If you want to get a picture of the current retail landscape, to see how retailers have held on and re-positioned themselves and worked feverishly to stay profitable during what some economists have referred to with grim humor as the recession that never ends, take a stroll along Fifth Avenue in Manhattan and peer into the windows of Lord & Taylor’s flagship store.

In the months leading up to the fall 2008 crash, the East Coast department store chain had been undergoing a makeover. The company’s new owner, real estate magnate Richard Baker, wanted to shed dowdy, down-market brands and, following the lead of millions of American shoppers, go more upscale. Baker signed deals with young designers like Peter Som, began sitting front row at runway shows and hired a new CEO, Brendan Hoffman, C’90, WG’97, a Neiman Marcus veteran, to carry out the plan. Then the economy collapsed. “It was a great strategy for about two days, until the world started to melt,” says Hoffman, whose first week on the job in October 2008 was the worst week for the stock market in 75 years. “We immediately knew that trading up wasn’t going to work in the new world.”

In the months that followed, Lord & Taylor shed employees, reduced costs by 25 percent and brought back some of the mass brands they’d pulled from stores, like Jockey underwear, Nautica sportswear and Nine West shoes. The new strategy focused on creating what Hoffman calls a “kinder, gentler, more upscale version of a traditional department store.” The shift is evidenced in the Fifth Avenue store’s window displays, where a mannequin wears a slinky Tahari dress priced at $199.99. Written alongside it is the slogan “Shop more, Guilt less.”

The stock market crash two years ago has resulted in perhaps the biggest shake-up to the retail sector since the Great Depression. Like a violent, upending storm, the recession has been marked by how long it has lasted and how quickly it came, preceded by what seemed like a never-ending upward trend. “For the most part, you had a 20-year run of a growing consumer culture,” says Erin Armendinger, WG’03, managing director of the Wharton School’s Jay H. Baker Retailing Initiative, which studies retail data and works with students considering a career in the industry. “There was very little to tell people that one day this could all come to a stop—very quickly.”

Then, of course, it did. We all know the story: the fall of Lehman Brothers; the erosion of the Dow; double-digit unemployment for the first time in a generation. Caught off-guard, many retailers were left with too much inventory, and too few Americans willing or able to spend. “Demand dramatically and rapidly declined,” Armendinger says. “Many of these products [have] a shelf life. No one wants last season’s winter coat.” Big chains like Circuit City and Linens N’ Things didn’t survive the downturn. Shopping centers built in outlying exurbs during the housing boom became ghost malls. Even as most retailers have shorn up their bottom line and soldiered through the lows of 2009, uneasiness persists.

So where is the retail sector today?

“We’re basically just grasping along with the economy,” says Stephen J. Hoch, Wharton’s Patty and Jay H. Baker Professor of Marketing at the Wharton School and director of the Baker Retailing Initiative. Hoch says that most retailers are in “leaner and meaner” mode, trying to carry less inventory but maintain sales. “It’s a consolidating time right now in retail. Just like it is for consumers.” According to SpendingPulse, a report by MasterCard Advisers that tracks national retail data, July showed a 1 percent year-over-year increase in sales. As slight as it is, that figure is actually down from June’s 1.1 percent increase (retail growth rates of five and six percent were common during the boom years). “There was a healthy uptick in the first quarter” of 2010, says Kamalesh Rao, director of economic research at SpendingPulse. “But from recent data, we’ve bottomed out. We’re hovering at growth rates that are pretty weak.”

Michael Niemira, chief economist for the International Council of Shopping Centers, paints a similar picture. “During the first three months of 2010, there was an improvement in the ‘broad middle,’” says Niemira, “but since then it has narrowed again with some stores doing very well, but the broad array struggling.”

Even the small year-over-year gains can’t be viewed as a positive sign; the comparisons are against 2009 figures, a period that many economists now regard as the market bottom. Rao says that consumer spending has essentially been reset to 2007 levels, but adds that “a one or two percent growth from retail is about as good as you can expect from the macro-economic picture with a labor market that’s moving sideways.”

While unemployment remains near 10 percent, it’s the prospect of joblessness that looms larger and is perhaps at the root of the ongoing consumer malaise. “Even if you have a job, if others don’t then you worry about your own and there’s a damper on everybody,” Hoch says. Consider the June savings rate: 6.4 percent, a number that has ticked up each month since February and stands at three times the prerecession average. It’s a reminder that this recession is very different from others of recent memory in which easy access to credit allowed us to buy our way out. Or, as Richard Galanti, W’78, CFO of Costco, puts it: “In the past, if the recession was over on a Tuesday, people were out spending on Wednesday.”


Americans are still spending, of course. It’s what we do. But there’s been a major pullback, especially in the luxury sector. “I think before the recession there was tremendous movement upmarket and a lot of us got sucked into buying logos we couldn’t afford,” says Hoffman. The fear of not being able to feed one’s family tends to quell any desire for Gucci loafers. In the months after the recession hit, the luxury sector posted 10-15 percent drops, and the stock prices of high-end department stores like Saks got hammered. While luxury spending showed strong signs of a comeback earlier this year, that growth has moderated and both jewelry and apparel sales were down 1 percent in July, according to SpendingPulse.

What money is being spent is instead largely going to purchase durables. Shoppers are in bargain mode. “It’s a time for value,” says Hoch. Discount retailers like Walmart and Costco, he says, “are selling tons of stuff . You go in there and you know it’s the lowest price you’re going to get anywhere.” Galanti says the chain’s reputation as an “extreme-value” proposition has served the company well during the downturn. “I think there’s a sense among people that there isn’t another big shoe to drop, but things also aren’t going to change for some time, so people are being judicious and cautious in their spending,” he says. “Since late 2008, into 2009 and even through 2010, there’s been a switch away from bigger ticket items. All the basics—food, toiletries—have done very well for us.”

The shoppers walking through retailers’ doors today are a different breed than those of even three years ago. They look first for value, consume less conspicuously, shop online more often (e-commerce sales are growing by 10 percent yearly) and buy items closer to when they need them, a trend known in the apparel industry as “buy now, wear now.” The question remains whether these are permanent behavioral changes or temporary adaptive strategies. “Is there a fundamental shift in car consumption? Yes. People aren’t interested in buying big gas-guzzling cars anymore,” says Hoch. “And that’s permanent. With the shopping stuff—I don’t know.” For his part, Niemira, a contrarian in many ways when it comes to this recession (he doesn’t believe the current downturn is intrinsically different than previous severe downturns, for instance) is of the mind that the recession will not have lasting changes to consumer behavior. “My view is that consumers in time will return to their typical buying habits,” the economist says. But, echoing Galanti’s point, Niemira agrees that one troubling difference of today is “the slowness of that return to the typical buying habits.”

As for Armendinger, she used to believe Americans would return to their big-spending ways as soon as the economy rebounded, blocking out the Great Recession as if by collective amnesia. But as the downturn drags on, she says the likelihood becomes greater for lasting, generational changes in spending, especially among young people. “We’re approaching two years now,” says Armendinger, “and two years in somebody’s life when you’re 20 and just graduating college is a long period.”

Long enough for people to examine whether they need 10 pairs of shoes, or if it’s worth paying triple for an item because of its brand logo. A recent New York Times story profiled one couple who donated most of their belongings to charity and downsized to a studio apartment. The same article analyzed the new buying habits and found that many people are choosing to spend on experiences—a long-desired trip, art classes, even a backyard barbecue—rather than material items. “We’ve been surprised at the strength in the last few months of patio furniture,” says Galanti, noting how Costco is selling more home and garden supplies this summer because people are turning hanging around the house into an experience. “For many years, we thought, ‘If I work hard, I deserve nice things, and those things signal something—wealth, or that I’m a hard worker,’” says Armendinger. “With Gen Y, I think they’re questioning that notion.”

In response, retailers and communities are adopting new strategies to lure consumers. In August, several states held sales tax holidays to boost sluggish back-to-school spending. At Lord & Taylor, the chain has renovated its stores to focus on the shopping experience, not luxury brands. The idea is that recession-strapped women can find value at Lord & Taylor without feeling like they’re rummaging through the bins at a discount outlet. “If you come through the Fifth Avenue store, you’ll see a major renovation in a store that hadn’t changed in 30 years,” says Hoffman. “It’s about reinvesting in ourselves and maintaining that during the downturn.” Robert Trone, W’81, L’91, co-founder of the spirits superstore Total Wine & More, says that for the first time he’s stressing in marketing efforts that the spirits chain is a price value leader. “Wine is considered a luxury good in many respects,” Trone says. “So we’re shifting the emphasis on low-price goods.”

At Costco, the challenge has been to drive sales of the bigger ticket items with greater profit margins to go along with the value-oriented durables—and, as at retailers across the board, to get skittish consumers excited about buying again. One way the chain has done this is through its “treasure hunt” merchandising strategy—luxury items like Coach bags or Cartier watches appear in stores for brief, random periods at heavily-discounted prices. “Even if you don’t buy the item, you’re impressed,” says Galanti. “It’s the excitement of seeing something you didn’t expect.” This summer’s hot item was stand-up paddleboards—priced at a reduced $299.


Michael Dart, WG’87, head of private equity and strategy at Kurt Salmon Associates, says that to be successful in the future, retailers must adopt tactics like Costco’s “treasure hunt” to attract an increasingly demanding and empowered shopper. “The consumer has tremendous access to almost any goods they want,” says Dart, who, along with Robin Lewis, has co-authored a new book, The New Rules of Retail, to map the new consumer-centric world. Like nearly everyone interviewed for this article, Dart praised Apple as a retailer pointing the way ahead. “People have gone from wanting stuff to wanting experiences,” says Dart. “The iPhone has done a phenomenal job of creating a platform of experiences for the consumer. The way I use it—the music, movies—is custom to me.”

Apple is a universally recognized bright spot in this gloomy economy—“a positive contagion,” says Hoch. Sales of iPhones continue at a brisk pace, and in a stroke of retailing genius that will be studied in business schools for years, Apple launched its iPad tablet this spring—during the third year of the worst recession in recent memory—and has sold over three million units so far. Why are cash-strapped consumers ponying up to $800 or more for an electronic gadget? Because the iPad isn’t marketed or perceived as a gadget. “It replaces other things and simplifies life,” says Armendinger. She said her husband got an iPad with some reluctance but soon found he was able to ditch his cumbersome laptop on business trips, not to mention listen to music, read periodicals, download books, watch movies, surf the Web and perform dozens of other time-saving and time-wasting activities. “It’s part of your entertainment budget, your intellectual curiosity budget—it fulfills several needs.”

Of course, the retail world cannot live on iPad sales alone. At the moment this article is being written, there are negative reports on housing, retail sales and jobs numbers, and talk of a “double-dip” recession continues to loom. Both retailers and consumers are in extended wait-and-see mode. According to Hoch and others, what will jumpstart the retail sector again is declining unemployment. But the consumers that re-emerge will likely be more discerning and less easily parted with a dollar, making the job of retailers that much harder. “They’ll just have to find new ways of interacting with consumers,” says Armendinger. “Giving them more special things or a better value proposition.”

Still, she says, “Let’s be real. We will come back to spending.”