Retailing - Industry Overview

The retail trade sector (SIC 52-59) is one of the major sources of jobs in the U.S. economy, consistently accounting for about 21 percent of all non-farm jobs in the private sector. Retail establishments are primarily engaged in selling merchandise for personal or household consumption.

Before reading this chapter, please see "Getting the Most Out of Outlook '94" on page 1. It will answer questions you may have concerning data collection procedures, forecasting methodology, sources and references, and the Standard Industrial Classification (SIC) system. For other topics related to this chapter, see chapters 32 (Apparel and Fabricated Textile Products), 35 (Motor Vehicles and Parts), 36 (Household Consumer Durables), 38 (Wholesaling), and 43 (Drugs).

Retailers sell an ever-changing combination of durable and nondurable merchandise. The Census Bureau designates the several different types of retail stores according to their principal merchandise lines, such as food stores, or usual trade designations, such as department store or discount store.

A principal merchandise line is one that accounts for at least 50 percent of total sales. Thus, the Census Bureau would classify a retail establishment that derives at least half of its revenue from food as a food retail store, despite the fact that the store also receives part of its revenue from the sale of paper products, soaps, housewares, and services, such as renting rug cleaners or arranging flowers. The store's entire revenue would be recorded as food sales by the Census Bureau.

The Census Bureau's practice of reporting the total sales revenue of a retailer by the principal merchandise line makes it difficult to accurately interpret trends in retail sales of individual merchandise lines as retailers constantly alter their products to adjust to changing consumer demands.

Retail merchandise lines are divided into the following categories: building materials, hardware, garden supplies, 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 stores (SIC 59).

In general, sales of retail establishments in SIC groups 52, 55, 57 and 59 are mostly from durable goods and sales of retail establishments in SIC groups 53, 54, 56, and 58 are mostly from nondurable goods.

Year-to-year changes in sales of retail stores concentrating on nondurable merchandise lines, such as food and clothing, tend to mirror changes in general business conditions as indicated by the gross domestic product (GDP), which is forecast to grow about 3 percent in 1994. In contrast, year-to-year changes in sales of retail stores concentrating in durable goods, such as furniture and major household appliances, tend to exaggerate changes in business conditions by increasing more than the GDP during good years and declining more than the GDP during slowdowns. In addition to overall business conditions, retail sales reflect changes in prices, merchandise mix, and shifts to alternative channels of distribution.

[TABULAR DATA OMITTED]

This chapter will focus on the trends that influence the current and near-term demand for nondurable retail merchandise.

Industry Sales

In 1993, total retail sales reached nearly $2.1 trillion, a gain of more than 6 percent in current dollars. A major portion of the increase was due to price hikes. It is difficult to measure the precise increase in "real dollars" because of the incompatibility of retail sales data and the Consumer Price Index which measures inflation.

Stores selling mostly nondurables accounted for nearly 64 percent of total retail sales, with 1993 revenues topping $1.3 trillion, up 5.7 percent over 1992. Sales of durable goods totaled $757 billion in current dollars, up more than 7 percent from 1992, and accounted for 36 percent of the total.

However, these year-to-year gains should be taken as only a rough approximation of the direction of change for the sales value of all consumer durables or nondurables because of the way Census Bureau data is reported. For example, K-Mart reported furniture sales totaling $364 million in 1991. The Census Bureau reported all of these sales as retail sales of nondurables because K-Mart's principal merchandise lines are nondurable.

Retail stores selling primarily nondurable goods, for which Census Bureau data are available, include general merchandise stores, department stores, food stores, variety stores, apparel stores, restaurants, and drug stores. Other retailers for which Census data are not available include discount stores, warehouse clubs, convenience stores, and catalog and video sales firms.

A list of the top 100 retailing firms compiled by Chain Store Age Executive magazine combined the sales data for the top 100 retailing firms in 1992, including data for types of retailers not collected by Census. The results indicated that discount stores accounted for 21 percent of all sales by the top retail stores selling nondurable goods, second only to supermarkets, which represented 35 percent of total sales. Warehouse clubs, a relatively recent entrant into the retail market, accounted for 6 percent of nondurable sales in 1992. (See Table 1.)

Table 1: 1992 Retail Sales of Nondurable Products
(by type of store, ranked by total sales(*))

                      Market Share
    Item              (in percent)

Super markets                 35.0
Discount stores               21.0
Department stores             13.0
General merchandise            8.0
Specialty apparel              7.0
Warehouse clubs                6.0
Drug stores                    5.0
Convenience stores             3.0
Variety stores                 2.0

   Total                     100.0

(*) Based on total sales of the top 100 retailers of nondurable
merchandise in 1992.
Excludes revenues of catalogs and video sales channels,
estimated at $2 billion.

SOURCE: Chain Store Age Executive, April 1993.

According to the Chain Store Age Executive, discount stores and warehouse clubs achieved their current market position mainly by underpricing department stores, variety stores, and drug stores. Supermarkets also increased their market share at the expense of drug stores, and specialty apparel stores captured markets formerly claimed by department stores. A new category of retailer - "G" stores, operated by the major gasoline companies - encroached on the market share of traditional convenience stores.

New Strategies for the 1990's

In response to increased competition from new market participants, retailers are exercising a full array of strategies, including downsizing and restructuring, changing their merchandise mix, adding services, and adapting the "quick response system" for controlling inventory management costs. Over the past decade, these strategies, singly or in combination, helped retailers faced with declining market shares and falling profit margins to prevent further erosion of their market positions and improve their overall revenues.

But these competitive strategies may not be enough for the 1990's. David Glass, president and chief executive officer of Wal-Mart, told the 1993 National Retail Federation convention that "all concepts of doing business are changing." He pointed out that the customer of the 1990's is looking for genuine value, coupled with superior and different customer services. Others have made similar observations. P.R. Trimmer, in his book, 50 Powerful Ideas You Can Use to Keep Your Customer, called customer service "the competitive battleground for the 1990's."

The retail customer of the 1990's is significantly different from the retail customer of a decade ago and retail strategies need to be reassessed in view of the changing demographics and new buying patterns.

The most significant demographic change is in the declining importance of households composed of married couples, dropping from 60.8 percent in 1980 to 55.3 percent in 1991 as shown on Table 2. At the same time, the number of people living alone increased, influencing the consumer buying habits and forcing retailers to respond with appropriate packaging and marketing, as evidenced by the increase in "single serving" products.

Table 2: Relative Importance of Retail Market Segments

                                     Percent
Market Segment                 1980    1991   Change

Married couples                60.8    55.3     -5.5
Persons living alone           22.6    25.0      2.4
Single parent families          7.5     8.5      1.0
Unmarrieds, living together     5.4     6.5      1.1
All others                      3.7     4.7      1.0

   Total                      100.0   100.0

SOURCE: Furniture/Today, August 21, 1992.

Some retailers depend on groups other than households for their target markets. For instance, men between the ages of 18 and 34 are the mainstay customers of convenience stores. But the number of men in this age group is expected to decline during the 1990's, portending a difficult period for convenience stores.

Another demographic change is the projected surge in the number of teenagers and young adults in the next five years. This group will be more inclined to embrace electronic shopping channels and interactive television, sometimes referred to as "storeless" shopping.

Changing buying patterns projected for the 1990's reflect new priorities for households composed of married couples and a different lifestyle for single-person households.

Many married couples consisting of maturing baby boomers have changed their priorities to emphasize more leisure time. Increasingly they have rejected the day-long shopping trips of the past in favor of quick "buy and go" patterns. These changing attitudes toward shopping appear to have had an effect on the retailing scene. Sales at super regional malls - those with at least 3 anchor stores - dropped 7.3 percent between 1990 and 1992, after increasing 18 percent during the previous three years. During the same period, retail sales at smaller community shopping centers increased 15 percent and sales at neighborhood strip centers increased nearly 7 percent.

Consequently, superstores are being downsized to attract the 1990's consumer. In the 1980's, the superstores had 220,000-260,000 square feet. In the 1990's, the superstores will cover 116,000-188,000 square feet.

Retailers also have altered strategies to appeal to the increased number of people living alone. This group follows a different lifestyle than the traditional retail customer. According to Barbara Caplan, Vice President of Yankelovich, Clancy Shulman, people living alone "no longer feel that they have to do what society says, but feel that they have permission to do as they please." This group of customers tends to shun traditional buying patterns and look for unusual items and wider assortments of merchandise.

As Michael Wellman, Vice President for Marketing at K-Mart, told retailers at the 1993 National Demographic and Lifestyle annual conference, "The successful retailer of the 1990's must change his operation to meet the needs of the 1990's customer." These changes will include new marketing vehicles such as "electronic retailing."

Electronic retailing, as defined by Carl Steidtmann, director of Management Horizons, a division of Price Waterhouse, includes interactive communications via faxes, electronic data interchanges, and other interactive media. Here are some examples of electronic retailing already in place:

* An upstate New York supermarket allows its customers to electronically check out and pay for their purchases without the aid of a check-out person.

* A discount store in Maryland allows its customers to fax their orders to the store for immediate assembly and delivery to the ordering customer.

* Several "G" stores are experimenting with interactive electronic menus at the gasoline pump that list the merchandise carried in the store. The customer electronically indicates the merchandise to be purchased, pays for the gasoline and other merchandise at the pump with a credit card, and picks up the bagged selections at the store's drive-in window.

Competitive Measures

Shifts in market position during the last 5 years prompted retailers to adopt competitive countermeasures, including downsizing and consolidation, merchandise mix changes, more consumer services, and greater use of advanced technologies, such as a quick response systems, to control inventory costs and increase productivity.

A quick response system usually involves a strategic alliance between a retailer and manufacturer, coupled with an Electronic Data Interchange (EDI) system, which includes sharing sales, marketing, and inventory data with vendors; bar coding on packaging to track sales and inventory; and point-of-sale scanners to track sales and implement an automated stock replenishment system. It is also essential that an EDI system be able to issue invoices and payments electronically and track consumer buyer patterns.

The most frequently cited benefits of a quick response system include increased inventory turnover and reduced inventory levels, operating costs, and frequency of out-of-stock items. A recent Garr Consulting Group survey of a cross section of retailers conducted for Chain Store Age Executive magazine found that 61 percent of those surveyed had entered into strategic alliances with vendors to take advantage of the benefits of a quick response system.

The various competitive strategies undertaken by major types of retailers during the last few years are reviewed in the next section.

Department Stores

Department store sales increased from nearly $153 billion in 1988 to $183 billion in 1993, a 5-year increase of nearly 20 percent, according to Census Bureau data. Despite the growth in sales volume, department stores lost market share to discount stores, warehouse clubs, and specialty apparel shops, dropping from nearly 15 percent of the market for nondurable retailers in 1988 to slightly less than 14 percent in 1993.

To adjust to the competitive pressures from other types of retailers, several department stores, including R.H. Macy and Federated Stores, filed chapter 11 bankruptcy actions while they downsized and restructured their operations. Other department stores have changed their merchandise mix to de-emphasize their durable lines, and highlight their fashion apparel, gifts, and designer household items.

The Garr Consulting Group survey showed 78 percent of the department store managers interviewed reported they had entered into strategic alliances with their vendors to implement the quick response system. In terms of sales, the top five department stores are Mays, J.C. Penney, Federated, R.H. Macy, and Dillard.

Supermarkets

Food retailers increased their sales but accounted for a smaller share of nondurable goods purchased during the 1988-93 period. Sales rose from $326 billion in 1988 to $387 billion in 1992, a gain of nearly 19 percent, according to the Census Bureau. In terms of market share, food stores claimed more than 29 percent of the total market for nondurable retailers in 1993, down from the nearly 32 percent claimed in 1988. Supermarkets have consistently accounted for about 80 percent of all food store sales.

During the last several years, supermarkets lost sales to drugstores, discount stores, and warehouse clubs. To meet these competitive challenges, supermarkets changed their merchandise mix by dropping duplicated product lines and allocating more shelf space to fast-moving, non-food items and promotional items. Some supermarkets also have revised their marketing strategy, shifting some of their advertising dollars from weekly newspaper inserts to direct mail circulars.

According to the Garr Consulting Group survey, 46 percent of the supermarket managers surveyed said that they have entered into strategic alliances with their vendors to implement the quick response system. In addition, a few supermarkets have expanded their consumer services, such as accepting telephone orders of groceries for home delivery.

The top five supermarkets are Kroger, American Stores, Safeway, A&P, and Winn-Dixie.

Warehouse Clubs

The number of warehouse clubs increased from 15 in 1983 to 577 in 1992, experiencing double digit growth in sales and earnings until the early 1990's. Since then, warehouse club sales and earnings have declined.

Part of this deterioration in sales and earnings is due to competitive challenges from other types of retailers such as supermarkets. In response, warehouse clubs are downsizing and restructuring, changing their mix of merchandise, adding more services, and opening new markets. K-Mart's recent sale of Pace Club to Sam's Club, and Costco's merger with Price Club, are examples of the new competitive strategies. Price Club and Sam's Club also entered new markets by forming joint ventures with retailers in Mexico.

The top warehouse clubs include Price Club, Sam's Club, and Waban.

Discount Stores

Sales of the big 10 discount stores grew at a robust average annual rate of 11.5 percent from 1987-1991, according to Chain Store Age Executive magazine. But discount stores' sales have begun to slow, increasing only 10.3 percent during from 1990 to 1991 - the latest period for which revenue figures are available. A closer look at the individual sales changes from 1990 to 1991, compared to the full 1987-1991 period, reveals a significant slowdown in the revenue of several discounters, including Hills, Ames, and Rose's. As a result, discount stores have implemented strategies to maintain their market standing, including downsizing and restructuring, changing their merchandise mix, adding services, and intensifying the use of their quick response systems.

The Garr Consulting Group report revealed that 50 percent of the discount store managers responding to the survey said they have entered into strategic alliances with their vendors to implement their quick response systems.

Discount stores also are changing their merchandise mix by adding groceries to their product lines. Others are adding more services, such as beauty shops and in-store opticians. A few discount stores also are expanding into new markets by forming joint ventures with retailers in Mexico.

The major discount stores include Wal-Mart, K-Mart, Stop N Shop, Pacific Enterprises, and Ames.

Apparel Stores

Apparel and accessory stores posted sales of $108 billion in 1993, up 27 percent from the $85 billion recorded for 1988. In terms of market position, apparel and accessory stores have maintained a fairly stable 8 percent of total sales of all retailers of nondurable merchandise. Apparel and accessory stores have been effective in maintaining their market position by emphasizing fashion and value, thereby capturing consumer clothing sales previously claimed by department stores.

According to the Garr Consulting Group survey, 59 percent of the apparel store managers surveyed reported that they have entered into strategic alliances with their vendors to implement quick response systems.

The top retail firms selling mostly apparel and accessories are: Melville, The Limited, TJX Co., U.S. Shoe, and Gap.

Catalog and Video Retailers

The top six catalog retailers show an average annual increase in sales of 13.8 percent during the period 1987-1991 compared to the 5.7 percent increase registered from 1990 to 1991, the latest year for which revenue figures are available. Chain Store Age Executive magazine attributed the 1990-91 slowdown to the recession, rather than competitive pressures from other direct sales channels.

Catalog retailers are maintaining their competitive edge in part by expanding into foreign markets. For example, L.L. Bean has formed four joint ventures in Japan; Land's End is developing the British market and plans to test the market in France; and J. Crew recently hired a vice president for international development to guide their expansion into foreign markets.

Video retailers were given a boost recently by the merger of QVC and Home Shopping Network. These two video retailers claim to cover about 99 percent of the total $2.2 billion market for video sales. Some industry analysts view current video retailers as rivals for the catalog retail customer, but about half of all video retail sales - $1.1 billion - are from repeat customers. The greater competitive threat for both catalog and video retailers appears to be from general merchandise stores, such as Dillard, that are planning their own shopping channels with interactive electronic arrangements that would allow the at-home customer to make direct purchases.

The top catalog retailers are Fingerhut, Speigel, Land's End, and L.L. Bean. The top video retailers are QVC, Home Shopping Network, and the Fashion Channel.

Convenience Stores

Combined retail sales for the major convenience store chains increased an average of 1.6 percent from 1987 to 1991, although about half of them showed double-digit growth rates during the period. In contrast, convenience store revenues declined 3 percent from 1990 to 1991.

Convenience stores are losing sales to "G" stores, convenience-like stores owned and operated by the major gasoline companies - including BP, Shell, Texaco, and Hess - in conjunction with their gasoline sales. "G" Stores tend to offer a greater merchandise mix than convenience stores, including fresh fruits and vegetables, salads, and sandwiches.

Convenience stores have not undertaken the full range of strategies adopted by others to meet the competitive challenges of the "G" stores. Southland and Cumberland Farms have undergone reorganizations to become more competitive. Stop N Go changed its merchandise mix to serve niche markets by targeting each store to one of three markets: upscale, mainstream, or hispanic. Convenience stores rarely enter into strategic alliances since they seldom employ bar coding or other essentials of a quick response system.

The top convenience stores in terms of sales include: Southland, Circle K, Cumberland Farms, Stop N Go, and Super America.

Drug Stores

Drugstore sales increased nearly 37 percent from $57 billion in 1988 to $78 billion in 1993 while their market share remained relatively steady at about 6 percent, despite strong competition from supermarkets and discount stores. Part of this stability may be attributed to the strong sales position of the two of the major discount drug stores, Phar-Mor and Drug Emporium. Traditional and chain drug stores, in contrast, have lost market position to supermarkets and discount stores.

In response to that competition, traditional and chain drug stores have changed their merchandise mix to include many food and convenience items and downsized their hardware and related departments. Some have expanded their services to include free delivery of medicines and drugs, a valuable service to the elderly and mothers of young children. Others have made shopping easier by relocating in strip malls and other easy in-and-out locations, rather than in large shopping malls.

The top drugstores are Walgreen, Eckerd, Rite Aid, Phar-Mor, and Drug Emporium.

Restaurants

Restaurant sales increased at an average annual rate of 4.5 percent from 1988 to 1993. During this same period, the number of restaurants also increased. However, as Nation's Restaurant News points out, the number of restaurants is constantly changing, as new entrants come and go and chains expand into new areas. In addition to the many single proprietorships, there are at least 100 chains that service one or more of the twelve niche markets. They include: dinner houses (e.g., Red Lobster), sandwich shops (e.g., McDonalds), family restaurants (e.g., Denny's), chicken shops (e.g., KFC), pizza shops (e.g., Pizza Hut), steak houses (e.g., Bonanza), seafood houses (e.g., Captain D's), snack restaurants (e.g., Dunkin' Donuts), cafeterias (e.g., Morrison's), contract food service (e.g., Marriott), hotel restaurants (e.g., Hilton Hotels), theme park food services (e.g., Disneyland), and in-store restaurants (e.g., K-Mart).

Each of these individual markets showed a different growth pattern between 1988 and 1993. Nation's Restaurant News reports that dinner houses posted the fastest growth rates, both in terms of sales and the number of outlets opened. Family restaurants were a close second. Sandwich shops lost sales to dinner houses and family restaurants during that period. Growth in hotel and theme park restaurants was less than 2 percent.

To meet the competitive challenge of dinner houses and family restaurants, sandwich shops are expanding into greater levels of service and providing more value for the customer's dollar. In addition, the sandwich ships are using computers to integrate order taking, food preparation and service, inventory control, and managerial and accounting functions.

According to Restaurant News, the top restaurant chains in terms of sales are McDonalds, Burger King, Pizza Hut, Hardee's and KFC.

INTERNATIONAL COMPETITIVENESS

Until recently, few retailers attempted to expand into foreign markets. But the easing of investment restrictions in some foreign countries, and the emerging trend of establishing affiliated firms abroad, has launched a new era in retailing.

The precise volume of exports and imports attributable to retailers is not known because merchandise trade flows are identified by type of product (e.g., manufactured, agricultural, metals, and minerals, etc.) rather than type of organization. The only export data identified by type of organization are listed in the U.S. Direct Investment Abroad (DIA) reports published every 5 years. The latest, the 1989 benchmark survey, shows the 50 U.S. retailers, with 211 foreign affiliates, exported merchandise valued at $200 million to affiliated firms in foreign markets. They included retailers of general merchandise, food, clothing, autos, garden supplies, hardware, as well as discount stores and catalog retailers. (See Table 3.) In addition, U.S. retailers reported $500 million in direct sales to foreign customers.

Table 3: Retail Firms with Foreign Affiliates in 1989
(by type)
                             Number with
     U.S. Retailer         Foreign Affiliates   Percent

General merchandise                7                 14
Food stores                        4                  8
Apparel                           10                 20
Eating/drinking places             9                 18
Not elsewhere classified          20                 42

Total                             50              100.0

SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis, 1969
Benchmark Survey, U S. Direct investment Abroad

In 1989, major stores with at least one affiliated firm in a foreign market included Sears, J.C. Penney, Woolworth, and Carter-Hawley. The foreign affiliates of these retail parent firms were either wholly owned or majority owned by the U.S. firm. Since then, several other major U.S. retailers have established affiliated firms in foreign countries, including Toys-R-Us, Sam's Club, K-Mart, Price Club, Blockbuster, and Dillard.

Most recent investments in foreign affiliates have been in Mexico due to easing of government restrictions on joint ventures and other business activities that had previously been imposed on foreign investors. Further expansions are expected pending congressional approval of the North American Free Trade Agreement.

Foreign governments often impose restrictions on how or where foreign firms may operate or limit foreign investment to certain sectors or organizational arrangements. These constraints discourage U.S. retailers from expanding into new markets through affiliated firms in foreign countries. A major objective of the Uruguay Round of multilateral trade negotiations, as well as separate bilateral consultations, is to reduce or eliminate restrictions on investment. If the negotiations are successful, more U.S. retailers will be encouraged to expand to new foreign markets. For example, bilateral consultations with Japan have resulted in an easing of restrictions on the size of foreign retail stores, prompting Toys-R-Us and Blockbuster Video to establish affiliated firms there.

Additional U.S. investment in retail affiliates abroad may increase the demand for American exports from U.S. parent retail firms to their foreign affiliates.

Outlook for 1994

Total retail sales should reach $2.2. trillion in 1994, up 7 percent from 1993. Total revenue earned by stores concentrating in nondurable product lines will exceed $1.4 trillion, an increase of more than 6 percent over 1993, largely reflecting higher prices. These projected increases reflect the general view of business forecasters that consumer spending in 1994 will provide the underlying strength for the 3 percent growth rate in the GDP forecast for the 1993-94 period. During 1993, consumer spending, reflecting uneasiness about the future, was projected to remain flat as consumers continued to reduce their debt burden. However, low interest rates and diminished inflationary pressures should encourage business investment and induce consumers to spend more in 1994.

Long-Term Prospects

Retailers of nondurable merchandise face a dual challenge of a slow-growing market and changes in demographics and consumer buying habits that have spawned structural changes within the industry. The retailers that adjust their competitive strategies to these new realities, and take advantage of the new marketing techniques such as electronic retailing, catalog marketing, smaller stores, and improved customer service, should succeed in improving their market position in the changing retailing era of the 1990's.

Additional References

Survey of Current Business, Bureau of Economic Analysis, U.S. Department of Commerce, Washington, DC, 20230. Telephone: (202) 606-9900. Employment and Earnings, Bureau of Labor Statistics, U.S. Department of Labor, Washington, DC, 20210, Telephone: (202) 219-5000. Chain Store Age Executive, Lebhar-Friedman, Inc., 425 Park Ave, New York, NY, 10022. Telephone: (212) 756-5252. Furniture/TODAY, Cahners Publishing Co., 275 Washington St., Newton, MA 02158-1630.Telephone: (800) 395-2329. Business Week, McGraw-Hill Inc., 1221 Avenue of the Americas, New York, NY, 10020. Telephone: (212) 512-2000. U.S. Direct Investment Abroad, 1989 Benchmark Survey, Final Results, Bureau of Economic Analysis, U.S. Department of Commerce, Washington, DC, 20230. Telephone: (202) 606-9600.

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