 1992. This increase is expected to be slower than the average growth in the overall economy partly because of the structural changes (e.g., the tendency to purchase more at superstores) taking place in retailing.

Apparel and accessory stores, which are losing market share to the newer types of retailers, are forecast to post sales of $106 billion during 1993 and have an increase of more than 7 percent in current dollars over 1992. This sales increase will be less than has occurred in the second year of other US. economic recoveries.

Long-Term Prospects

In the long term, the retailing sector is not expected to grow as fast as in the past because of changes in consumer buying patterns and structural shifts in retailing. According to the latest projections of the Department of Labor, retail sales, adjusted for inflation, will show an average annual rate of growth of 2.5 percent during 1990-2005, compared with 3.5 percent annually during the previous 15 years.

The Department of Labor recently projected a near doubling in the rate of worker productivity increase of the retail sector during 1990-2005. Output per employee is expected to increase at an average 0.9 percent annually during the period, compared with a 0.5 percent annual rise during 1975-90. Nearly all of this increase appears to be associated with projected improvements in operating and marketing activities through extensive computerization. During 1990-2005, the average annual rate of increase in consumer demand and the number of employees in retailing are expected to increase at lower rates than in 1975-90, while the number of hours worked per employee will remain unchanged.--James Walsh, Office of Service Industries, (202) 482-5131, September 1992.

Additional References

(Call the Bureau of the Census at (301) 763-4100 for information about how to order Census documents.) Monthly Retail Sales, Accounts Receivable and Inventories, Current Business Report, Bureau of the Census, U.S. Department of Commerce, Washington, DC 20233. Revised Monthly Retail Sales and Inventories, January 1980-April 1992, Bureau of the Census, U.S. Department of Commerce, Washington, DC 20233. Annual Indexes of Output Per Hour for Selected Industries, Monthly Labor Review, April 1992, Bureau of Labor Statistics, U. S. Department of Labor, Washington, DC 20210. Telephone: (202) 523-4000. Outlook: 1990-2005: Industry Output and Employment, Monthly Labor Review, November 1991, Bureau of Labor Statistics, U.S. Department of Labor, Washington, DC 20210. Telephone: (202) 523-4000. The Trilateral Trade Agreement, Coopers & Lybrand, 1800 M St. NW, Washington, DC 20006. Telephone: (202) 822-4000. Retailing: Driving the Economy, National Retail Institute, 701 Pennsylvania Ave. NW, Suite 710, Washington, DC 20004. Telephone: (202) 783-0370.

FOOD RETAILING

The U.S. food retailing industry (SIC 54) consists mostly of establishments selling fresh and processed/prepared foods to the general public for mainly at-home preparation and consumption. Many food retailers sell a variety of non-food grocery items such as pet supplies, soaps and detergents, paper and plastic goods, and alcoholic beverages. Larger retailers frequently offer fresh fish and other seafood, delicatessen foods, in-store baked goods, flowers, and drugs. Sales data for the industry include food, beverage, and non-food grocery products, and goods sold in service departments such as in-store bakeries, pharmacies, and flower and deli departments.

The food retailing industry encompasses traditional multiline grocery stores, convenience stores, free-standing retail bakeries, meat and fish markets, confectionery stores, and produce and dairy stores. Many of these establishments, especially grocery stores, are owned and operated by corporate chain-store organizations. Industry sales data exclude sales of restaurants, fast-food establishments, or other food service outlets. The data also exclude sales of drug stores, discount department stores, and general merchandise stores, although many of these outlets sell food and non-food grocery items.

In 1992, shipments of the industry (including grocery stores and most other retailers of foods and beverages for consumption at home, but excluding food service) reached an estimated $387 billion. This was an increase of percent in current dollars over 1991. Grocery store sales, which account for about 95 percent of industry sector sales, rose more than 1 percent in current dollars to $362 billion in 1992. However, sales of the larger retail grocery firms advanced almost 2 percent, reaching $226 billion. In 1992, these larger grocery retailers captured over 60 percent of the grocery store market and more than 58 percent of total food retailing sales.

INTERNATIONAL COMPETITIVENESS

Food imports play an increasing role in the U.S. food retailing system. They are likely to become even more prominent if two major trade agreements, the North American Free Trade Agreement (NAFTA) and the Uruguay Round of the General Agreement on Tariffs and Trade (GATT), are approved. NAFTA will create the largest free trade area in the world among the United States, Canada, and Mexico.

Both these trade pacts will reduce US. and foreign food and beverage tariffs, quotas, and many other marketing restrictions. US. food processors are expected to use less costly raw materials for domestic production and to source more finished goods abroad, especially from our NAFTA partners, Canada and Mexico. Foreign-based food and beverage processors are also likely to step up their efforts to market processed and branded products because of improved access to the U.S. market. These trade-liberalizing agreements are expected to result in greater consumer choice and price competition.

The two agreements, when fully implemented, will also provide US. retailers, wholesalers, and food/beverage processors with substantially improved access to Mexico and other foreign markets. Under NAFTA, Mexico will bilaterally reduce its current relatively high tariffs on U.S. agricultural and processed foods and beverages over 15 years and replace its restrictive quota system with tariffs. Some Mexican tariffs will be reduced to zero immediately, while the majority will be phased out over 5 to 10 years.

The GATT round of trade negotiations involves virtually all U.S. trading partners. Successful completion of the negotiations will result in generally lower tariffs, reduced trade barriers, and an extension of GATT rules to many service industries and to food, beverage, and agricultural commodities. US. food export interests will benefit from a successful Uruguay Round because U.S. food tariffs and trade barriers are now low, while many foreign countries, especially those in the European Community and several Asian nations, maintain high tariffs and other barriers to entry.

New U.S. Food Labeling Laws

Foreign food and beverage makers are likely to react unfavorably to proposed changes in U.S. food labeling requirements. The new labeling, which is required for all packaged foods, both foreign and domestically produced, covers such topics as nutrition information, serving size, health messages, and descriptive terms such as "light" and "low fat." The US. Food and Drug Administration (FDA) and the U.S. Department of Agriculture (USDA) share responsibility for food labeling along product lines. The USDA covers meat and poultry, and the FDA handles all other products.

Effective May 1994, new labels will be required on all packaged foods that are produced. Newly labeled products will appear on store shelves later that year. The new labels will feature a standardized section (yet to be made final) requiring specific, comparable treatment of key elements, such as serving size. All food products must conform to these requirements. Due to the complexity and extended coverage of the new requirements, it appears likely that most manufacturers will have to design new labels rather than modify existing ones.

The labeling requirements may prove especially difficult for many foreign food manufacturers, especially firms unaccustomed to such extensive product analysis and disclosure. Some industry observers contend that the new requirements constitute a barrier to trade and could be challenged in GATT. In contrast, defenders of the requirements observe that all manufacturers, both domestic and foreign, must comply equally and that the labeling rules are the result of a well-accepted need to improve US. health standards. These observers believe that any GATT challenge to the new regulations will be dismissed.

Consumer Spending

Consumer spending for foods and beverages consumed at home slowed significantly in 1992, reflecting stable-to-declining prices for some staples and U.S. shoppers' concerns about unsettled economic conditions. Nominal personal consumption expenditures (PCE) for all foods and beverages consumed at home rose at an annual rate of less than 1 percent in current dollars during the first six months of 1992. (In contrast, PCE for at-home foods and beverages rose about 2 percent in current dollars in 1991, and increased at an average annual rate of 5 percent during 1988-90.) Adjusted for inflation, PCE for all foods and beverages declined slightly in the first half of 1992, due primarily to a drop of about 2 percent in real PCE for alcoholic beverages consumed at home.

During the first half of 1992, consumer spending for poultry, pork, fresh fruits and vegetables, and nonalcoholic beverages rose by at least 2 percent in current dollars. Sales declined for all types of alcoholic beverages, pet foods, sugar and sweets, bakery products, processed fruits, and other prepared foods.

Industry Issues

In 1992, grocery store operators and food processing firms encountered other problems in addition to slow sales growth. Traditional grocery store operators viewed with concern the incursion of member-only discount clubs into the sale of food and beverages. A recent study by the Food Marketing Institute ?Ml) estimates that discount clubs' sales reached $33 billion in 1991 and should capture a 13-percent market share of overall food retailing within the next 10 years. Some retailers have fought back by creating special merchandising sections featuring the large size and no-frills, multipack styles favored by the discount clubs. These actions are viewed as primarily defensive because discount clubs limit their selections to cyclical items in limited sizes, with a high recognition factor and a very low price.

More retailers are directing their anger about discount clubs at food and beverage manufacturers/marketers. The FMI study contends that manufacturers are partially responsible for the grocers' woes and that a new period of tense relations between retailers and manufacturers appears about to occur. Retailers argue that part of the lower selling price of discount clubs results from several factors: lower product and wholesale costs, better promotional deals, and more favorable package sizes and product mixes. The FMI study contends that 6-10 percent of the discounters' lower prices can be attributed to manufacturers' pricing structure.

Retailers appear ready to take a harder line with their suppliers and show interest in pursuing strategies to penalize suppliers believed to be offering special prices and packages to non-traditional retailers. Not surprisingly, grocery product manufacturers react by contending that grocery retailers should not continue to expect to receive substantial promotional funds, special terms, and merchandising monies (including slotting allowances), while demanding low wholesale prices and special packs that are often jumbo size.

Grocery product manufacturers indicate increasing interest in a pricing strategy sometimes referred to as Everyday Low Pricing. This substitutes lower consistent wholesale list prices for complicated pricing schedules encompassing various short-run promotional prices. Many manufacturers believe this pricing strategy will help to cut down substantially on so-called promotional spending, which manufacturers view as required, but unproductive, compared with more direct forms of consumer stimulus. Retailers are generally unsympathetic to this strategy, and the long-range prospects for Everyday Low Pricing remain cloudy.

Outlook For 1993

A continuation of the unsettled economic conditions prevailing in 1990-92 is likely to dampen consumer spending in 1993, and result in slow growth for the grocery retailing industry. Food retailing industry sales are expected to rise slightly over 2 percent in current dollars in 1993, reaching an estimated $396 billion. Because of slow sales growth, food retailers are expected to increase pressure on suppliers for price and product concessions. Manufacturers, encountering competitive sales and profit constraints, are likely to resist these pressures. In any event, consumers are likely to be the beneficiaries of increased price discounting in 1993 as traditional retailers, discount-club outlets, and grocery product manufacturers all strive for enhanced market share in a slow-growth U.S. economy. Due to projected modest growth in the world economy, U.S. retail food exports are unlikely to rise rapidly in 1993.

Long-Term Prospects

Between 1993 and 1997, food retailing industry sales are forecast to rise 2 to 4 percent annually in current dollars. Less costly imports resulting from NAFTA and the Uruguay Round, along with spirited competition among grocery manufacturers and grocery retailers, are expected to restrain food prices. Slow growth of the U.S. population, minimal real increases in disposable personal income, and continuing economic concerns should restrain growth in food purchases. Therefore, the next five years appear difficult for the U. S. food retailing industry.--Cornelius F. Kenney, Office of Consumer Goods, (202) 482-2428, September 1992.

Additional References

Call the Bureau of the Census at (301) 763-4100 for information about how to order Census documents.) Census of Retail Sales, Bureau of the Census, U.S. Department of Commerce, Washington, DC 20233. Quarterly Financial Report, Bureau of the Census, U.S. Department of Commerce, Washington, DC 20233. Employment and Earnings, Bureau of Labor Statistics, U.S. Department of Labor, Washington, DC 20210. Telephone: (202) 523-6700. Food Marketing Review, Economic News Service, U.S. Department of Agriculture, Washington, DC 20250. Telephone: (202) 447-8732. Food Marketing Institute, 800 Connecticut Ave. NW, Washington, DC 20006-2701. Telephone: (202) 452-8444. Progressive Grocer Maclean Hunter Media, Inc., 1351 Washington Blvd., Stamford, CT 06902. Telephone: (203) 325 3500. Advertising Age, Crain Communications, Inc. 740 Rush St., Chicago, IL 60611. Telephone: (312) 649-5331. American Institute of Food Distribution, Inc., 2812 Broadway, Fair Lawn, NJ 07410-5570. Telephone: (201) 791-5570.

         Retail Output Per Manhour, 1981-90
            Index of Output per Manhour
              (1982 = 100)
                                      Compound Annual
Type of retailer       1981    1990    Rate of Change
Hardware stores        98.5   123.7           2.6
Department stores      97.8   119.4           2.2
Variety stores        105.3   100.0          -0.6
Grocery stores        100.0    86.6          -1.6
New/old car dealers    97.9   121.6           2.4
Auto/home supply      101.8   121.0           1.9
Men's clothing         99.9   118.6           1.9
Women's clothing       90.0   113.4           2.6
Family clothing        94.1   105.7           1.3
Shoe stores           103.7   117.9           1.4
Eating/drinking       100.4    96.5           0.4
Drugs/medicine         99.7    98.5           0.1
All businesses         99.9   109.7           1.0
SOURCE: U.S. Department of Labor, Bureau of Labor Statistics.

COPYRIGHT 1993 U.S. Department of Commerce
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