Monday, August 18, 2014

“Inferior” Retailers?

Economists traditionally classify some products as “inferior,” meaning that customers tend to buy more of them when they are on a tight budget, less when they have more money and can spend more freely. The assumption is that such a product must be a less expensive substitute for some other product. There isn’t nearly so much talk about retailers in this connection, but it is easy to find the same effect: when the U.S. economy turned sharply downward in 2007–2009, sales boomed at discount stores Walmart and Target, and fast-food leader McDonald’s recorded its biggest years ever.

Those connections are important to note now because theory holds that as the economy improves and people have more money to spend, the previous expansion will reverse, with retailers seeing either declining revenue or revenue increases below the rate of population growth. That effect is most obvious at McDonald’s. Probably the same effect is seen at KFC but it is harder to tell because KFC’s larger problem is that it is innovating in the opposite direction from trends in consumer tastes. Looking at Walmart, it does seem it is losing some customers just because the customers’ incomes have increased. Walmart is improving its stores, but with difficulty, and obviously is not keeping up. At Target, with all its other troubles, who can say?

With the job market continuing to expand, it is worthwhile to look for other retailers that might be suffering from their positioning as the cost-cutting compromise.