Summer 2006 When Cohorts Collide

The United States is on the verge of a momentous demographic event: The two biggest consumer cohorts, the Baby Boom generation and their Generation Y offspring, are moving into new life phases. As is widely known, if not fully understood, the 78 million Boomers born between 1946 and 1964 will start hitting retirement age in 2011. At the same time, Generation Y, a 74-million-member cohort born from 1977 to 1994, is moving into full adulthood—launching careers, establishing households, marrying and starting families.

Simply put, over the next four or five years these Americans, who represent two-thirds of all consumer spending, will change their patterns of consumption. How they do so will have enormous effects on the overall economy (two-thirds of the $10 trillion US GDP is household consumption) and, in particular, on the retail real-estate industry.

The most basic need will be to sustain the mall’s breadth of relevance among these two powerful consumer bases. Can Boomers and Generation Y consumers coexist at the mall as they do today? We believe they can. For mall owners and retailers, the stakes are huge. As the accompanying graph, “Hey Big Spenders,” shows, retailers and developers will need to come up with strategies that appeal to both groups. Although the Bureau of Labor Statistics doesn’t calculate spending among teenagers who aren’t “householders,” market-research firm Teenage Research Unlimited estimates that teens spent $269 billion in 2004—about $91 each a week for everyone age 12 to 19—which puts Generation Y’s 11- to 28-year-olds among America’s champion spenders.

Hey, Big Spenders

The biggest growth in households is among the Boomer and Gen Y cohorts. This table shows the growth in households between 1995 and 2005, and projects growth from 2005 to 2015. The Consumer Spending Index, a measure of consumption, compares spending by these age-grouped households to the national average in 2003. The 2003 level is 100, so households headed by individuals under age 25 spent 40 percent less than the average.

Experience counts

imageWhat do Boomers like? They place a high priority on “experience” in their shopping behavior. Essentially, this means they’re less interested in product and service features and cost than older consumers are. In their 30s and 40s during the 1980s and 1990s, Boomers valued the traditional mall for the “time back” experience: with its mix of department and specialty stores and convenience food, the regional mall gave harried two-career families an opportunity to accomplish a great deal in a single visit, thereby netting Boomers precious time for other experiences. If they had to pay a bit more, it was well worth it to them.

To the chagrin of mall owners, Boomers also recognize the “time back” benefit of online shopping. Today, online retailing accounts for a little more than three percent of non-car related retail sales, up from 2.7 percent in 2003. And according to AARP, almost 7 in 10 adults ages 55 to 65 spend time online.

AARP research also shows that 79 percent of Boomers plan to work past normal retirement age to stretch their savings and benefits. Despite these economic concerns, however, Boomer retirement is an opportunity for the nation’s 1,200 regional malls.

As full-time work gives way to part-time occupations, Boomers will have more leisure time. And many of them are expected to downscale housing into convenient mixed-use developments—less yard work, more opportunity to shop. Instead of soccer Saturdays and overscheduled weekdays, Boomers will have time—and much of that time will be devoted to enrichment, says Ken Dychtwald, Boomer expert and president of consulting company Age Wave. In between world travel, outdoor sports and writing the occasional novel, however, these consumers will continue to pursue shopping experiences.

Still, the experience must change. The young Boomer mom thought a peak mall experience was getting in and out of the food court without a kiddie meltdown. At 50, her idea of a positive experience is a sit-down dinner with her husband or friends. As Boomers age, they will retain many of the characteristics that labeled them the “me generation.” In contrast to their Greatest Generation parents, who had intense loyalty to their Chevies and RCAs, Boomers grew up amid a perpetual stream of new product categories, formulations and line extensions. They shifted promiscuously from brand to brand, and will continue to look for the next new thing as they strive to remain vital and valuable to American society. And Boomers are interested in their social “legacies.” Shopping centers can play to this—for example, by offering charity drop-off locations.

Listen to the echo

What of the Boomers’ offspring, these “echo boomers?” Consumer market strategists speak broadly of the Gen Y shopper as hyper-savvy, design-obsessed and extremely confident. The Gen Y gestalt is a composite of their entitled Boomer parents and the deep cynicism of Generation X, the 60 million Americans now age 30 to 39.

The shopping styles of Gen Y consumers have formed primarily around discretionary purchases—apparel, music and video games, telecommunications, and food outside the home. The traditional boundaries of media, products and places all get redefined as Generation Y consumers mix and match entertainment, information and commerce into a unique blend of consumption behavior whose primary motivation is “hooking up” with one’s social network.

Over the next two decades, career opportunity and household formation will anchor Gen Y goals. But even as they move beyond Britney and Mary-Kate and Ashley, the avid shoppers who made the back-to-college season a $26 billion industry will remain a major force. They place high value on design, individuality, authenticity, efficiency of form and function, and connectivity. And they spent their formative years at the mall, where many Gen Y consumers had their first taste of independence and learned to “socialize” information with friends as they made their decisions.

As these consumers start to buy home furnishings and baby clothes, shopping center developers and retailers can leverage an already profound relationship. But they need to understand the obstacles for this group, which now has to pay for its own frenzied adoption of music, computer games, fashion and so on.

Generation Y households will enter their peak earning years by 2012. Until then, many of them will be struggling to pay off school loans and make rent. A&F’s Hollister, Hot Topics, PacSun, American Eagle, Aeropostale and Steve Madden continue to be hot retail concepts with Gen Y. Target also scores well, appealing to Gen Y’s instinct to link shopping with entertainment and celebrity.

The new melting pot

imageNo demographic development is more powerful and challenging to the retail industry than the growing ethnic diversity of the American shopping public. Unlike earlier waves of immigrants, many of whom learned to be Americans by studying what was being marketed at department stores or on network TV, the new multi-cultural American consumer is redefining what an American is. Who are these consumers?

• White America—those who list themselves as white and non-Hispanic on census rolls—is old; multicultural America is young. In 2005, more than one in four white non-Hispanic Americans is 55 or older, compared with one in nine Hispanics and about one in six Asians or African Americans. Among white, non-Hispanic Americans, just 20 percent are children under 18, compared with one in three Hispanics and one in four Asians or African Americans.

• Multicultural America will dominate. By 2015, the white, non-Hispanic population will increase 3 percent, compared with increases of 30 percent for Asians, 28 percent for Hispanics, and 13 percent for African Americans. By 2020, white, non-Hispanics will be about 61 percent, Hispanics almost 18 percent, African Americans 13.5 percent and Asians 5.4 percent. The Census Bureau forecasts that the portion of the US that is not a racial or ethnic minority, designated as white, non-Hispanic, will decline from almost 70 percent in 2000, to around 50 percent in 2050.

The rise of multiculturalism is clearly an important consideration in attracting Gen Y consumers. It cuts another way, too: multiculturalism may hit hardest in the traditional geographic bastion of mall development—suburbia. Population centers, including suburbs, will see enormous growth in ethnic consumers; developers will no longer be able to rely on white middle-class, married-with-children families to fill the parking lots of the suburban mall. The highest rate of growth for all major ethnic and racial categories is in the suburbs. Even now, nearly half (45 percent) of Hispanics in the US live in suburban areas.

Profiles in consumption

Race is only one of the ways in which the makeup of the Echo Boomer generation looks radically different from the Boomer cohort. Between the time Boomers reached maturity in the 1970s and the oldest Generation Y consumers finished college six years ago, the profile of America itself changed. As it became far more diverse in language and ethnicity, it also came to look nothing like the “traditional” America that existed when malls first swept the country. In the 1960s, 54 percent of all households were composed of married couples with children; today the number is 24 percent and falling.

The retailing industry needs to accommodate these new demographics. Too often consumer goods and service providers continue to approach American households as if they were all still nuclear families. As Boomers age, the ranks of homes without children will continue to swell. And Generation Y doesn’t look like it will pick up the slack: Marriage rates for Americans ages 20 to 34 were about 47 percent in 1983. Today, the marriage rate is about 40 percent for that age group.

Thanks to all of those Boomers, American households are older, too. Over the past 10 years, 85 percent of household growth has occurred in the 45-to-64 age group. During the next 10 years, almost three-quarters of household growth will take place among those age 55 to 74. In 1995, the median age of householders was 46; by 2005, it will have advanced to 49, and likely will reach a record high of 50 years old by 2015.

The good news: For now, older is richer. In the past 10 years, the highest rate of increase in income occurred in the 55-to-64 age group. The 78 million Americans who were 50 or older in 2001 controlled 67 percent of the nation’s wealth, or $28 trillion, according to data collected by the US Census and the Federal Reserve. Households headed by someone in the 55-to-64 age group had a median net worth of $112,048 in 2000—15 times the $7,240 reported for the under-35 age group.

On the other side of the coin is the proliferation of smaller, non-traditional households. As the relatively small Generation X moves into the prime child-rearing ages of 35 to 44, the nation’s percentage of married-with-children households is expected to decline further—toward 20 percent in many regions. Even when the much larger Generation Y moves into its peak family-formation years, retailers can’t look forward to a rerun of the consuming boom that accompanied the establishment of Baby Boomer families. As noted, Gen Y has tended to delay marriage and has shown lower childbearing rates. That means that family creation will not generate the level of consumer spending growth seen in the 1970s, 1980s and 1990s.

Targeting non-traditional households without disenfranchising traditional households may be the most significant challenge for mall developers and retailers over the next decade. Companies like Gap, A&F, Gymboree and a number of other retailers have begun to introduce new brands and retail formats for emerging demographic segments while trying to sustain the value of the older, more established brand names. For shopping malls, whose target households for 50 years have been married couples with children, marketing is likely to get tougher. The consuming public is not only more fragmented, but the new non-traditional families that are proliferating tend to be lower-spending.

Survival tools

imageThe most effective way to ensure that a center captures the dollars of the Boomers and Gen Y is to renovate or re-merchandise, but there are other, less-costly means of making immediate changes that can impact the customer’s loyalty to the center.

Ageless fashion. Specialty retail options for the $45.8-billion apparel market for older women will abound. The latest examples include Gymboree’s Janeville, Gap’s Forth & Towne, and Chico’s Soma. Abercrombie & Fitch’s Ruehl, and Metropark, the latest concept from Hot Topic founder Orv Madden, create fashion alternatives for a maturing Gen Y.

Task-oriented shoppers. Department stores already offer easy first-floor layouts for rapid-deployment shoppers. Look for more tactics that appeal to shopping-phobic consumers—Sony and Apple stores alongside luxury retailers Neiman Marcus, Louis Vuitton, and Bally. The “clustering” of similar tenants remains a viable tactic for reaching customers with specific shopping needs.

Clicks to bricks. The lines between catalog/online and storefront blur. Coldwater Creek, once solely a catalog retailer, is opening stores in upscale lifestyle centers with interactive kiosks offering free shipping. Stores carry only 35 percent to 40 percent of merchandise offered in its catalogs. Malls have to offer not only time back, but also an experience of delight, true choice rather than a flood of options, an environment that’s easy to navigate, and a level of service that memorably offsets the efficiency of online commerce.

New tenant categories. Recent mall entrants range from gourmet restaurant concepts to health clubs to discount merchants to night clubs and even casinos. The effect is to break retail’s traditional boundaries, blend shopping tasks with health-oriented and leisure experiences and develop flexible, multi-tiered strategies that are responsive to ongoing reinvention. Shopping centers that dispense with traditional department-store anchors in favor of yoga and extreme-sports clinics may be one answer to Generation Y’s evolving needs.

Be good at multicultural marketing. Merchandisers are paying attention. Among the new initiatives that reflect these developments is Sears’ deal with Latina Media Ventures. The magazine publisher is creating the Latina Life line of apparel, footwear and handbags for 425 Sears stores and its website.

The challenge

Both Boomers and Generation Y came of age in periods of sustained affluence, and each of those generations shows undaunted optimism toward the present and the future. Clearly, the challenge to mall managers, retailers and investors is that these two cohorts have perfected the art of becoming moving targets.

As Boomers arrive at their “third phase” of life-aging-and as Gen Y steps into its “second phase”-adulthood-consumer goods and services businesses of all types will face profound parallel and simultaneous demographic changes that will affect national and regional economies, the shopping mall business, and our national culture. The stakes? Double or nothing.

This report was reprinted with permission from Jones Lang LaSalle.

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