Emerging demographic groups can help retailers' focus

The more things change, the more they keep changing. That's not the normal way of putting it, but it is the best way to describe retailing.

Most people think the sector is collapsing, but that's wrong. What is occurring is that the marketing of goods and the markets of retailers are changing dramatically. Those that are adapting to the emerging landscape are surviving and prospering, while the others are falling by the wayside.

There are two huge trends buffeting traditional retailers, restaurants, and even vehicle dealerships. The first is the one everyone talks about: the transition from brick-and-mortar stores to internet sales. But the second one is rarely discussed: the emergence of three distinct demographic consumer groups, each with different tastes and preferences, that have replaced the more traditional single, dominant demographic.

Let's begin first with the one we all know: the ascendancy of internet retailing. A decade ago, e-commerce sales accounted for only 3.5 percent of total retail sales. By this year, e-commerce's share of sales had risen to 8.5 percent. What's more important is that, since 2006, about 70 percent of the increase in total retailing could be traced to e-commerce activity. Thus, it should surprise no one that traditional stores are closing like crazy.

With same-day delivery ramping up and competition among online retailers keeping prices down, the share of retail sales going to e-commerce should only increase. That's the environment in which more traditional retailers (however they may be structured) will have to operate.

It's interesting that this market transformation in retail point-of-sale is nothing new. Suburbanization changed where retailers located and the way they sold. National companies destroyed mom-and-pop stores. Strip malls gave way to regional malls and then mega-malls. And now we are replacing regional malls with smaller "town centers," which are mixed-use developments that include residential and commercial properties as well as traditional retailers and restaurants.

Brick-and-mortar stores are not dead. They are just changing in size, location and structure.

But the second mega-trend may be just as important as the movement to e-commerce. For decades, retailers focused much of their attention on one major demographic: baby boomers. If you made it with boomers, you made it. That's no longer the case. Now, there are three distinct demographic groups with diverse sets of spending power and preferences: boomers, millennials, and Gen Xers.

Boomers (55 to 75 years old) are now about 23 percent of the population and about 21 percent of the labor force.  They are slowly but steadily retiring or passing on.  They are changing their housing and purchasing preferences to match their economic and age requirements. Their income growth is slowing, but they are spending their wealth.

The technology generation, the millennials (20 to 34 years old), comprise about 21 percent of the population and 32 percent of the labor force. They get all the press, but their income/spending power is only starting to grow more quickly.  They have been slow to form households and are burdened by educational debt, factors that help define their spending habits.

Gen Xers (35 to 54 years old), whom we so often forget about, are at their "sweet spot" when it comes to earning years. They have the highest incomes, which are growing relatively rapidly. They have families, are more fixed in their household locations, and command a significant portion of disposable income/spending power. Their consumption patterns reflect their place in the life cycle.

This vast distribution of tastes and spending power only adds to the advantage of e-commerce retailers. They don't have to stock stores with inventory to meet the different demographic groups' preferences, and thus can more rapidly pivot to meet the changing demand.

The restaurant industry has come face-to-face with this dilemma. It is difficult for restaurant chains to rapidly pivot large numbers of stores as demand changes. By contrast, independents can alter their menus much more swiftly. The number of births and deaths of small restaurants is massive, but that churn creates flexibility in this portion of the industry, and is why independents are eating the chains' lunches.

Going forward, retailers will have to contend with the two marketing challenges. They have to decide how to compete with e-commerce firms, especially as home delivery ramps up, and they have to determine which demographic(s) to target. Failure to address both concerns is not an option if a retailer wants to succeed in the marketing wars ahead.