Last March, Paco Underhill was guest speaker during the Retail and Luxury Outlook organized by RBC Capital Markets. By the way, I will be speaking to RBC on the same topic in a few days.
Paco Underhill is an environmental psychologist, consumer expert and best-selling author (ie Why we Buy; Call of the Mall), and had some fascinating insights on consumer trends in the Retail and Luxury space. As a sociologist, I recommend a retail perspective coming from a social science approach and today, more than ever. Customer centricity is essential and shopping behaviour, customer experience, communication and channels have radically changed.
See below the notes from the mentioned event:
RBC: How does this consumer environment compare with what you have seen in previous inflationary periods? Do you see any big differences in how consumers are likely to respond?
Paco Underhil: We are in a period where what is good about working in retail is change. There are 5 factors to highlight: 1) the changing relationship between eyes and brands due to screens; 2) the changing status of women; 3) time – all of us are dealing with multi-tasking issues which affect our consumption choices; 4) what is global and what is local; and 5) the changing role of money and our relationship to it. All of these affect the degree to which retail has to change in line with how we are changing.
Assuming a consumer downturn due to cost of living pressures, should we expect smaller brands and companies to suffer more than larger ones?
One of the challenges that merchants have is understanding what is global and what is local. Part of what we find is that some of the regional merchants have an easier time understanding what is local. There are dresses that fly of the shelves in Dallas that nobody would touch in Philadelphia. The dichotomy of how to get local is something that global merchants are struggling with and in a lot of cases, the local merchants are doing a better job. Looking at the countries that have centres (eg everything that happens in France, happens in Paris), these have historically had trouble exporting retail. In countries without centres (eg Italy, Spain), retailers do better at exporting as they understand localization better.
Do consumers turn more to trusted brands during downturns?
There are a number of different threads here. Branding was a 20th century invention. As the 21st century hit, we saw an explosion in house brands. These started as a compromise purchase and now they are a smart purchase. Eg Costco’s own brand in the US (Kirkland) has very high scores. This is giving some of the 20th century leaders a run for their money as people are seeing that the quality and reviews are as good as for the third party brands. Additionally consumers no longer get the same ubiquitous marketing messages in print and media as consumers got in the 20th century.
Based on your experience, how common is “trading down” in a downturn? Is it mainly confined to food, or do consumers also trade down in other areas eg apparel and handbags?
The concept of luxury brands, whether it be handbags or other, changes as we age, and the degree to which we understand what our aspirations are changes. Consumers bring a different set of judgments to their decision. Looking at Asia (China, Japan) we are looking at an aging customer base. We aren’t necessarily looking at trading down, but changing priorities which lead to different spending eg buying fewer, better things.
Do you expect international shopping to return to pre pandemic levels in London, Paris and New York?
International shopping will come back but the question is whether London, Paris and New York will have the same volume and exclusivity that they have had historically. I don’t think so as there are other places competing for the international shopper (eg Singapore, Doha, Dubai, and Bangkok). Up until the mid-1990s, wealth was controlled by an aristocracy. Today, 19 out of 20 of the wealthiest people on Earth have earned that wealth during their own lifetimes. London, Paris and New York were set up to service an aristocracy and whilst this aristocracy still exists, new money consumers do not have the same level of loyalty to historic shopping locations (eg Harrods, Bloomingdales etc).
Will high end retailers have to make up a decline in footfall with higher conversion/spend per customer?
Retail is often a reflection of the changes in us. What made a good store is 2000 and what makes a good store in 2022 is a reflection of the evolution is us. What will be interesting will be to see how nimble the luxury merchants are, in response to the changing patterns of use and the changing profiles of money. The question is whether they will be better at serving a specific customer base. For example, there was an anecdote from the 1990s that Neiman Marcus stayed open based on the shopping patterns of 100 women. The degree to which the luxury merchant focuses on its key customer and figuring out what inspires greater loyalty from them will be interesting.
Do you expect spend on vacations/holidays to recover to pre pandemic levels this year, or will we have to wait another 2-3 years at least?
There is a lot of pent of demand since consumers have been stuck in their homes for 2 years. On the other hand, there is a certain degree of caution and part of what this caution is based on, is the fear of being trapped by testing positive in a foreign country. The patterns of where consumers choose to go are going to be adjusted.
You talk a lot about the emerging consumer in Asia, Middle East and Russia but the debate we are hearing is that the US is a key emerging region for luxury consumption on a per capita basis – how do you view the US as a market for luxury consumption?
Part of what we have seen is that the luxury merchant has undermined their status by their expansion. For example, in Union Square in San Francisco you can find a luxury merchant and immediately outside it, you see homelessness. As the luxury merchant has expanded its presence in the US, there have been some unfortunate choices. Also, in order to sell, retailers must first educate. The US has .com millionaires who still buy clothing out of the Land’s End catalogue. Part of the challenge for luxury goods is how to educate consumers to move from a $2 t-shirt to a $10 t-shirt and what is the difference.
What kind of services are you seeing packaged up with shopping eg medical services? Is this the future for shopping malls?
Services will be a key part of shopping malls. If you go to a shopping mall in Bangkok, there are yoga studios, there are doctors’ offices etc all built into the mall. There is a portion of our world that doesn’t travel as just couples of immediate families, but they travel with extended families. Therefore, there is a need to offer something for everyone. Looking at the modern mall, it isn’t about the “mall” but the ‘all’. The younger generation of consumers don’t want to drive/travel for hours every day to get to everything they need.
Consumers are looking at carbon footprints and may not be willing to make longer journeys – how will this impact consumption patterns?
This goes back to what is global and what is local and the degree to which international travel will come back. Travel will come back but not in the way and the form that it was pre-pandemic. If we think about sourcing, sourcing has moved from eg the US, to Mexico, to China, to Vietnam to Bangladesh as it chased the lowest cost production. What we will find is that there are new digital factories which means we do not have to source items from across the globe. This could even be personalized for consumer body types, for example. There are major changes in the retail pipeline to come. Historically, some of the major distinctions in shopping were in relation to gender. We are finding now, that this has moved to generational differences as well – in general the younger consumer is more concerned about sustainability.
How will the current Russo-Ukrainian conflict affect luxury purchases? Are there any particular areas or regions that will suffer more than others?
There is a question about whether the Russian tourists will come back. I believe that Russia is going to be re-cast as a tragic place and may not be welcomed in other parts of the world. Russia has a pariah status, at least in the near term. Even in the US, there are Ukrainian flags everywhere.
Would you expect a negative impact on profitability this year as stores outperform online, as retail and luxury companies appear to have earnt very good margins online during the pandemic?
There is no more separation between the physical and the cyber world. In any store, anywhere in the world, at least 50% of the people have their phones in their hands. People’s use of phones to access information and for peer to peer conversations is key. The average time in a dressing room is up 20% as consumers contact others to ask their opinions on what they have tried on.