Are we seeing a change in retail sales behaviour in America?

As the so-called Great Recession—I prefer to call it the Long Recession, since I liken it more to the Long Depression in the late 1800's than the Great Depression in the 1930's—was unfolding, one of the big uncertainties was over the structure of the US economy. Since the US consumer was the over-leveraged party going into the credit bust, the big change is likely to lie with the consumer.

One of the big question marks for me, and to many others as well, has to do with the type of products consumers will purchase in the future. To put it bluntly, will American consumers pay up for higher-end products or will they trade down? By higher-end, I am referring to products that have a premium attached to it relative to similar products from competitors. This differs slightly from the definition used by some, where higher-end refers to luxury goods. For instance, I would consider, say, Colgate toothpaste to be a higher-end product within its market.

I ran across a Bloomberg article about various clothing retailers in America and thought it was worth contemplating the behaviour of shoppers in the last year. The following data from Bloomberg is interesting:

One shouldn't read too much into a few data points but it still gives an idea of what we are seeing.

What is very clear is that high-end retailers suffered the most during the recession that just ended. I remember reading analyst and journalist views in mid-2000's suggesting that high-end retail was recession-proof (during the recessions of 2000, 1990, 1982, and 1979, high-end retail held up it seems.) Well, that view turned out to be completely wrong and it goes to show how widely-held views can fail when unpredictable events materialize.

Not surprisingly, given the difficulty faced by consumers, discount retailers performed the best. Not only did the discount retailers see smaller sales declines in the first half of 2009, they also appear to have recovered once the economy started growing.

The biggest story from this chart, in my eyes, is actually what is happening to the mid-end. The worst segment appears to be the mid-end segment. It didn't collapse as much as the high-end but it hasn't recovered much either. I'm not sure if it takes longer for the mid-end to recover but whatever it is, it doesn't look good so far.

If the mid-end market doesn't recover, it may indicate an erosion of consumer spending on middle-of-the-line products. The middle class essentially drove that segment and with the deleveraging and insolvency faced by many in the middle-class, we may see the mid-end being hit the hardest over the next decade. All this is pure speculation on my part—need more data—but if this is true, it may mean the best companies to own are those near the low-end and maybe the high-end.




(Happy Canada Day to all! On another note, here's hoping my team, The Netherlands, wins against Brazil tomorrow in the World Cup :) ...going to be a very difficult team to defeat... )