Retail trends in the 1990s: the aging population will trigger a host of retailing innovations in the decade ahead.

RETAIL TRENDS IN THE 1990s

The aging population will trigger a host of retailing innovations in the decade ahead.

Retailing is fundamentally the business of buying and selling goods. A successful retailer offers the right goods at the right price in the right location. A successful retailer can't be static. The fundamental changes in demographics and consumer preferences projected for the next decade will force many retailers to rethink their

* Product policies.

* Pricing strategies.

* Channels of distribution.

* Technological support.

* Real estate needs.

This article takes a look at retailing in the next decade.

DEMOGRAPHIC CHANGES

Demographic projections indicate the population will increase 7.1% by the year 2000. But unlike previous population rises, this one will come more from increased longevity--not increasing birth rates.

Exhibit 1 on page 48 illustrates the following demographic trends:

* The 16-to-24 age group will continue to shrink as a percentage of the population. Since this group has traditionally supplied labor for retailers, this downward trend will force many retailers to either reduce their demand for labor (through increased use of technology) or be more innovative in attracting this age group to retailing. A third action will be to attract workers from other age groups. We're likely to see as many retirees staffing retail stores as teens. Additionally, retailers currently selling to teens may need to shift their product lines to counter the impact of a shrinking market.

* The 25-to-34 group also will continue to decline. This decline may be more significant than the decline in the younger group because the 25-to-34 year olds create new households and therefore purchase home furnishings, appliances, housewares and similar items.

* The population in the 35-to-44 age group has reached its peak and will continue at this level. Again, retailers catering to this segment will find it difficult to increase sales without taking market share from other retailers.

* The group between 45 to 54, clearly on the rise since the early 1980s, is projected to increase 31% from 1990 to 2000. This age group is at the peak of its earning ability, while its largest expense--its mortgage--mostly is low and close to disappearing. To win loyalty from this group (and capture some of its discretionary income), retailers will have to cater to its new needs and preferences. Fueled by the aging of the baby boomers, this group will continue to grow and spend in the 1990s.

* The 55-to-64 age group also will rise from the mid-1990s as the immediately younger group gets older. In addition, the increased longevity due to medical advances will increase the numbers in this age group. Many in this group will go into retirement, which means a necessary slowing of spending. But it also means more time available for shopping. Therefore, retailers will succeed by offering these customers merchandise for travel and for other leisure activities.

Though the population is aging, don't be fooled into thinking the United States will become a geriatric society buying Geritol and liniment. The aging baby boomers are active both at home and work, and they've been taking good care of their health. Many are better educated than previous generations, they live in dual-income families and they have many hobbies and interests.

THE CHANGING CONSUMER PREFERENCES OF THE 1990s

The 1990s not only will see more older consumers but their preferences will change. And they'll have more money. Because those in the over-50 age group have already purchased homes and reared families, their expenses tend to plateau. This group controls 50% of all discretionary income and earns 42% of all U.S. aftertax income.

As people age, their consumer preferences change. This group is much more value-oriented than younger groups; it's not looking for image products. Research has shown that 83.6% of the over-50 age group say they're willing to pay more for quality. And 88.8% would rather buy a few high-quality items than many items of lower quality. The conspicuous consumption of the yuppie generation will diminish as an older, more sophisticated shopper, with a desire for quality and diversity, emerges.

Convenience also will emerge as a consumer preference. An increasing number of families are made up of two full-time workers. The buyers in the family have little time and thus need convenient shopping--such as at-home shopping via catalog/direct mail and television shopping. Consumers don't want to spend Saturday on the freeways driving for discounts; they want to spend Saturdays on the fairways driving for birdies. A recent survey showed 13.2% shop regularly and 51.8% occasionally at a convenience-type food store, and this trend will continue.

PRODUCT POLICY

Retailers must be responsive to these changing demographics and preferences in order to succeed. Altering product offerings is one way retailers can respond. Traditionally, retailers selected their merchandise assortments for breadth and depth. To meet ever-changing consumer preferences, however, retailers are changing their thinking. Let's look at the trends that will continue into the 1990s:

Focused assortment. Despite their size and national prominence, such retailers as the Limited Stores and The Gap have stuck with their original formulas of offering a small focused assortment in great depth. A stroll through any of the regional malls reveals many similar specialty merchants--stores that sell exclusively sunglasses, nuts, brushes, bathing suits and so forth. These specialty stores represent the traditional departments in a department store.

Brands versus private labels. Private-label sourcing really began with lines such as Sears' Kenmore and Craftsman products. While the success of the private label isn't universal, two trends are emerging:

1. Department stores will continue to use some private labels as they do today.

2. The specialty stores will continue to depend heavily on private-label products. They'll continue to promote the store name and its brands aggressively.

The category killers. Category killers--Toys |R' Us is the best example--are nationally prominent specialty merchants that dominate their categories. These merchants have successfully developed a following of their own and can make decisions regarding assortment, pricing and location--independent of competitors. They'll continue to wield huge market power, influencing everything from product development to pricing structures to real estate development.

PRICING POLICY

Price strategy is another method retailers have to carve out a niche for themselves. The meteoric rise of discounters in the 1970s and early 1980s has reached its peak, primarily because of heavy competition in that market. Currently, growth appears greatest among the category killers. That's because they're specialists that are able to create their own customers and become market leaders within a chosen segment. The ability of these super specialists to offer both broader and deeper assortments within a limited category ensures them steady traffic without promotional price-cutting. In the 1990s look for the following pricing trends:

Everyday low pricing. Although promotions encourage comparison shopping to obtain the best price, many people with demands on their time refuse to do that and instead will trade potential savings for time. This partially explains the success of Walmart and Kids |R' Us. From a management perspective, everyday low pricing means labor savings because of reduced marking and remarking of price tags, and fewer stock shortages on the promotional items.

High/low promotional pricing. Rather than ticketing an item at an expected selling price, the retailer sets an artificially high ticket price. Markdowns or promotions then bring the item down to the expected selling price. Retailers that choose this pricing strategy will have to be better merchants, combining fresh merchandising with crisper visual presentations and perhaps adding store attractions to keep the traffic flowing. The promotions of the department stores will most likely continue, since they depend more heavily than others on selling quickly changing fashions.

CHANNELS OF DISTRIBUTION

The changing demographics are best illustrated in the emergence of new channels and the resurgence of some old channels of distribution. The demand for convenience, not just price, has allowed nonstore retailing to flourish. Since the technology is changing so rapidly, it's impossible to guess what the end of the next decade will bring, but here are some of the hottest trends for the beginning:

Electronic shopping, including video kiosks (both dedicated and shared), tele-shopping (including interactive) and on-line computer shopping. These electronic alternatives address the lack of assortment in small independent stores and the more sophisticated demand of today's consumers. There are currently over 8,000 video kiosks nationwide. Major players in the retail and computer hardware industry have invested considerably in developing and instituting electronic home-shopping technologies. The rise in these technologies coincides with the increase in cable subscription, home computer ownership, use of automated teller machines (ATMs), debit cards and women working outside the home.

Mail-order catalog/direct mail. Catalog and direct-mail retailers have become more competitive because of greater use of techonolgy, smarter buying, less costly and more time-efficient distribution systems, and general economies of scale. In terms of product mix and product development, many catalogers are among the leaders in their specialty markets. Increased computer sophistication in marketing has allowed them to get closer and closer to their target consumers, ensuring them a greater return on investment and surer merchandising.

Manufacturer's outlets: Throughout the Northeast and Midwest, manufacturer's outlets are becoming very popular. Many of these are located in outlying rural and ex-urban locations. These centers have been shown time and again to have the power to draw bargain hunters by the busload. Among the nationally known brand names with outlet stores in these centers are Corning Ware, Carter's Childrenswear, Van Heusen, L'eggs/Hanes/Bali, American Tourister, Dansk, Mikasa and Fuller Brush. The number of these outlets may continue to expand as they become one of the stops on retirees' many vacation trips.

Hypermarkets. Truly one-stop shops, hypermarkets offer a huge assortment of products, carrying everything from grocery and fresh foods to softgoods and apparel to hardgoods, consumer electronics and automotive supplies. These new retail formats are intended to eliminate as much of the cost after wholesale as possible. Hypermarket retailers must be willing to accept low margins across a broad range of products to ensure the kind of traffic needed to maintain a large volume. They depend on the low service and high volume they can get by creating a broadly assorted, no-frills environment for one-stop shopping. These stores, however, have yet to catch on in the United States the way they have in Europe. Major mass merchants such as Walmart and K-Mart, along with European originators Carrefours and Auchon, are testing the format in the United States.

TECHNOLOGY TRENDS

Technology systems are now a necessary part of the retail business. Information collected at the point of sale (POS) becomes an integral part of the process of analyzing and planning business. This information brings the merchant at headquarters closer to the selling floor and thus closer to the consumer. Through management information systems, this information affects merchandising, financial, distribution and operational decisions. The next wave of retail technology trends are:

Quick response. Quick response (QR) is the retailer's just-in-time (JIT). Retailers have found that planning six months or a year ahead by product is no longer a successful strategy. By replenishing product according to what's selling, as well as removing what's not selling, successful retailers have demonstrated that QR isn't just a link between the consumer and the retailer. It extends to the manufacturer and the whole manufacturing chain.

UPC and EDI. Universal product code (UPC) and electronic data interchange (EDI) are techniques for getting information up and down the QR chain. In addition, they supply management with information for plotting trends and conditions and with information on how to react to those trends.

EDI will continue to bring retailers closer to the sources of product in a more timely and efficient manner. Orders will be placed faster and more accurately through electronic receipt of shipping and invoicing information. Electronic funds transfers will make cash management, accounts receivable and accounts payable more efficient.

Expert systems. The retail industry is starting to explore artificial intelligence as its next wave of strategic information systems. The objective is to create expert systems that help managers make business decisions using the tremendous volume of transactional information collected by MIS through POS systems. (See exhibit 2 below for the services that expert systems using artificial intelligence will perform for retailers in coming years.)

RETAIL REAL ESTATE

Retail real estate is changing to adapt to buying habits and consumer needs. Today, store sizes are getting both larger and smaller. Specialty stores in regional malls are becoming smaller and more geared toward specific niches (for example, Sunglass Huts, Sock Express, Just Ties and so forth). Leading category killers grow ever larger and more dominant in their relevant markets.

Originally, shopping occurred in the downtown and secondary urban commercial districts. In the 1950s, with the huge increase in suburban residential development, neighborhood strip centers of less than 100,000 square feet appeared. These typically held a pharmacy, dry cleaner, small independent grocer, travel agent and so forth.

The next level of development was the community shopping center, often anchored by a supermarket or branch of the local department store. These centers ranged from 150,000 to 300,000 square feet.

Later the regional mall emerged. It's anchored by two or more major stores, including either a national mass-merchant like Sears or Penney's or a full-service department store. In the 1990s as retail markets become more segmented, real estate development will offer new formats to accommodate the needs and desires of consumers and retailers. See exhibit 3 on page 55 for more real estate trends.

THE FUTURE

Over the next decade, the population will continue to grow older proportionately. In real terms, however, retail spending won't grow significantly. Retailing is becoming a "zero-sum game" where dollars must be taken from one retail outlet to be spent at another.

Product policy. Retailers that continue to be focused and closest to their customers and fundamental marketing objectives will be strong. Those unable to focus will fall by the wayside.

Pricing policy. Category killers will continue to be able to set their own prices. While some retailers will continue to price promotionally to attract traffic, the everyday low pricing concept clearly is here to stay in the 1990s.

Channels of distribution. It's not clear yet whether hypermarkets will succeed in North America as they have in Europe. Catalog and direct mail will continue to divert dollars away from traditional retailers, but the emergence of various forms of at-home electronic shopping could present the greatest threat of all to traditional retailing. Those involved with early experiments, such as Sears and Prodigy, have the deep pockets to stick with them until they become successful.

Retail technology. Information is clearly the competitive advantage that will determine success or failure in the 1990s. Gathering information through POS--and more specifically through UPC scanning--will increase the speed and accuracy of collection, and EDI will increase the speed of transmission. The use of this information in a QR system will speed replenishment, making merchants better able to react to market demands, getting them closer to the customer and the vendor. Quicker reaction time will translate directly into quicker turnover, higher margins and better customer service.

Real estate. The emergence of the newer formats in retail real estate allows retailers to enter previously economically prohibitive areas. Large national and regional chains will penetrate new markets further from the major urban centers. The creativity of developers will continue to spur additional growth of the national chains into new markets.

Given these changes in demographics and technology, it's very likely that retailing will change more in the next decade than it has in the last century.

EXHIBIT 2

How expert systems will help retailers in the 1990s

Here's a list of services that artificial intelligence systems will perform using information gathered at point of sale:

* Expert sales assistant. Engages in on-screen dialogue with the customer recommending the best selection for particular customer needs. These systems are the brains behind the more advanced in-store video kiosks. * Inventory replenishment. Monitors store inventories and sales forecasts and uses expert rules to order just enough inventory to maintain a satisfactory service level. * Employee scheduling. Develops employee work schedules that match coverage to traffic. This kind of scheduling can be very complicated in large stores and in peak seasons. * Merchandise planning and distribution. Plans the merchandise mix for each store, as well as deciding how to distribute it. * Buyer's workstation. Helps merchandise buyers select the vendors with the best prices, terms and so forth. Also it can monitor purchase orders, invoices and shipping documents. * Cash-flow management. Gives the smaller retailer the management expertise that only the larger chains can now afford. * Store site selection. Provides screening of new store sites by sifting through demographic data using real estate expert advice. * Planning floor space. Plans or modifies floor space allocation to improve store image, profitability and customer traffic flow.

EXHIBIT 3

Retail real estate in the 1990s

The 1950s downtown stores and 1970s shopping malls are giving way to the new locations of the 1990s. Changing demographics and consumer preferences are causing new shopping formats to emerge. Among these are the following:

* Festival. Without any real anchor tenants, festival centers are characterized by their festive atmosphere making shopping a social or even tourist activity. This format usually has lots of food and entertainment alongside specialty stores. Examples are the South Street Seaport in New York City and Baltimore's Inner Harbor Shops. In Salt Lake City, Melvin Simon's Trolley Square festival center was voted the city's most popular tourist attraction. * Mixed use. Often located in urban centers, with lower floors comprising the retail space and upper floors dedicated to offices or residences, this style has been popular in places like Hong Kong and Tokyo for years and is best exemplified by New York City's Trump Tower or Chicago's Water Tower Place. * Redevelopment of downtowns. As the outlying urban shopping environments have withered, downtown again has become the focus for urban shoppers. Always supported by the weekday working shopper, downtown is now the only shopping available to many city dwellers by public transportation. * Discount centers are characterized by a major anchor tenant, such as Marshall's, T. J. Maxx or Caldor's, and surrounded by complementary shops, grocery stores and so forth. * Specialty centers have no anchor tenant and are made up of (usually upscale) regular-price specialty retailers. * Manufacturers' outlet centers. Built to be a destination or attraction in their own right, these centers are primarily composed of direct manufacturer's outlet stores, and restaurants, but also may have off-price retailers. When not housed in a special building or village setting, they're often located close to other tourist attractions. * Stand-alone destination. IKEA is an example of a store that has the power to draw by itself from great distances. This store sells only private-label products and provides baby-sitting service and an in-house restaurant. * Hypermarkets. Thus far hypermarkets haven't achieved the level of success they've attained in Europe. They're too utilitarian and don't appeal to the social aspects of American shopping. What the future holds for the many companies experimenting with hypermarkets is not clear. Given the fundamental concept that consumers never have enough time, the ability to get all of their shopping done in one trip through the checkout line must have enormous appeal. * Power centers. The concept here is to have no major anchor store but rather five or more nationally known stores that have the power to draw customers alone but that achieve even greater pull when combined in one location. The attempt is to marry known specialists, leaders in their markets. * Special-interest centers. These highly specialized shopping centers target specific limited niches. Examples are automotive centers for those who work on their own cars or ethnic centers that cater exclusively to one segment of the population. * Warehouse clubs. While many have membership fees or other restrictions, these retailers offer a no-frills, low-price alternative to traditional retail outlets. Purchases are usually in bulk quantities, and these outlets offer a variety of products, including food. [Exhibit 1 Omitted]

RICHARD V. SARKISSIAN, CPA, is a senior consultant in the New York City office of TRADE, the Touche Ross Retail Unit specializing in operations, merchandising, distribution, financial organization.