2016 Deloitte holiday survey Ringing in the retail

08 November 2016

The decline of retail theater; the Prime Effect; the mismatch of consumer expectations and reality.... Rod Sides and Tanya Ott discuss this holiday season’s consumer shopping trends, as described by the 2016 Holiday Retail Survey.

We asked a question about where people were planning to shop, [at] what venues, and what we found is traditional bricks-and-mortar style—whether it be malls, standalone stores, etc.—all were down 3 to 4 percent. So I think that's really going to be a challenge this year, to have foot traffic come back to the stores. It’s really got to be a compelling experience for folks to come in.

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Where do you prefer to shop? A big mall? From the comfort of your couch with a catalog? Or anywhere you darn well please on your phone? We’re talking holiday retail on this episode of the Press Room. I’m Tanya Ott.

One trillion dollars. Actually, a little more than 1 trillion dollars. It’s kind of hard to fathom, but that’s how much holiday shoppers in the US are expected to spend November through January this year. It’s up slightly from last year. Rod Sides leads the retail distribution division at Deloitte. They’ve been surveying consumers every holiday season for 31 years. I got him on the phone to talk about what he’s seeing this year.

ROD SIDES: What's interesting is we always ask the question: How are you feeling? Do you feel like the economy is going to get better or worse? When we talk to the consumers, we found about 45 percent expected the economy to improve, which is great (either improve significantly or modestly).1 Only 22 percent of the folks expected it to weaken, and that was down from 25 percent last year. So I think the consumer is feeling good about the holidays. I think the job market being up certainly helps that sentiment.

TANYA OTT: How does that compare with what the experts are telling us about the economy?

ROD SIDES: I think there's a lot of folks who believe the economy is on its way down. But if you look at the last couple of periods of consumer reporting that happened in the second and third quarter, what you'll find is that actually consumer confidence is up, and it's rising. So I think that's going to fuel a pretty good holiday season. Now eventually, the economy may run out of energy, but for right now it's very strong.

TANYA OTT: So consumers are pretty optimistic about the economy. What kinds of retailers are they choosing this year?

ROD SIDES: They’re looking at a variety of retailers, and the channel is really important as well. Fifty percent of folks said that they were going to use online channels as a shopping destination. Then they moved down to big department stores (traditional big box); that was down to about 43 percent. Department stores are up every year, which is amazing, and it continues to show strength in the holiday season, although I think they struggle outside of the holiday period. But each of those looks like they're going to see good results this holiday season.

TANYA OTT: You mentioned that they're going to be choosing more online shopping. And you've been tracking in-store versus Internet shopping for several years now. What have the historical trend lines been?

ROD SIDES: What we've seen actually over the last three years is the amount of spending budget dedicated online has risen from 40 percent to about 47 percent this year. This year is the first year that that percentage is exactly the same. So what consumers told us is they were going to spend 47 percent of their budget in store, and 47 percent of their budget online. The remainder 6 percent would be for catalog, etc. So it's the first time we've seen online and in store be exactly the same.

TANYA OTT: Is this going to be disruptive, do you think, to brick-and-mortar retailers?

ROD SIDES: We asked a question about where people were planning to shop, [at] what venues, and what we found is traditional bricks-and-mortar style—whether it be malls, standalone stores, etc.—all were down 3 to 4 percent. So I think that's really going to be a challenge this year, to have foot traffic come back to the stores. It's really got to be a compelling experience for folks to come in. I do think it's going to quite require a lot of savvy on the part of retailers to be able to figure out how to get consumers back in.

TANYA OTT: So it's going to require savvy. It's going to require a sort of unique experience. What does that mean? What kind of experience should they be looking at creating?

ROD SIDES: It comes back to service, and it comes back to basics. I think where we got off a little bit as an industry the last four or five years is we thought experience would equate to some type of entertainment value; “retail theater” was something that was bantered about as a topic.

TANYA OTT: What does that mean, retail theater?

ROD SIDES: Well, it's to come in and entertain folks. Do you have the latest magic mirror, or do you have things that are going to essentially entertain the consumers when they come in? Are you going to have coffee or drinks or what have you in there? I think what we're finding, though, is the consumer wants a really simple experience, and they want it to be one where the associate understands their needs and helps them get in and out quickly, especially the holidays. I think if we get back to basic execution in retail, that could constitute a great customer experience.

TANYA OTT: So kick it back old school, kind of.

ROD SIDES: Absolutely. What we're finding is coming back to product. If you have a great compelling product, and you have a nice experience, it makes it easy to shop. Folks are going to come into the store, and it's something that will be worth their time. If you fail on either one of those categories, I think folks are going to move online. And that's what they told us in the study.

TANYA OTT: One of the appeals of online is that obviously you can't try something on, but you can buy something pretty quickly. Whip that credit card out or even have it stored within the online platform that you're using. But a lot of retailers are starting to mash that in-store and online experience. What are some of the smarter examples that you've seen?

ROD SIDES: A lot of it is making sure that they're able to help you continue your shopping journey. From the time you go online, especially if you're willing to opt in and give them information about yourself, [them] being able to take the things that you might have browsed for last night and help you locate those once you're in the store. That's where leading retailers are going, because they want to make sure that you're able to extend that shopping journey from digital to physical and back again. I think what happened often was that folks would look at the two channels as being kind of separate shopping experiences, and we know now that they're meshed together. We asked the question, how many of you would prefer to shop online versus in the store? Forty-four percent of the folks said they would prefer to shop online. Thirty-eight percent said they would prefer to shop at the store. Thirty-one percent said they really value both.

TANYA OTT: Let me get back to that example where you're talking about taking it from online to in store to online, and back and forth, sort of that meshing. What you're saying is that a consumer could conceivably go online to sort of winnow down the products, and then have that information stored in some way so that if they went in a brick-and-mortar or physical store, they could locate it quickly?

ROD SIDES: Correct.

TANYA OTT: How does that happen?

ROD SIDES: Generally what the consumers have told us is they usually go shopping over the holidays with the specific product, or at least the category, in mind for what they're looking for. So as I go into the store, if I'm able to opt into the Wi-Fi network, and they know who I am and what I'm looking for, it very quickly could provide a locator capability for me to go find the product and have it mapped for me in terms of shopping journey. What the consumers tell us over and over again through the holidays is they want it to be fast, convenient. They expect the store associate to help me find the product. I want to make sure I've got the best price, and I need a quick checkout. Those are always the top three criteria for great shopping. Being able to use the information that you gleaned from last night's digital shopping experience would make that a really streamlined experience, and I think consumers will come to really like and appreciate it.

TANYA OTT: You say they want it fast, and you also write about something called the Prime Effect. What is it, and why should we care?

ROD SIDES: A couple of years ago when Amazon came out and introduced the whole Amazon Prime option for their loyal customers, what we found is they started to add more features to the shopping experience. One of the things we found was that they created this notion of free shipping. Now we all pay for Amazon Prime. It's about $100 a year. Shipping is really not as free as we think it is. However, they set the expectation that when you order through that channel, you can get things usually within two days, and that doesn't come with an added cost or shipping cost with that. So what that's really forced a lot of bricks-and-mortar retailers to do is to respond in kind.

Last year we asked people: How fast is fast shipping? The cutoff was somewhere around three or four days. So certainly, within same day, next day, two day— about 95 percent of the folks said, yeah, that's fast shipping. When we asked about three to four days last year, 63 percent responded and said, yeah, that's fast shipping. This year what we found is that number dropped to 42 percent. There's a clear delineation: Fast shipping is two days or less, slower shipping is beyond. What we're finding is consumers have that expectation now. That's the Prime Effect.

TANYA OTT: I just want my replicator so I can order it, and it just gets dropped immediately in my little scanning machine. When we talk about the Prime Effect, though, that could be a real problem if there is, say, a big weather system anywhere in the country the week before Christmas, because people are expecting it in a day or two, and they might not get it.

ROD SIDES: That's correct. What we've found is consumers’ expectations are misaligned to reality. When we ask a question, “Do you think you could order something after December 17 and get free shipping?” 64 percent of the folks said yes. Most people, I think, will be expecting blue skies with no precipitation etc. to be able to get products, and that's just not realistic. The other thing that's not realistic in consumers’ expectation is how much it costs to ship an individual product. We ask a question every year: Tell us how much you'd be willing to pay for same-day, next-day, two-day shipping, etc. What we found in every category was that what folks would expect to pay has dropped significantly even since last year. Again, we're moving to an instance where the consumer expects all of us to be free and on time and service levels to be at a level, honestly, that would be almost impossible to achieve.

TANYA OTT: So who get squeezed in that? Are consumers going to compromise on what they expect, or is the retailer going to have to eat some of that?

ROD SIDES: I think the retail will have to eat it. A lot of large shipping companies have been very clear on their policies in terms of when last-day shipments are allowed to come through, where they will guarantee same-day delivery or next-day delivery. As a result, I think we're going to find retailers will continue to get more and more pressure as consumers are starting to demand more.

TANYA OTT: Last year when we talked, there was an uptick in interest in handmade goods, either bought from any of the numerous online crafting or artisan sites, or maybe in person at craft fairs or small boutiques, or even people go into art supply stores and making them themselves. Does that trend hold up this year?

ROD SIDES: We didn't see that hold as much as we thought. It certainly didn't grow. I think there will still be a number of those kinds of purchases that are made in the marketplace, but I think what we're seeing more than anything is a market share shift from the large players to some of the smaller players. We have a body of research that we looked at [on] volatility from a retail perspective. What we've actually found in that is that about $200 million of market share has been traded over the last two to three years among the top 25. But what's happening is that $200 million [of the] market share is going to smaller players with upstart brands. I think that's the real big story this year.

TANYA OTT: So what is the lesson or the cautionary tale there for those larger players?

ROD SIDES: I think you have to make sure that the brands you carry and the identity that you have are focused around the consumers that you're after. To me, that's the most important element, because what we're finding is a lot of these upstart apparel brands are going in and taking a lot of the fashion market share over time. For a lot of those traditional retailers, they have to retrench around categories they want to win and brands they want to make sure they're famous for and continue to leverage that strength in the marketplace.

TANYA OTT: Haven't larger retailers always, I guess, thought they were doing that? That they were really trying to target a specific kind of consumer?

ROD SIDES: I think so, but over the last 100 years of retail, we built bigger and bigger stores, and we wanted to have fewer and fewer trips, but in my particular location, etc. What we've seen in the last three to four years is fragmentation has really expanded. We've gone from a centralized model to decentralized. Now most traditional retailers have stores that are way too large. They have way too many of them. So they're having to have additional categories that they offer to try to fill the space and bring the consumer back in.

You've seen some mainline stores that have really shifted their focus. We've got a couple that have reintroduced appliances after being out of that business for 20 or 30 years because the perception is the consumer needs assistance in that shopping journey, and they're not able to do that online. They've done that as a way to try to bring traffic back in. So there's been a lot of those movements in and out of categories as a way to leverage the physical footprint that they have.

TANYA OTT: So are you talking about appliances back at, say, department stores?

ROD SIDES: Correct.

TANYA OTT: That's fascinating. It's so funny because it takes me back to my childhood when my mom give me the catalog around Christmas time, and that was my job was to sit and circle everything I wanted.

ROD SIDES: If you think about it, that was that's where we used to get inspiration as kids, because I did the exact same thing. Now inspiration really starts online or digitally. If I think about my 13-year-old, if there's something he really wants, rather than waiting for the catalog or waiting for the push, he basically is using [either] Instagram [or] YouTube and following his interest. He'll identify the things he wants, and then basically he'll send me a digital link. So the shopping journey really begins, and inspiration happens very differently than it has over the years. And it happens quicker. I do think this whole notion of moving more to digital online is really the kind of the biggest story of the year around what we're seeing.

The other thing that's really interesting is we found this year non-gifts spending dropped pretty dramatically, which was a surprise to us. As we have been tracking this over the last three years, we've seen that category grow as people look to gift experiences etc. So what we found is that it actually dropped dramatically this time. It'll be interesting to see if that's a trend or maybe it's just a blip on the screen. But we have seen things like restaurant spending over the last six months start to drop. So the big question is, is this the canary in the coal mine that says maybe the economy is starting to wane, or maybe the consumers are just losing their steam in the marketplace? To me, that's the big question— how long will this continue given where we are.

TANYA OTT: Another trend this year: People plan to spend less money on themselves, which could mean we’re doing a bit of belt tightening. Or we could be feeling pretty good about our personal finances, so we’re spending on ourselves throughout the year rather than treating ourselves once a year. Rod Sides thinks it’s the latter.

You can read about more results from the 2016 Holiday Survey at deloitte.dupress.com, where you’ll also find our archive. On a recent show, we talked about digital readiness: how companies use digital technologies, from cloud computer to mobile apps to social media.

GERALD KANE: So we actually asked the question: To what extent do you believe digital will disrupt your industry? And 87 percent of respondents said they agreed to either a moderate or a great extent that digital is going to disrupt their industry. So everybody knows this. Everybody recognizes that digital is disrupting everything. What they’re doing about it varies quite a bit.

Less than half of the business execs they surveyed say they’re prepared for the disruption. Check it out at deloitte.dupress.com.

If you haven’t subscribed to the podcast yet, do it! We drop two episodes a month, and sometimes we even give you deep dives into a big issue, like the Internet of Things or behavioral economics. They’re great for a road trip, a long run, commute on the train, or whatever. You can tweet us at @du_press or email us at podcasts@dupress.com. I’m Tanya Ott. Thanks for listening!

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