Wednesday, 23 August 2017 11:33

Opinion: Retailers aren’t hurting because people are buying ‘experiences’ instead of stuff

By REX NUTTING
http://www.marketwatch.com

Retail goods are cheaper, but we’re spending the savings on expensive health car

The brick-and-mortar retail industry is in crisis. For many old-line retailers, sales and market share are plunging fast. The most obvious explanation for their distress is the rise of online shopping, but some analysts mistakenly point to another trend: “Shoppers are choosing experiences over stuff, and that’s bad news for retailers.”

Instead of purchasing a couch, we’re going to Paris! Or maybe buying avocado toast.

One of these hot takes in the media even came with a provocative (and completely erroneous) graphic claiming that experiences now account for 67% of spending, compared with just 3% for clothing.

The reality is more mundane: We are spending a smaller portion of our budget at the mall, but the money we’re saving is mostly going for the most expensive health care in the universe.

It’s probably true that many of us yearn for something more than a pile of possessions that will never love us back, but the cold, hard truth is that Americans are purchasing more things today than ever before — more vehicles, more clothing, more housing, more health care, more financial services, more food and more electronics. More of almost everything, including couches and trips to Paris.

If you’ve heard these stories about the shift away from material things and toward experiences, you might be shocked to learn that retail spending hit a record $1.4 trillion in the second quarter. Retail spending has increased in 30 of the past 33 quarters. We still love to buy stuff.

The problem for traditional retail isn’t that we’ve fallen out of love with filling up our lives and our houses with things. (It’s still true, as comedian George Carlin said, that the meaning of life is finding a place to keep your stuff.)

The problem for retailers is that prices are falling for many retail goods such as clothing, electronics, appliances, furniture, tools, luggage, toys and many other things. That is killing the bottom line for traditional retailers, who get less revenue per unit sale but still have to pay the fixed costs of rent and payroll.

For consumers, on the other hand, falling prices are a godsend, because we can buy even more stuff and still have some money left over to spend on other things.

It would be great if we really could afford to shift our spending from the boring things we need to the fun things we want, but in reality most of the money we are saving due to cheaper clothes and cheaper gasoline is going for goods and services that no one would call fun: hospital bills, financial services, rent, and prescription drugs.

$1 trillion a month
An incredible amount of money is spent on personal consumption — more than $1 trillion every month. A little less than half is spent on stuff at retail stores, and much of the rest is spent on housing, health care, financial services, education, communication and other services.

Over the past 20 years, there has been a revolution in our spending patterns. Since 1997, Americans have shifted a significant portion of their spending from physical things like autos, clothing and petroleum to services like health care, rent and internet access.

Twenty years ago, for instance, 5.4% of total personal consumption expenditures went for motor vehicles and parts, but today that accounts for just 3.6% of consumer spending. Clothing was 4.5% of our budget in 1997; today it’s 3%. We spent 6.6% of our budget on groceries in 1997, but only 5.3% today.

On the other hand, spending on health-care services was 14.5% of consumer spending in 1997 but has grown to 16.9% today. In addition, prescription drugs have gone from 1.5% of spending to 3.4%.

We are spending a bit more on foreign travel, entertainment and eating meals at restaurants compared with 1997, but these categories still represent a tiny fraction of our total spending.

It’s quite true that annual spending on the experience of foreign travel has risen by $104 billion since 1997, but spending on home furnishings like couches and washing machines has increased even more — by $110 billion. And spending on prescription drugs has risen by an incredible $374 billion.

At the margin, we are spending a little bit more on having fun than we did 20 years ago, but most of our money still goes for necessities, not experiences.

Read 53 times Last modified on Wednesday, 23 August 2017 11:40