UNRAVELING RETAIL SALES
Retail sales numbers have a story to tell – a story that can often get lost in the complexity of the figures. June’s results are a case in point. Do they indicate a slowing consumer economy, or is the message more positive?
Of all the economic numbers, retail sales are by far the most fascinating. The aggregated figures provide a snapshot into the hearts and minds of the American public; telling tales of what they desire, how they’re feeling, what they’re doing, and how they’re behaving.
As much as the detail is absorbing, it is also complex. Not least because there are many different ways of looking at the figures, and even more ways of interpreting them. The numbers just released for June are a case in point. The media and many commentators took a negative view of the results, noting the month-over-month decline in growth. However, looked at from a year-over-year standpoint the outcome is fairly positive, with June recording the second highest rate of growth this year, after January. The apparent contradiction is largely the result of perspective.
As frustrating as it might be for seekers of truth, it’s important to say that there is no right or wrong perspective: each is valid, albeit with some caveats. Month-over-month movements are good at picking up on short term changes, although they do not necessarily provide a solid indication of longer term trends. Normally they also used seasonally adjusted data which adds a certain opacity to any interpretation. Longer term trends are best viewed by looking at growth on a year-over-year basis. Using non-seasonally adjusted data here provides a truth to the figures, but it also means the viewer has to be mindful of calendar shifts in the timing of events like Easter and of one-off occurrences such as harsh weather.
That all perspectives are valid does not mean that readers of the results are not allowed a preference in the measure they use. At Conlumino, we favor looking at year-over-year changes on a non-seasonally adjusted basis. These are, in our view, most instructive to understanding the general pattern of retail. Assessed on this basis, the results from June are shown below.
"On a year-over-year basis, June's results were not too bad - the month recorded the second highest rate of growth this year"
By this method of calculation, total retail sales performed reasonably well in June – up by 2.9%. This is a marked improvement on the 0.7% growth seen in May and, indeed, is the second highest growth rate this year after January’s 3.4% expansion. This improvement makes sense in relation to the small uplifts in both consumer confidence and household finances across June.
Under the headline number the components of spend show a varied performance. Thanks to lower fuel prices, gas station sales continue to be very depressed and were down 16.2% on last year. That said, the magnitude of decline has become shallower since the start of the year when gas station sales were down by almost a quarter.
Obviously, lower gas prices mean that consumers are saving some money which is, in turn, boosting the cash they have to spend elsewhere. This, together with improved sentiment, is one of the reasons that auto sales have been so strong – and June was no exception. Sales of autos, which excludes parts and accessories, rose by 10.5% over last year – one of the highest rates of increase since the start of the year.
Foodservice has also, seemingly, been a beneficiary of reduced gas prices as consumers have treated themselves. Sales in June rose by 7.8%, a slightly more subdued level than previous months but still robust in terms of recent history.
The interesting part, however, is pure retail. The sector does not appear to have been a beneficiary of lower gas prices to the same extent as auto or foodservice. Indeed, total growth in pure retail since the start of this year is 2.9% on a year-over-year basis. That’s not terrible, but over the same period last year growth was identical at 2.9%. Lower gas prices have seemingly provided no ‘bump’ to spend.
Worryingly, growth so far this year is also some way below the long run average, which stood at 3.9% per year across the 2010-14 period. This fact is reflected in the proportion of spend that pure retail accounts for: over the past 10 years this has averaged at around 61.3%, so far this year it has averaged at 60.1%. Retail is slowing down, albeit slightly, and it is also losing share of spend as consumers divert spending elsewhere.
This shift in spend is one that is occurring within the universe of retail sales. Given that the wider aggregation of retail spend has also lost share as a percentage of all household spending, the trend is actually sharper than it may first appear.
The dynamic is a troubling one for retailers – not least because the factors behind it are as much psychological as they are economic. Today’s consumers are arguably less concerned with the pure acquisition of products per se. They are somewhat less impulse driven and question much more before they buy. Do they really need the item they are buying? Why is it worth the money? What is quality like? How long will it last? And so forth.
As consumers become choosier, aggregate demand has weakened and will continue to do so. This is one of the reasons why, comparative to historical standards, rates of growth in retail expenditure have slowed. Retailers need to adapt to this slower growth environment.
It also means that the job of selling to consumers, of persuading them to buy, will become a lot more challenging. It’s reasonably simple to sell a television to someone who doesn’t already have one; to sell an enhanced television to someone who already has several TVs is significantly more difficult. The key for retailers will be to make people want things that they don’t necessarily need. To do this requires very different selling skills and different business models to the ones many retailers have traditionally employed.
Part of the change will involve understanding the consumer and engaging with their values: a much more sophisticated form of selling than many in retail are used to – and one which carries with it far greater costs and risks than traditional methods of selling.
The bottom line is that over the next decade consumers will want less and retailers will need to work much harder to persuade them to buy. Their success in so doing will be reflected in the story that future retail sales numbers tell.
This piece is taken from our Viewpoints service, which provides subscribers with analysis and opinion of retailers’ results as and when they are released. For more a free trial of this service, click below and complete your details.