China’s “Revenge Spending” Isn’t Coming to America

Although most retailers want to reopen the economy as soon as possible, it looks unlikely that the American public will embrace consumerism with the same passion they did during the thriving 1920s when new patterns of mass consumption were adopted. Prior to the COVID-19 crisis, the anti-consumerism trend was already on the rise in the US, which doesn’t bode well for episodes of “revenge spending” that defined China in the first days of post-lockdown happening in the US. According to Bain & Company’s estimation, in the first quarter of 2020, global luxury sales will suffer a year-over-year decline of 25% to 30%. Furthermore, Bain & Company acknowledges that “profitability will be disproportionately hit. Yet there is an emerging bright spot: The Chinese market already appears to be on its way to recovery.” Unfortunately, the United States isn’t. Here, we explore the retail industry to understand America’s distinctive consumption patterns, business environment, and innovation patterns, as well as the government’s response, which is setting up the US retail market for failure. Comparing the Sino-American response to COVID-19 While the number of COVID-19 cases continues to rise at an alarming rate across the US, China appears to have contained the spread of the pandemic. What’s even more striking is China’s achievement of keeping the human cost relatively low, at 3.33 lives per million population, compared to the US, currently with a staggering rate of 210.37 lives per million. Apart from the human cost, which is directly related to the American government’s botched handling of the pandemic, there’s also the economic cost. While Beijing stabilized the domestic economy through a tight centralized control, Washington became notorious for downplaying the threat and failing to organize a coordinated response. Li Bin, who served as the first chairperson of China’s National Health and Family Planning Commission between 2013-2018, said that China had set up comprehensive new procedures to tackle major health threats. In fact, through China’s Information System for Disease Control and Prevention, a new mechanism was created that granted hospitals and clinics access to information on outbreaks in real time On the other side of the spectrum, Forbesreports that the CDC made important mistakes in their initial response, including the use of flawed tests and limiting the number of people who could be tested. Even today, the United States’ testing criteria is very restrictive, and this policy encourages the widespread of COVID-19 through asymptomatic carriers. Given this, one thing is for certain: the US is nowhere near ending the COVID-19 pandemic. And as the deadly virus continues to spread, even as states across the country begin to reopen, American consumers won’t be rushing to stores or shopping malls in any pre-COVID-19 numbers, which will result in many of these businesses shuttering for good. Store closures in the US persist Even prior to COVID-19, the state of American retail was doomed. Famous names like Pier 1 had to fight off bankruptcy rumors and the “retail apocalypse” was wreaking havoc among retailers across America, forcing Gap, J.C. Penney, and Victoria’s Secret to close hundreds of stores. According to USA Today, 100,000 retail stores could permanently close by 2025, a trend accelerated by the pandemic and the customer preference toward online shopping. In contrast, China was already on the path to reinvention, building a more efficient and modern infrastructure and employing strategies that satisfied the needs of the contemporary consumers. Trailblazing technologies like virtual reality, augmented reality, and machine learning have opened the door for innovation and higher engagement with the consumer. Unfortunately, most American retailers are stuck in a brick-and-mortar footprint that seems outdated for this century, leaving them to play catch up with Chinese companies and consumers. The unemployment rate According to the South China Morning Post, China’s unemployment rate during lockdown rose to 6.2 percent for January and February from 5.2% in December and 5.3 percent a year earlier. Industrial production declined by 13.5 percent over the first two months of the year. The situation in the US is far more tragic with jobless claims soaring faster than COVID-19 cases. CNN reports that 30.3 million Americans have filed claims for benefits since mid-March. This number represents roughly 18.6% of the US labor force. Moreover,personal income decreased 382.1 billion (2.0 percent) in March, according to estimates released by the Bureau of Economic Analysis, and personal consumption expenditures (PCE) decreased 1,127.3 billion (7.5%). This unprecedented disruption is creating unfamiliar consumption patterns. With little or no disposable income, consumers will focus only on necessities, avoiding going into debt for goods and services that are not a priority. According to CNBC, retail sales in the US plunged 8.7% in March, the biggest decline since the government started tracking the series in 1992. There is no indication that the negative trend will end, and conspicuous consumption will return with a bang. On the contrary, history demonstrates that conspicuous consumption in times of economic crisis is toned down. The Looming recession Morgan Stanley and Goldman Sachs warned of a record decline in the US output in the second quarter. As stated by Fortune, Morgan Stanley’s US economists led by Ellen Zentner told clients that they see American gross domestic product falling 30.1% between April-June. According to Morgan Stanley’s estimation, this will drive up unemployment to average around 12.8%. James Brian Bullard, the chief executive officer and president of the Federal Reserve Bank of St. Louis, has an even more grievous prediction. Bullard states that the US unemployment rate could rise roughly to 30% in the second quarter, with an unprecedented 50% drop in gross domestic product. Jan Hatzius, Goldman Sachs’ chief economist, estimates a 24% drop in US output in the next quarter. It is highly probable that Washington won’t be able to restart the economy, pushing the country and the Western Hemisphere into a global recession or worst. If this evaluation is genuine, the COVID-19 crisis will alter consumer behavior for good. Let’s not forget that even today — a decade after the Great Recession — lower- and middle-income Americans still carry the scars of the 2008 crisis. Income inequality continues to rise, real median household income is indeed growing, but modestly and the number of Americans without health insurance rose from 25.6 million people in 2017 to 27.5 million in 2018. Furthermore, as stated by the United States Census Bureau, 38.1 million people in 2018 were poor and about one in eight Americans still lived below the poverty line — 25,465 for a family with two adults and two children. These numbers show that the American economy is possibly not “healthy” enough to overcome another recession. A change was already on the way even prior to COVID-19 in the U.S. According to The Atlantic, American millennials are truly the Lost Generation. They “entered the workforce during the worst downturn since the Great Depression. Saddled with debt, unable to accumulate wealth, and stuck in low-benefit, dead-end jobs, they never gained the financial security that their parents, grandparents, or even older siblings enjoyed,” says journalist Annie Lowrey. “They are now entering their peak earning years in the midst of an economic cataclysm more severe than the Great Recession, near guaranteeing that they will be the first generation in modern American history to end up poorer than their parents.” Target Marketing calls American millennials the “true post-aspirational consumers.” They don’t engage in conspicuous consumption, understanding the actual value of brands, and they rarely spend on luxury items with transitory characteristics. According to Marshal Cohen, chief industry analyst, retail, at The NPD Group, Inc., “even well-to-do consumers are behaving in more frugal ways — such as shopping at dollar stores.” Moreover, when millennials spend, many opt for investments in experiences instead of luxury goods. This change has a powerful impact on the luxury industry because millennials and Generation Z are the target audience for most luxury brands operating in the US. Even if, miraculously, the American economy bounces back, the changes that are already underway will be difficult to stop. American retailers will have to innovate, cut real estate costs by reducing the brick-and-mortar footprint, eliminate underperforming segments and teams, and redesign their entire business model. Basically, this unfavorable climate is an opportunity to clean up the retail mess and come up with a full reset plan.

China’s “Revenge Spending” Isn’t Coming to America

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Published May 13, 2020

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China’s “Revenge Spending” Isn’t Coming to America