Retail Boom Isn't Reliant Only on Rich [Good news for Wal-Mart and Kmart]
By LESLIE KAUFMAN -- May 7, 1999
Michael Gonzales, a waiter from Los Angeles who
earns about $25,000 a year, has been in a buying
mood
lately. "Things are going well for me these days," he
reflected, while shopping at Home Depot in Los Angeles
for supplies to refurbish his apartment. "It's not like
I'm spending mountains of cash. Just enough for a few
comforts."
Gonzales, 28, adds, "I'm older, so I can't stand living
someplace that looks ratty."
Whether snapping up bathroom fixtures at Home Depot,
shrink-wrapped T-shirts at Old Navy or wide-screen
televisions at Circuit City, American consumers are on
a rampage, increasing their spending even faster than
they did last year. In the first four months of this
year, sales in stores open at least one year rose 6.7
percent from the corresponding period last year, one of
the biggest jumps in years, according to the Goldman
Sachs retail composite index. That increase comes on
top of a dizzying 5.1 percent increase last year.
For growth in consumption to actually accelerate after
eight years of economic expansion is a surprise -- the
torrid pace had been expected to slow. Retail analysts
and economists now point to numerous factors, including
the continued rise of both the stock market and home
values, to explain much of the gains.
But another change is also helping: While the
wealthiest consumers powered the expansion in its early
stages, spending by those in the bottom 40 percent of
income, defined as households making up to $28,500 a
year, has been picking up. Real growth in wages and the
lowest unemployment rate in 30 years have spread the
shopping spree into every corner of American society.
"Our research shows that for the first time in
two-and-a-half decades, workers' broad-based wage gains
are generally driving consumption throughout the
economy," said Jared Bernstein, an economist with the
left-leaning Economic Policy Institute based in
Washington. "It is not just the wealth bubble at the
top."
During the first years of the economy's expansion,
middle- and low-income Americans increased their
spending, but at a much slower pace than wealthy
households, those making over $47,000. Consumption by
those earning less than $28,500 grew 10 percent from
1993 (a nadir in consumer spending for this group)
through 1997, whereas spending by the richest fifth of
Americans, those earning over $73,000, grew 25 percent,
according to Edward Wolff, an economist at New York
University who has analyzed the federal government's
Consumer Expenditure Survey. Wolff projects that this
will change when the government data are made available
for 1998. Spending by the group making less than
$47,000 will have grown by 5 percent, he estimates, and
spending by the richest by only 3 percent.
Given that the inflation-adjusted pay of the bottom 20
percent of wage earners has grown 5 percent to 10
percent since 1996 while their savings rate has hovered
around zero, economists say it is safe to conclude that
their additional earnings are going to new purchases.
The earned-income tax credit (expanded in 1994) has
also given them some additional buying power.
But low earners are taking on additional debt too, as
credit card companies court them and federal programs
encourage them to buy their own homes and assume
mortgages.
"When we get the '98 and '99 data, it will become very
clear that they are accounting for a very sizable share
of the growth in consumer spending," said Mark Zandi,
the chief economist for RFA, an economic consulting
firm in West Chester, Pa.
All this is not to discount the spending power of the
rich. As the biggest beneficiaries of sharp gains in
the stock market, the wealthiest fifth of Americans are
consuming as conspicuously as ever. Their intense
appetite for luxury items has created a boom market for
upscale cars and for homes that rival the gaudiest
mansions of the Gilded Age.
One sign of the giddy spending is the fierce resurgence
of the ultimate income showpiece: fur. Not only are
mink stoles in fashion for the fall, but designers are
using fancy animal pelts for all manner of clothing
from sweaters of royal blue chinchilla to skirts in
shearling.
But if the rich are enjoying a sumptuous banquet, the
remainder of Americans are not just scooping up table
scraps, as many critics of Reaganomics argued was the
case in the 1980s expansion. In everything from apparel
to electronics to home furnishings, these Americans are
making their mark.
Most notably, they are speeding the rise of
value-oriented emporiums and highlighting the growing
troubles of retailers that cater to the middle market.
In previous economic booms, low-income people tended to
trade up to more expensive stores. This time around,
they are sticking with those that offer them the best
deals, and they are being joined by more affluent
Americans, who are increasingly willing to shop both in
chichi boutiques and in stores that offer cut-rate
prices.
In previous months, the surging buying power of lower
earners has helped move Target Stores, Kmart Corp. and
Wal-Mart Stores Inc. to the head of the retail pack. In
April, sales at discount stores rose 3.8 percent from a
year earlier, according to Goldman Sachs, much slower
than in previous months but still impressive
considering that Easter sales were recorded in March
this year.
This segment is winning big because it has transformed
itself from pragmatic but grim to stylish yet
affordable. Target, a unit of Dayton Hudson Corp., is
the most obvious practitioner of the strategy, but not
its only one. It employs a brigade of trend hunters who
bring the hippest clothing designs to the stores in a
timely manner and recently unveiled a home design
collection by the renowned architect Michael Graves,
featuring retro-chic tea kettles and toasters.
"Four years ago there were no major brands in the
discounters; then somebody finally woke up," said
Adelle Kirk, director of marketing for Kurt Salmon
Associates, a retail consulting firm. "These days
discounters very successfully deliver fashion, terrific
merchandising, and brands -- all at value prices."
Some market researchers argue that the more polished
approach, in the best tradition of retail, is doing
more than simply filling a need. It is also creating
new desires to fuel the economy. In other words,
home-and-hearth avatar Martha Stewart, whose products
are now available at Kmart stores, is making
200-thread-count cotton bed sheets in sunflower yellow
something that most every American can aspire to.
Jessica Clark, 21, has two jobs, one as a data entry
clerk at a bank and another as a cashier at a grocery
store. She says she regularly visits Target in her home
town of Memphis, even on evenings when she goes out
with friends.
"I always spend way too much when I come here, but I
always find other things to buy," Ms. Clark laments.
"Today I came to buy detergent and fabric softener, and
I ended up with two plastic lawn chairs, plants,
electronic games, candles, socks and a utility knife. I
thought I would spend maybe $25, but I spent $106
instead. Every time I come here, I do that."
The other winners in this environment are also stores
that emphasize good value. This includes Home Depot
Inc. and the electronics giant Circuit City Stores Inc.
Old Navy, the stylish low-cost clothing chain started
by the Gap in 1994, has also repeatedly registered
double-digit sales growth in the last year and reported
a 7 percent increase in the latest monthly sales
report.
Meanwhile, stores that cater to the middle class, like
Sears, Roebuck and Co. and J.C. Penney Co., are finding
it hard to get solid footing. Both stores Thursday
reported slight sales declines in April from a year
ago.
Jeffrey Feiner, a retail analyst with Lehman Brothers
Inc, said, "The companies who are losing market share
need to reposition themselves as value leaders, or they
are not going to last."
Copyright 1999 The New York Times Company |
