Analysis: Millennials and the modern retailer

In light of steady improvements in employment rates and disposable income over recent years, retailers can expect consumer spending to continue on a positive trend in the coming years. In particular, a large portion of spending is expected to come from a strengthening consumer demographic: millennials. The group, which is loosely characterized as people born between the early 1980s and early 2000s, has an estimated $200 billion in annual buying power. To take advantage of this consumer group’s considerable purchasing power, as well as overall rises in spending in line with the strengthening economy, retailers will need to adjust their business strategies to appeal to millennials. Fortunately, with overall consumer spending and corporate profit rising, retailers will have more funds available for related expansions and upgrades. IBISWorld has identified various products and services that could help retailers improve their customer engagement, distribution centers and store operations.

 Traditional print advertising is on its way out, so if retailers want to remain competitive, they must adapt to new forms of advertising. Social media advertising campaigns, for example, have become popular strategies for reaching consumers, especially millennials, and developing customer engagement. Other new advertising formats include: native advertising, crowd sourcing, online advertising, digital advertising and integrated advertising. According to IBISWorld, demand for all of these advertising services has experienced growth during the three years to 2015, a trend that is forecast to continue through 2018. But because prices for digital advertising agency services and integrated advertising, in particular, are anticipated to rise during the next three years, buyers should look to secure contracts to lock in lower prices. Buyers may also be able to save by working with a diversified supplier that offers multiple types of advertising services. The use of a single service provider can often mean volume discounts based on a larger contract value, as well as the benefits of a streamlined marketing approach.

In addition to these advertising tactics, retailers can also look to search engine marketing (SEM) services. SEM helps retailers increase their visibility online, which is especially important because millennials are known for doing their research online before making a purchasing decision. The use of these tactics helps to mitigate wasted advertising expenses and allows retailers to focus their efforts where customers spend the most time. IBISWorld expects the price of third-party SEM services to increase in the three years to 2018, but the availability of alternatives such as in-house or software solutions will slow growth for SEM services compared to the past three years. Overall, the positive effects of low market concentration and high availability of substitutes balance out the negative impacts of high product specialization and high switching costs, giving buyers more negotiation power.

According to market research firm GlobalWebIndex, 67% of millennials buy products online and together they make up more than half of the nation’s mobile shoppers. The purchasing behaviors of this group are contributing to skyrocketing demand for e-commerce and online auctions, which has increased 10.9% per year on average since 2012, according to IBISWorld. In order to meet growing demand from e-commerce sales, retailers are being forced to adjust. For instance, Walmart plans to open four 1 million-square-foot distribution and fulfillment centers by late 2015, while Target expects to spend $1 billion this year to improve its supply chain and technology systems.

Retailers that already have distribution centers in place can procure warehouse management systems and distribution center equipment, such as automatic palletizers and conveyor systems, to achieve greater operational efficiency and improved shipping times. If the retailer does not have its own distribution center, order fulfillment services can be used. These services allow retailers to outsource the packaging and shipping processes to a third-party fulfillment provider. According to IBISWorld, the prices of these products and services are forecast to grow in the next three years; therefore, retailers should seek contracts now to lock in current prices and avoid potential price hikes.

For the 81% of shopping that millennials still do in physical stores, according to IBISWorld, retailers have been making superficial changes to enhance the customer experience and improve customer loyalty. By updating their retail store fixtures and storefront signage, retailers can help create positive shipping experiences for their in-store visitors. Retail store fixtures and storefront signage can be used to create an inviting, attractive and memorable first impression on potential customers, including the highly influential Millennial demographic. Additionally, upgrades to environmentally friendly options, such as energy-efficient lights and recycled materials, will reduce their carbon footprint while resonating with the widely eco-focused group of shoppers.

According to IBISWorld, both the retail store fixtures and storefront signage markets exhibit low market share concentration, meaning that no vendor controls a majority share. As a result, buyers have more leverage than suppliers during the negotiating process because suppliers must compete strongly with one another to win the business. During the buying process, retailers can pit suppliers against one another to achieve the most competitive prices.

Considering millennials’ expanding role in today’s retail environment, retailers must rethink the way they obtain loyal customers now if they want to retain them and their influence into the future. By improving advertising techniques, e-commerce operations and their physical presences, retailers can attract more customers overall, while further capitalizing on the burgeoning Millennial market.

Fortunately for retailers, there are key strategies and positive market characteristics for all the products and services discussed to help achieve their goals and negotiate the best deals. Many suppliers in each of these markets produce or sell more than just one solution, so buyers will benefit most when sourcing from a single vendor when possible. Doing so may result in bundling discounts, as well as ensuring that advertising campaigns are consistent and that signage and fixtures are compatible. As a result of rising prices in many of the markets, though, it is important now more than ever to understand these markets and strategize for the best price.

Jordan Weinstein is procurement research analyst for IBISWorld, a strategy, research and marketing firm (IBISWorld.com).