Why the Grinch will Steal Christmas for Retailers Part 2

In the last blog, I identified one of the biggest reasons that big box retailers are behind the curve is because of technology.  The growth in retailing today is mainly from the online powerhouses like Amazon and Apple.  There is a trend is exemplified in my kids.  This trend desires to purchase as much online as possible—from Christmas gifts to toothpaste.  This makes shopping more of a social experience than one to actually acquire items.  Places that will appeal to the social need will be able to find a niche among this paradigm shift in shopping habits.

There is a second trend that will bring out the Grinch for retailers this Christmas and possible for many other Christmas shopping for some seasons to come.  It is because of a resource that is beginning to disappear and it will continue to disappear for years to come.  There is no way we can replace the resource quick enough to stem the tide.  The resource is not oil, water, gold, or any commodity.  This resource is people.  This will not only have an impact on Christmas sales, but also on the economy as a whole.

Economist Harry Dent spent considerable time studying spending and wealth trends of Americans.  On average we all act in a similar fashion.   We tend to enter the workforce in our early 20s.  We get married around age 26 and begin to have kids a few years later.  Most of us then buy starter homes in our early 30s, which are traded up for larger homes in our late 30s or early 40s.

We then enter in our peak spending phase, the time when we tend to have the most disposable income and purchase stuff like cars, technological gadgets, and various grown up toys.   This usually occurs from ages 39 to 55 but the average peak is around age 46 for an average household and 54 for those most affluent.

But after this peak, our spending habits change drastically.  We begin to look at the future and see retirement in the future.  Our kids begin to leave home and start their own families.  People begin to retire in their mid-60s and have their greatest net worth at age 64.

Take this information and look at the demographic condition of the US.  Births in the US saw sharp increases from the late 1930s to early 1960s.  Usually the time from after WWII to the early 60s is referred to as the baby boom generation.  After the mid-1960s, the birth rate dropped and did not pick up to a level close to the boomers until the millennials came on the scene.

Baby boomers represent around 35% of the total US population but they control 77% of all net worth in the US.  As boomers have moved into their peak spending and net worth years, the economy has grown and the stock market has taken off with it.

But since 2007, the boomers have begun to retire at a rate of one every eight seconds.  In the next 14 years we will see up to 50 million boomers leave the workforce.  But think of what this means, you have people who are not generating as much spending because they have less income.  When the largest component of your economy is consumer spending, this could mean that the largest part of our economy will shrink.

Not only that, but think of the skills and knowledge of those who are leaving the work force.  We will be losing much of our intellectual capital and experience.  And the generation that follows the baby boomers, the GenXers, of which I am a part of, is not nearly as large as the boomers.  We would have to greatly increase our spending in order to meet the deficit the boomers will leave.  This will not happen.

So think about what this means possibly for real estate prices.  If more and more folks are retiring and selling their homes, if the supply of houses exceeds the lower demand from future generations, we will see prices drop.  When you look at the stock market, Dent shows that you can overlay the inflation adjusted Dow over a population chart that adjusts births to match an average peak spending age, there is a close correlation between the two.  If the correlation continues, we could see a long time drop of 30-60% in the stock market before another bull market begins around 2020.

As affluent baby boomers grow older, their spending moves from the larger home to a vacation home around their mid-60s.  Then in our late 70s we tend to downsize, move into a condo and end up in a nursing home in our mid-80s.  So right now with the baby boomers retiring, we will begin to see them seek to sell their large homes in favor of smaller ones with less maintenance.  For the first time in modern history, America may have a shortage of home buyers.  What makes it worse is the millennials are waiting to purchase houses later because of preference or economic stress with high student loan debt.

This situation is exactly what Japan experienced in the mid-1990s when its own baby boomers were followed by a much smaller generation.  The property market has not recovered since that time.  The price per square foot of real estate in Tokyo’s Ginza district is worth less than a quarter of what it was in 1989.  If we see a massive retraction in real estate prices, it may put as many as half of the homeowners in a negative equity position.

But this blog was originally about Christmas shopping so let’s get back to that.  Imagine what will happen to retailers who rely on a strong Christmas season for a profitable year.  First, an overall decrease in demand would cause retailers on the whole to experience less revenue from January 1 to Black Friday.  Second, as so many boomers have less income and adjust their spending habits accordingly, we will see poorer results for Christmas shopping.  The demographic Grinch will have struck and will continue to until the millennials spending and wealth begin to kick in.