Tough times ... Australians have lost faith in the middle market.
In his mid-80s classic hit You Can Call Me Al, Paul Simon sings about a man walking down the street asking himself: “Why am I soft in the middle? The rest of my life is so hard.”
Simon was singing about a man in crisis, but he could just as easily have been impersonating Australia’s retail industry 25 years on.
A new report from the retail equities team at the Commonwealth Bank, led by Andrew McLennan, has found further confirmation that retail is “soft in the middle” and that the middle market could be looking at a hard life ahead.
It’s a trend that has long been entrenched in the US and now seems to have taken hold in Australia too. The trend is variously called the "barbell" effect, the "hourglass" effect, or "hollowing the middle."
Whichever of the names you care to use it isn’t hard to decode: Australian consumers, in the aggregate, are allocating a decreasing share of their spending to retailers positioned in the middle of the market, exemplified by the Premier Investments group of brands that are ubiquitous across the Australian retail landscape.
As the influence of these retailers wanes they are pruning back on their store fleets, which will make it harder for operators of second- and third-tier shopping centers to maintain occupancy and rental growth without adopting some fresh leasing strategies.
The new CBA study is based on credit card data that shows spending patterns across 109 fashion retailers, both land-based and online.
The study found that in 2011 the fashion specialty middle market grew at approximately 8 per cent below average. Meanwhile, the low end grew at 4 per cent below average and the high end grew at about 5 per cent above average.
The barbell effect is not confined to fashion, something that also reflects what is going on overseas.
In other developed countries, upscale and "value" retail are both thriving while the middle is being pulverised.
This phenomenon can be seen in the peculiar combination of winners and losers. For example, in the US, luxury department stores and so-called "dollar stores" are simultaneously doing a roaring trade, while middle-market icons such as Gap and J.C. Penney battle for relevance.
CBA’s finding that the barbell effect has surfaced at the specialty store level in Australia means consumers now doubt there is a compelling value being offered in the middle market.
What then are middle-market retailers doing to adjust? It has been repeated ad nauseum by industry gurus that retailers should be going online, differentiating their products and improving the store experience, all the while cutting costs of course.
To Australia’s legion of middle-market retail chains, there must be something unsatisfying about this advice.
First, for an average chain with a mature concept and a garden-variety product, shifting to e-commerce is likelier to shore up existing sales than actually increase them, even if the product can be sold more cheaply online. Unless e-commerce is being used to tap into a new geographic market (e.g. overseas), it is not necessarily opening up an interface with a lot of new consumers – just opening up an additional interface with the same ones.
Second, many industry professionals are now coming to the conclusion that product differentiation isn’t anywhere near as helpful as it once seemed without being accompanied by other significant sources of competitive advantage. The reason is that it is now far too easy for others to rapidly duplicate a new product or design. Take, for example, “fast fashion” retailers like Zara and Hennes & Mauritz. They earned their name partly by being able to reverse engineer new runway hits and get them into stores faster than the runway designers themselves.
Third, improving the store experience can often only be done with the help of better service, which conflicts directly with the fourth item on the list of must-do’s: cutting costs.
So the middle market, once the best place to be in Australian retail, has now become the trickiest.
Ironically, the barbell effect should have favoured the nation’s most upscale department store, David Jones. Yet DJs, which was not part of the CBA study, has contrived to have one of the most abject sales trends of any major retailer in the market.
Clearly, the barbell effect doesn’t automatically confer carte blanche to retailers just because they have exceptional prices.