The Price of Love: The Economic Impact of Valentine’s Day

by

There is no doubt about it: February is a rough month to be single. With retailers everywhere fueling Valentine’s Day, one can’t help but feel at least a little left out. But who is Valentine’s Day really for? In theory, it is to celebrate your loved ones, especially your significant other. In practice, however, many feel that Valentine’s Day is more for consumerism and retailers more than anyone else. With companies and retailers making massive profits every February, Valentine’s Day has been dubbed a Hallmark Holiday, curated to make people feel like they need to spend money to prove their love. In fact, one 1994 study surveyed 105 men “found that though they primarily associated a feeling of love or friendship with Valentine’s Day, a sense of obligation was a close second.” (theatlantic.com). With the percent of people planning on participating in Valentine’s Day hitting an all time low in 2019 (only 51% of people), it is clear that individuals aren’t buying gifts because they want to, but because they feel like they have to. 

Retailers everywhere embrace Valentine’s Day with full force in hopes of making a profit from the increased consumer spending of the season.

But just how much are people spending out of obligation? As it turns out, quite a lot. In 2019, “celebrants were spending a record amount of $161.96 per person. That beat the 2016 record of $146.84. It’s also 13 percent more than the $143.56 spent in 2018.” (National Retail Federation). On average, men spend as much twice as much as women for the big day, which can be explained by the antiquated social expectation for men to demonstrate their ability to provide for women financially (thebalance.com). And while you may feel victorious when you buy your spouse the purse she’s been eyeing for months, no one wins more than retailers during the season of love. In 2019, shoppers funnelled a record high of $20.7 billion dollars into the economy, according to the National Retail Federation. The industries profiting most from love (and obligation) are “jewelry at $3.9 billion, clothing/lingerie at $2.1 billion, flowers at $1.9 billion, candy at $1.8 billion, gift cards at $1.3 billion and greeting cards at $933 million” (FoxBusiness.com). Tiffany & Co. , for example, saw “better-than-expected results with overall worldwide net sales rising 15 percent” during the first quarter of last year, which Valentine’s Day falls under (The Financial). 

Consumer Spending Trends for Valentine’s Day in 2018 (Statista)

Consumer spending statistics tell us that spending for Valentine’s Day is on the rise, despite the fact that the number of people participating in the holiday seems to be falling. How can we explain this phenomenon? While I cannot pretend to have all of the answers, one possible explanation is increased consumer confidence due to an expanding economy. The U.S. economy has been steadily growing over the past few years and this leads people to feel secure in their financials. When people feel richer, they are more likely to splurge a little extra for special events like Valentine’s Day. So while five years ago, you may have bought your boyfriend the speaker system that costs $400, you are feeling financially strong this Valentine’s Day season and decide to buy him the $700 set instead. He’s a lucky guy…this year. 

Click here for the interactive version of this graph from the National Retail Federation

Regardless of whether you are buying out of devotion or out of societal pressure to live up to your role as ‘good significant other,’ the fact stays the same: you are buying. And as long as consumers continue to keep the holiday alive with gifts and special outings, retailers and Valentine’s Day will live happily ever after, oh so blissfully married by fervent capitalism and heart-shaped boxes.

Women, the new Apple Card, and credit discrimination

by

By Sarah Montgomery

“The @AppleCard is such a fucking sexist program. My wife and I filed joint tax returns, live in a community-property state, and have been married for a long time. Yet Apple’s black box algorithm thinks I deserve 20x the credit limit she does. No appeals work,” tweeted user @dhh. 

The man behind the Twitter handle is David Heinemeier Hansson, a software developer with a large social media following. When he and his wife, Jamie, applied for the new Apple Card, he received a much higher credit limit, even though his wife has a better credit score and they share assets. 

Steve Wozniak, a co-founder and current employee of Apple, said that he and his wife face a similarly unfair discrepancy in creditworthiness in terms of the credit card.

The Apple Card, which came out in August, was developed by Apple and Goldman Sachs. According to a support page, the applicant’s credit score, credit report and income level are entered into an algorithm that decidess creditworthiness. 

In response to the media attention that Hansson’s tweet garnered, the New York State Department of Financial Services announced that it will be investigating the algorithm that Apple and Goldman Sachs use.

Courtesy of Apple

How can artificial intelligence share human biases? According to a CNN Business article, artificial intelligence “can quickly learn about a simple concept, but it is dependent on the data that us humans feed it, for better or worse.” 

Gender discrimination in the finance world is nothing new. Only in 1974, not even 50 years ago, did Congress pass the Equal Credit Opportunity Act (ECOA). The act requires that banks, credit card companies, and other lenders make credit equally available to all creditworthy customers. It also outlaws discrimination based on several personal characteristics—sex being one of them— and thus lenders can only decide creditworthiness on income, expenses, debts, and credit history, amongst other limited pieces of information. 

“[I]f you weren’t a white male you were likely to be treated like a potential problem, not a potential customer [by lenders].”

Billy Fay of debt.org

Until ECOA was implemented, women were not allowed to apply for credit. All credit had to be obtained through husbands or fathers, even if the woman in question was gainfully employed. Though the legislation was a major push in the right direction, the National Consumer Law Center argues that unfair credit discrimination is alive and well, particularly against women.

Following up on his original tweet, Hannson writes: “I’m surprised that they even let her apply for a credit card without the signed approval of her spouse? I mean, can you really trust women with a credit card these days??!”

How Babies Affect the Economy

by

This year, the United States’ fertility rate hit 59 births per 1,000 women, the lowest number it has been in 32 years, according to the Bureau of Labor Statistics. 

Since the Great Recession, the number of births has decreased due to the financial investment of having a child and how the recession took away resources that were necessary to support families. However, although the economy has since recovered, the fertility rate has not increased dramatically since. Many Americans cite the financial cost of raising a child as their primary reason for delaying child births. 

Several factors have contributed to the decline in childbearing. The overall decrease in teenage pregnancies, the availability of birth control, a shift in delaying marriage in favor of furthering personal careers and the higher cost of childcare and education have played roles in this decline. Women also cite that having better access to child care and stronger parental leave policies could spur more childbirths over the next years. 

Seventy percent of women in the U.S. today work outside the home, according to an article by Vox. On the one hand, more women in the workforce means more income tax being spent and the enjoyment of more disposable income. As we studied, consumer spending plays a large factor in GDP. In addition, with the need for specialized labor, a more educated workforce can create more opportunities for higher, advancing sectors that can stimulate the economy. Some also cite that lower fertility rates can be beneficial to ration our limited resources. 

On the other hand, declining birth rates can also have long-term effects. For one, the elderly population will increase creating an eventually-declining labor force and not enough people to work (much like in Japan).

The United Nations predicts that by the year 2100, 30 percent of the population will be made up of people ages 60 and above. With longer life expectancies, this can create an age imbalance that leaves a limited number of able-bodied people to work. Economists have predicted that this will create a rising need for increased healthcare, thereby also increasing its costs. With a smaller workforce, those who pay income taxes to fund these medical programs will also shrink as well. 

To increase the amount of people in the workforce, lawmakers have proposed keeping older people working longer, a solution that may not be feasible or welcomed. Another solution is relying on automation, artificial intelligence and robots to boost production and replace workers but this also has its limits. The last solution is to boost immigration to bring in more people who desire to work and fill jobs. If the U.S. is heading towards a recession by next year, there will be a chance that fertility rates will start to decline as people prepare for an economic slowdown, which can have overall negative effects on our economy.

Sources:

https://www.marketplace.org/2019/01/22/americans-are-having-fewer-babies-and-it-might-have-do-economy/

https://www.vox.com/science-and-health/2018/5/22/17376536/fertility-rate-united-states-births-women

https://www.businessinsider.com/dropping-fertility-rates-will-affect-the-economy-2016-11

https://money.cnn.com/2018/06/27/news/economy/arizona-birth-rates-economy/index.html

And the Wall came tumbling down…

by

West German citizens gather at a newly created opening in the Berlin Wall at Potsdamer Platz in November 1989. DoD photo.  

November 2019 marks the 30th anniversary of the fall of the Berlin Wall. From 1961 to 1989, the Berlin Wall separated West Berlin from East Berlin. Standing approximately 12 feet high and 27 miles long, one of the reasons the Wall was created was to keep East Germans from fleeing to the west.

The fall of the Berlin Wall on Nov. 9, 1989 meant that East Germans were free to travel and to work outside of their country for the first time in decades. A New York Times article written three days before the Wall fell about the economic impact the fall could have on Europe mentions that “since East Germans can automatically obtain citizenship in West Germany, they also become citizens of the European Community, free to travel and seek jobs, housing, and eventually welfare benefits in any of the other 11 member countries.” 

Within a year of the fall of the wall, East Germany and West Germany reunited into one whole Germany. That new Germany was generally economically stable with a stable currency. The European Community morphed into the European Union, which Germany is heavily associated with. The country’s general economic strength typically means that the European Central Bank’s “one size fits all” interest rates only fit Germany.

A Pew Research Center study found that while Germany is generally viewed positively in Europe, views of Germany are tied to the EU as a whole. Essentially, if you like the EU, you generally like Germany. Since the global financial crisis, that’s less likely to be the case. In Italy, unfavorable views of Germany increased by 27 percentage points between 2007 and 2017. 

But Greece is where the real hate is at, with a little over three-quarters of Greeks having an unfavorable view of their fellow EU member. “The country is several years into an austerity program imposed by the EU and backed by Merkel’s government,” the study reminds. 

There’s another group of people that aren’t too fond of Germany right now: the Germans. More specifically, people from the eastern German states. It’s been 30 years since the Berlin Wall and 29 years since the German Reunification, and they are still living with the consequences. According to Marketplace, many state-owned companies were sold off to the private sector post-unification and many others collapsed because they could not compete in a market economy. 

When the Berlin Wall fell, many things changed for the better – residents of East Germany could see loved ones on the other side of the border again, could participate in democratic elections, and could travel freely. The economics of the matter is different. It has fostered a feeling of discontent amongst the former East Germans, who say they feel like they have been treated like second class citizens.

According to a recent opinion poll, only 38 percent of Easterners regard the unification as a success – perhaps due to the feeling that it was not a reunification of two Germany’s but the absorption of the East into the West. Jörg Roesler, an economist, said that although western taxpayers spent $2 trillion to improve infrastructure and a social safety net in the former East Germany, it was wasted. Roesler believes what Eastern companies needed was protection. He told Marketplace that if they had been protected for up to five years, a generation would not have been unemployed and “made to feel worthless.”

The dissatisfaction of the former East Germans isn’t just resentment over something that happened 30 years ago. Eastern Germans are still being effected. A Pew Research Center study on how the economic conditions of East and West Germany changed over time found that unemployment in the former East Germany is higher than in the former West Germany by around 2 percent. Although the economic gap between the two regions has become narrower recently, former East Germans make less money than former West Germans. 

“People in the former East Germany earned 86% the after-tax income of their West German counterparts in 2017,” said the study. “That percentage has changed little in recent years, but is far higher than in 1991, when per-capita disposable income in the former East was only 61% of that in the former West.”

The physical Berlin Wall may have fallen 30 years ago, but its economic and psychological shadows live on.

SOURCES

PSL: The Fall Staple

by

The Pumpkin Spice Latte, Starbucks’ most profitable seasonal drink, returns every year pre-Labor Day and is a staple to many peoples’ daily routines until the end of January. The iconic pumpkin spice flavor is sold in supermarkets everywhere, whether in ice cream, cereal, or even dog food but Starbucks has popularized the trend through a simple latte drink. The autumnal flavor has been a Starbucks go-to since 2003. Although considered a fall-flavored drink, Starbucks has begun to release the flavor during the warm summer months. It was predicted that customers would not order the drink in a humid summer but Starbucks was confident in the risk of making it available during more months of the year. Starbucks hoped for three outcomes:

  1. Customers pay one more visit to its retail shops.
  2. Customers spend more by buying a baked good or sandwich with the latte.
  3. The early release will garner so much media attention that it will gain massive amounts of free publicity.

Starbucks achieved what they had hoped and the PSL has now become the flavor of Fall as many products attempt an imitation of the customer-loved flavor.

With many products and brands that implement the pumpkin spice flavor into their products, customers can choose from a massive variety of food and drink options. Despite having an almost ridiculous amount of pumpkin spice flavored products, customers still choose the Starbucks latte over almost everything else. The dollar sales of pumpkin-related flavors is trumped by three main categories: in first place, with $130.6 million in sales, is pie filling, in second place is the PSL with $110 million in sales, and finally, in third place and probably the strangest way to choose this flavor is dog food with $109 million in sales.

The pumpkin spice latte seems to be one of the large contributors to Starbucks’ success, but in reality, PSL sales are barely 1% of annual revenue for the coffee giant. Starbucks has sold more than 350 million pumpkin spice lattes since its inception in 2003, but the success of the flavor is just a small, debatably tiny, contribution to the overall prosperity of the coffee chain. The latte alone may not contribute as monumentally as believed, but the flavor clearly brings customers into stores during the PSL season. Customers who purchase the latte spend an average of $1.14 more per purchase than the non-PSL buyer. A little over $1 per customer may not seem huge, but considering the 350 million pumpkin spice lattes sold over the past 14 years, it is safe to assume the $1 per customer adds up enough to keep the flavor in stores. The PSL is one of those must-try flavors because of its widespread popularity, and I have yet to get my hands on one.

https://www.delish.com/food-news/a22862289/how-much-money-does-starbucks-make-on-psl/

https://www.forbes.com/sites/maggiemcgrath/2018/10/31/inside-the-600-million-pumpkin-spice-industrial-complex/#1535b3ef1b95

https://www.forbes.com/sites/garystern/2018/09/21/starbucks-pumpkin-spice-latte-exceeds-expectations-but-will-it-turn-the-tide-for-sluggish-stock/#6e25ec3b20cb

737 Max economics

by

Grounded 737 Max jets

            After two fatal crashes in 2018 and 2019, the Boeing 737 Max has been grounded since March 10, 2019. Airline companies purchased this aircraft not knowing it was inherently flawed; so, now, they are stuck with planes that they cannot use. This is costing them in more than one way.

The airline industry relies on land, hangars and gates rented from airports. Every airline company rents a certain number of gates that they use for passengers, a certain amount of land they use to park planes and a certain number of hangars to maintain those planes. The nature of this business is that the planes circulate between the gates (flight), parking lots and hangars so that all of the planes are used to maximize profit. When the 737 Max was grounded in March 2019, this forced airline companies to reschedule flights, issue refunds and allocate other planes accordingly. The 737 Max planes are now parked on land for which the companies are paying. In essence, the companies have useless aircraft that costs them money – dead-weight.

As of October 24, 2019, American Airlines (owns 24 737 Max planes) paid $540 million, and Southwest (owns 21 737 Max planes) paid $435 million – $1 billion in total.[1] American Airlines cancelled 9,500 flights just in the third quarter of 2019 as a result.[2]

This is where Boeing comes into the picture. Because the grounding had such a large impact on the top-line and bottom-line for airliners, airline companies started negotiations with the manufacturer, Boeing, to compensate them. Boeing set aside $5 billion for this reason.[3]

Boeing CEO, Dennis Muilenburg, at a Senate hearing October 29, 2019. Pictures of the crashes victims surround him.

The 737 Max planes that have been delivered so far amount to 387 globally and pending orders for 400 more have been cancelled.[4] The 737 Max costs between $99.7 million to $134.9 million depending on the model.[5] Boeing has suffered a minimum of $39.88 billion and a maximum of $53.96 billion in unrealized revenues on the pending orders.

Boeing is the largest exporter and one of the largest employers in the US.[6] On top of a heavy trade imbalance due to the US-China trade war, Boeing’s cessation of producing 737 Max jets has further hindered GDP and manufacturing exports. This resulted in a drop of 1.3 percent of durable-goods orders in the second quarter and $2 billion loss in aircraft and parts sales. Bloomberg reports that 737 Max order book was worth $600 billion.[7] Bloomberg claims that the impact of the 737 Max crisis affected .2 percent of the second quarter’s GDP. Also, Investopedia reports that the impact would be greater than that of the 2019 government shutdown, which was $4 billion.[8] [9]

[1] https://www.cnn.com/2019/10/24/business/american-airlines-southwest-boeing-737-max-costs/index.html

[2] https://www.cnn.com/2019/10/24/business/american-airlines-southwest-boeing-737-max-costs/index.html

[3] https://www.cnn.com/2019/10/24/business/american-airlines-southwest-boeing-737-max-costs/index.html

[4] https://www.cnn.com/2019/10/24/business/american-airlines-southwest-boeing-737-max-costs/index.html

[5] http://www.boeing.com/company/about-bca/#/prices

[6] https://www.investopedia.com/how-boeing-s-737-max-crisis-is-hurting-u-s-gdp-growth-4694349

[7] https://www.investopedia.com/how-boeing-s-737-max-crisis-is-hurting-u-s-gdp-growth-4694349

[8] https://www.cnn.com/2019/09/17/politics/government-shutdown-cost-study/index.html

[9] https://www.investopedia.com/how-boeing-s-737-max-crisis-is-hurting-u-s-gdp-growth-4694349

Forever 21 and the retail apocalypse’s effects on the economy

by

Known for its glaringly yellow shopping bags, paper-thin shirts and stores blasting bubblegum pop ballads, Forever 21 has marketed itself as a teenybopper retailer set on the rapid comings-and-goings of the fashion industry. At its peak only three years ago, the privately-owned, American fast-fashion company grossed $4.4 billion in annual sales, opened 800 stores globally and employed up to 43,000 people reported the New York Times.

Just last month, however, the retail giant announced it would be filing for Chapter 11 bankruptcy protection meaning the business will still operate but will restructure its debt repayments to investors. The founders said they’d be stopping production with 40 companies, shuttering 178 stores within the United States and closing up to 350 total brick-and-mortar locations worldwide. 

What became of the retailer which seemed to dominate every other mall and bring in hordes of teenagers and moms who wanted to preserve their inner 21-year-old? 

Two words: retail apocalypse. The term refers to the advent of online shopping and shifting consumer habits that has caused many retail stores to close, forcing many companies to declare bankruptcy.

Starting in 2017, malls through the United States saw closures of prominent stores. Major stores such as Payless ShoeSource, Abercrombie & Fitch, American Apparel, Gap Inc., Charlotte Russe, J.C. Penney, Michael Kors, Bed Bath and Beyond, and Toys ‘R Us have been affected by the retail apocalypse. Alarmingly, this was during a time when the economy was strong and unemployment was low.

Both department stores and middle-tier mall chains either went out of business completely or shifted their focus to online distribution. The average household spent $5,200 online in 2018, a figure that rose almost 50 percent from 2013, as reported by the Washington Post.

Of U.S. retail stores, 75,000 out of approximately 1 million will close by 2026, according to the Washington Post, with online shopping making up nearly a quarter of sales. However, this figure isn’t as high as years prior. During the 2001 recession, 151,000 stores closed and again during the 2008 recession, another 148,000 stores closed.

For Forever 21, the combination of the retail apocalypse plus the owners’ reluctance to allow the privately-held business to be managed by others led to its eventual downfall.

In 2017, the Atlantic published an article describing three of the major contributors to the retail apocalypse: the rise of e-commerce, the number of malls in existence and the shift in consumer spending from retail to restaurant consumption.

Currently, there are about 1,100 shopping malls nationwide. During the late 1950s, many malls in America were built on the idea of a communal ground for middle-class, suburban America. As much as it was a workplace for minimum wage jobs, it was also a meeting ground for anyone and everyone to socialize. At one point, mall developers had dreams of a futuristic destination spot that housed apartment buildings, office space and hospitals. Its popularity fueled the construction of more and more malls. Nowadays, malls are less of a destination and are seen as a place to run errands or bypass shipping fees. Forever 21 occupied many malls with leases that were too long and spaces that were too large for the amount of merchandise they sold, fueling its demise.

On the consumer demand end, behaviors and attitudes toward stores like Forever 21 and its competitors like Zara and H&M have also changed.

For Sarah Okamoto, a USC junior majoring in computer science, a big portion of her money went to buying clothing, mainly from Forever 21. About once a week over the span of six years, Okamoto spent over 35 percent of her income at its brick-and-mortar stores.

“I started to realize it was almost [becoming] like single-use clothing, and I realized I didn’t want to be spending money on those things,” Okamoto said. “More and more people began pointing out that it was a fast-fashion brand, and it was really harmful for the environment. I think as people started to move away from that and there became more sustainable clothing options, I didn’t really feel a need to keep shopping there.” 

In addition to consumers becoming more aware of the harmful environmental impacts of fast fashion, Okamoto cited the rise of minimalism, thrift shopping and cleaning guru Marie Kondo. These new trends may also affect what consumers want to see in-store now. Similarly, stores that sell similar items to Forever 21 such as Charlotte Russe and Claire’s have also filed for bankruptcy in recent years.

With the rise of other fast-fashion competitors who have made their success through social media marketing and online distribution, the question then remains if Forever 21 can pick themselves up enough to once again to meet the changing needs of consumers and thrive again in a world where more and more physical stores are shutting down.  

The Mixed Effects of Rising Gas Prices on Consumers

by

During the week of October 2nd, gas prices in the Los Angeles area nearly reached the $5 per gallon mark, the highest it has been in five years. Since 2007, the average annual increase in gas is about 30 cents. The cost of gas is determined by a number of factors including supply and demand, geopolitical tension and a person’s location, among other things. So, what are the consequences of increased gas prices for the economy and how do these consequences affect consumer behavior?

         Gas prices are known to generally fluctuate over the course of a year due to regulations that require different gasoline blends for different seasons.  During the summer, beginning in the months of March and April, the Environmental Protection Agency (EPA) requires that a special blend of fuel be created which contains about 1.7 percent more energy than a winter blend, making it more expensive to make as production takes longer and yield per oil barrel is lower, an increase that is ultimately passed down to the consumer. Normally, gas prices come back down during the fall beginning September 15 when retailers are allowed to switch from summer-blend fuel to winter-blend fuel, but that isn’t necessarily the case for the West Coast, particularly in California where state and city regulations require the summer-blend months to extend until the end of October. On top of this, California also has some of the nation’s strictest gas-production policies that require refineries to create a cleaner gas blend with fewer emissions, a requirement that only a limited number of refineries are able to meet. The result is clear: California gas prices are consistently higher throughout the summer and winter months as compared to other states in the US. This is highlighted by the fact that during the week of October 4th this year, the average California price for a gallon of regular reached $4.18, compared to a national average of $2.65, and an average Texas price of $2.305, according to data compiled by AAA.

***The chart above, taken from the California Energy Commision, highlights the differences in gas prices between California and the US from 2005 to 2018. For each year, the price of gas has remained consistently higher in California than in the US in general.***

To better understand the impact of rising gas prices on the average Californian, the California Energy Commission released an analysis on gas prices in California this year at the request of Gov. Gavin Newsom. Their analysis found that California consumers have a gasoline preference for higher-priced brands such as Chevron, Shell, and 76, and are willing to pay higher prices to continue using these brands when gas prices rise. This indicates that consumers in this state prioritize the advertised quality of their preferred brand over the price of gas, despite having a multitude of options when it comes to choosing where to fill up that empty gas tank. Their report also found that Californians aren’t as concerned with gas prices as their non-western counterparts.

Despite this general preference for quality over price, not all Californians can afford to spend the extra money on presumably high-quality gas. The lower class faces a regressive tax when gas prices go up, while for the upper class, this difference barely (if at all) creates a dent in their wallets.  According to researchers at the Brookings Institute, rising gas prices tend to have a pronounced adverse effect on low to moderate income households in particular. For example, in 2010 when the average price of gas was $2.80 per gallon, US households with an annual income under $50,000 drove an average of 10,000 miles and spent roughly $1,500 on gasoline. Such households have had to front an additional $530 per year for every dollar increase in price, assuming the miles driven has remained the same. For higher-earning families, the increase may not have a direct effect on their purchasing power, but for lower-earning families who already spend most of their income, the impact is far more dramatic. Having no alternative, low to moderate income families are then forced to either cut back on other expenditures or fall further into debt just to keep up with the price of gas. 

This is especially true for families that live paycheck to paycheck as is often the case for low-income households, particularly those that fall below the federal poverty level. A family with an annual income under $25,000, which represents roughly 25% of US households, would end up spending an extra 2% of their income on gas. This percentage is even higher for households with more family members, as a household of four with an annual income of $25,000 already directs about 8.6% of their earnings towards gas, according to data compiled by the Urban Institute. For a family with an annual household income of $100,000, however, the extra money spent on gas amounts to about 0.5%. These households are less likely than their less affluent counterparts to spend all of their income and more likely to have savings to dip into if necessary. While the difference might not seem so meaningful, a family that typically spends all of their income cannot afford to redirect an additional 2% of their funds towards gas, while the 0.5% might already represent a surplus for families on the higher-end of the earning scale. With a poverty rate of 15.1% in California, many households could certainly see themselves affected by rising gas prices as families struggle to adjust gas expenditures on their budgets.  

An increase in gas prices isn’t just unfortunate for lower-income consumers, it may have mixed effects on the economy as well. When almost 10% of a person’s income must be directed towards gas, there is little surplus left for spending on other goods. Retail stores along with the rapidly-growing ecommerce businesses may find themselves affected by high gas prices because many consumers simply have less money to spend on goods. As an immediate response to higher gas prices, lower-income households will cut back on discretionary spending such as eating out or purchasing luxury items and try to minimize unnecessary driving because they can’t do anything else to alleviate the situation. That is, they can’t simply move closer to work or switch to a more fuel-efficient vehicle. However, data released by the Commerce Department indicates that buying trends remain similar even when gas prices hit an all-time high, so long as consumer confidence is high. Consumer confidence may remain high even when gas prices rise due to a combination of factors such as low unemployment rates and tax cuts that make discretionary spending still seem favorable and financially safe. 

One important industry that does find itself largely affected by increasing gas prices is the automobile sales industry. When gas prices are high automobile retailers sell fewer SUVs and large vehicles because consumers would rather not purchase vehicles that require premium gas or that will require them to spend more on gas. According to the Automotive Network, there is a correlation between fuel prices and auto sales, such that when gas prices are low, many people are more likely to purchase a larger car or performance vehicle. This is illustrated by the fact that large, gas-guzzling pickup trucks and SUV sales were up almost 10% in 2015 when gas prices were comparatively low, and the sales of the fuel-efficient Toyota Prius’ were down roughly 12% from the previous year. Unfortunately, gas prices don’t stay low forever, and those people who bought gas-guzzling cars realize they cannot afford to keep up with the costly maintenance of paying for premium gas.Businesses such as UPS, FedEx and other package delivery services are also affected when gas prices increase because their cost of operations becomes more expensive, also known as a ground fuel surcharge. This added expense is then passed on to the consumer, who now has to pay more for shipping: “Fuel surcharges allow for UPS and FedEx to keep its base shipping rate while making the necessary changes to cover any increase in fuel price” (Gibbs).

In response to these rising gas prices, business owners and employers have been forced to develop innovative ways to help their businesses and their employees save money. Some businesses have adopted work-from-home or carpool programs to help alleviate the financial burden caused by high gas prices on commuters.  Unfortunately, some businesses find it harder to evade the tax-hike effects. For example, drivers for Uber and Lyft are usually unable to escape the increase because their jobs rely solely on driving. Independent contractors must then funnel more money out of their pockets to bring in the same income, forcing them to work more or make less, especially for those who have no direct control over their rates. This might be enough to take away the appeal of being self-employed as a ride-share driver. To address the potential loss in employees, Uber and Lyft both implemented programs to incentivize drivers to opt for electric cars. A company in New Jersey, MMW group, created incentives to help with the rising gas prices by allowing customers to work from home two days a week and try to cut their employee’s transportation costs in any capacity they can. 

Gas price fluctuations have more of an impact on our daily lives than we think. The poorer working class woman who has to spend over two hours in traffic daily to save money wherever she can, now has to worry about the little money she has left going towards gas. The car dealerships begin to worry about meeting their monthly quota because people don’t want to purchase as many vehicles. Gas prices aren’t just prices; they impact the decisions people make on how they want to spend their money and how much they want to drive, especially for lower-income drivers. 

Sources: 

Gibbs, Brian. “How FedEx and UPS Fuel Surcharges Affect Shipping Rates.” Refund Retriever, 8 Mar. 2019, www.refundretriever.com/Fuel-surcharges.

Isidore, Chris. “Low Gas Prices Boost SUV and Pickup Sales.” CNNMoney, Cable News Network, 4 Dec. 2015, money.cnn.com/2015/12/04/autos/gas-prices-suv-pickup-sales/.

Marketing. “The Effect of Higher Oil Prices on ECommerce & Retail Spending.” The Effect of Higher Oil Prices on ECommerce & Retail Spending, www.rakutensl.com/post/will-higher-oil-prices-impact-ecommerces-bottom-line.

Nedlund, Evelina. “California Gas Prices Soar above $4, Reaching the Highest Price in Five Years.” CNN, Cable News Network, 8 Oct. 2019, www.cnn.com/2019/10/08/business/california-gas-prices/index.html.

Rocco, Matthew. “Why Surging Gas Prices May Not Stop Consumers from Spending.” Fox Business, Fox Business, 10 Oct. 2018, www.foxbusiness.com/economy/why-surging-gas-prices-may-not-stop-consumers-from-spending.

Sawhill, Isabel V. “How Higher Gas Prices Hurt Less Affluent Consumers and the Economy.” Brookings, Brookings, 28 July 2016, www.brookings.edu/opinions/how-higher-gas-prices-hurt-less-affluent-consumers-and-the-economy/.

Shinn, Lora. “4 Ways Employers Can Cut Commuting Costs.” Bankrate, Bankrate.com, 24 Nov. 2008, www.bankrate.com/finance/personal-finance/4-ways-employers-can-cut-commuting-costs.aspx.

Unrau, Jason. “The Correlation Between Fuel Prices and Auto Sales.” CBT Automotive Network, CBT News, 17 May 2018, www.cbtnews.com/the-correlation-between-fuel-prices-and-auto-sales/.

How the retail apocalypse will impact America

by

By Sarah Montgomery 

Forever 21. Payless. Sears. Toys R Us. These are a few of the many titans who have declared bankruptcy in the wake of the “retail apocalypse.” As retail migrates from brick-and-mortar stores to the internet, it is essential to acknowledge the fundamentally negative impact this will have on America’s future. 

Courtesy deadmalls.com

By 2022, analysts estimate that one out of every four American malls could be wiped out. That contradicts the narrative about the country’s economy— the economy is growing, unemployment is low, and consumers are confident. There are many reasons why traditional American retail is in a death spiral; the primary one being the rising popularity of online commerce, particularly brands dubbed as “e-tailers”. The losses of the brick and mortar market have been offset thus far by the success of online commerce— however, the honeymoon will not last forever. 

Year-to-date, Amazon has reported $117.1 billion in North America sales— and we have not even hit the busy holiday season yet— and has enjoyed an average 26% annual growth rate since 2016. For context, Target reported $75.36 billion in North American revenue for all of 2018 and an average 1.85% annual growth rate since 2016. E-commerce is outpacing traditional retail like a cheetah racing a housecat. 

The middle class is losing ground

Without a doubt, the popularity of online stores is eating at retail’s success. Gabriel Kahn, a journalism professor at USC, likens the situation to bringing a knife to a gunfight. Without the overhead costs of brick-and-mortar stores, online retailers can compete in ways that traditional retailers simply cannot. With the offers of next-day delivery, online price comparison tools, customer ratings, a larger inventory, less of the friction inherent in person-to-person interaction, and more, all accessible from the comfort of the buyers’ couch, there is no way physical retailers stand a chance. Though the e-tailer boom has meant increased convenience for the consumer, the cons certainly outweigh the pros. Convenience cannot be our god in this economy.

According to the Pew Research Center, America’s middle class is falling behind financially after spending four decades as the nation’s economic majority.  According to the study, “the nation’s aggregate household income has substantially shifted from middle-income to upper-income households;” the income held by the American middle earners has shrunk from 61% to 50%. As people work for less money and work more hours to try and overcome income shortfalls, the Average Joe and Average Jane have less time and money to spend in stores. 

Those who have disposable income are certainly not spending it on food court meals and trinkets from Macy’s, ultimately hurting the businesses that occupy the average mall. The malls that are surviving, like The Grove, cater to a more high-end, luxury market that is increasingly inaccessible to the middle class. The mall where grandmas and goths could all find something they wanted, where the rich and poor could spend time and not feel out of place, where teenagers got their first jobs, where families went to get some Sbarro’s before a showing at the AMC, where millions of Americans ambled away hours of free time— this modern suburban shopping mall will become a nostalgic memory. 

“Advances in technology, such as self-service checkout stands in retail stores and increasing online sales, will reduce the need for cashiers,” says the Bureau of Labor Statistics. 

The problem of retailers dying off is exacerbating the financial plight of the working class. Back in May 2015, retail salespersons and cashiers were the occupations with the highest employment. The Bureau of Labor Statistics estimates that cashier jobs will have a negative employment change of -138,700 people (4% decline), whereas retail sales workers will likely experience a negative change of -105,200 jobs (2% decline). Stragglers may be sucked into markets related to online commerce, like truck driving or warehouse jobs (which have appalling work conditions), but those jobs are at risk of being automated in the near future. We will lose jobs essential to the wellbeing of the middle class. As reported by NPR’s “Planet Money,” truck driving, retails sales clerks, cashiers, and customer service representatives— all currently impacted by the retail apocalypse— are popular jobs for middle- to lower-income brackets. 

For now, the loss of retail jobs has been offset by the increase in other job sectors, like the aforementioned warehousing, giving off the illusion of a bustling economy. That being said, it is important to keep in mind that those new jobs are not likely to be placed in the same suburbias where those malls once were. Department stores have an incentive to spread their products, and thus staff, throughout the country; e-tailers do not have such an incentive. The regions losing jobs are not seeing that problem mitigated by new jobs. Moreover, as posited by economy researchers Jason Bram and Nicole Gorton, non-retail jobs may demand a more sophisticated skill set than department stores; they liken salary as a proxy to skillset, noting that the average wage for non-store workers exceeded $59,000, whereas the average salary for department store jobs hovers at just $20,500. As obtaining a college education gets more and more expensive, there seems to be no way out for the middle class. Without access to low-skilled jobs, and without the education to secure skilled work, the middle class will be hollowed out. 

But wait: it gets worse. With less money being earned by its citizens, local governments will indubitably suffer. Sales tax and income tax comprise a large part of any city’s government. As malls and the correlated jobs die, so do two major sources of revenue that are nearly impossible to recuperate by other methods. Across the nation, sales tax comprises nearly 33% of state governments’ revenue and about 12% of the local government’s revenue. As malls and retail stores either collapse or flee to more prosperous regions, those localities also see a loss in commercial property taxes. 

Courtesy City of Arcadia

I spoke with Jason Kruckeberg, the Assistant City Manager/ Development Services Director of Arcadia, Calif. The city has a thriving Westfield mall thanks to how deftly it serves the large Asian demographic. He says the city reaps many benefits from the mall, considering the sales tax, employment tax, property tax, introduction of money into the local economy, tourism, name-recognition and community events that the Westfield Santa Anita promotes. Just looking at sales tax alone, for the 2017-2018 fiscal year of Arcadia, sales taxes generated $10,670,332 dollars whereas next-door neighbor Monrovia collected $2,404,000 in sales tax that same fiscal year.

Facing reduced tax revenue, governments can provide less social services when relief is needed most, while concurrently raising taxes (further aggravating the problem). Some people, like Alana Semuels of The Atlantic, argue that a viable solution to this problem could be the requiring of online retailers to collect sales tax and redistribute it to the states. Though an interesting solution, it would require an act of Congress, a lengthy and difficult process. Things will get worse before they get better. 

Any competent economist knows that behavior and the economy are closely linked. Displaced workers, shrinking tax bases, widening economic inequality, and reduced money flow is a recipe for disaster. With less consumer confidence, especially in the consumer-driven American economy, the repercussions could be severe. Money is the blood that circulates through the economy, keeping the system alive; without that flowing, the consequences will be grave— economically, politically, and culturally.

Gen Z says: Buy Less, Wear More

by

For every school dance I’ve ever had, the women in my family have helped to create a look screaming of class and elegance. But whenever I found the perfect dress, the Sax Fifth Avenue price tag was simply too steep for a junior prom. No individual in their right mind would send their daughter to a dance in a $14,000 dress. But those were the only dresses that exhibited some semblance of originality. It was an inner battle between being pragmatic about costs and being unique.

I am not the only one who experiences this cognitive dissonance. Generation Z’s consumption as a whole is characterized by expressions of individual identity and realistic decision-making. More and more, the individuals of my generation are turning away from spending for possession and are instead simply spending for access. Thrifting is making a comeback, rental is on the rise, and the sharing economy is taking over. Think of the streaming services dominating media consumption, or Uber and Lyft redefining transportation. This generation’s values are driving changes in almost every industry imaginable. The global economic sphere is shifting, and it’s all due to the fact that companies are learning to meet the needs of their present and future consumer base. 

Enter, Rent the Runway. 

Rent the Runway Drop-off Location

Rent the Runway was the perfect solution to my aforementioned dress dilemma. It is a service that allows one to rent high-fashion pieces for a limited amount of time. The sharing economy is entering the fashion world through services like these and changing the landscape. A study by McKinsey recently elucidated significant characteristics of Generation Z and their implications for companies today. Essentially, what we think and how businesses must adapt to stay afloat. Our main consumer habits reflect our preferences toward shared goods, singularity, and ethics. When inserting these qualities into the fashion framework, we can see where the shifts in the industry are and where they will be. 

Ownership is Down For Gen Z

McKinsey notes that my generation isn’t as focused on possession as the generations before us. The sharing economy has produced companies like Zipcar and Airbnb, and the trend is growing into the fashion industry. Young adults find little value in a single expenditure that only produces one item. Purchasing a subscription or participating in the sharing of goods and services seems more pragmatic and efficient. Additionally, many clothing items, especially luxury goods, see only one use. The formal dresses I purchased in high school have never again seen the light of day, simply taking up space in my closet back home.

So why are young people not keen on re-wearing big ticket clothing items? To put it simply, they don’t want to be seen wearing the same outfit more than once on social media. Polls from the The Hubbub Foundation, a British charitable organization, found that 1 in 6 individuals would not wear an outfit if it had already been featured on Instagram or Facebook. I even find myself pausing before posting photos with the same clothing combination, or at least attempting to wait before repeating a look. 

This is why fast fashion finds such a stronghold in society. Fast fashion produces the opportunity to cheaply purchase a clothing item and throw it away after a month of use. That way, no one has to repeat outfits. But fast fashion comes with its own consequences, both surface level and environmental implications. 

Gen Z Craves Singularity  

With everyone purchasing clothing from the likes of H&M, Forever 21, and Zara, it’s difficult to have a unique identity. There were three different girls at my senior prom wearing the exact same dress. The dress was cute in a traditional sense, but it was popular because it offered an alluring price tag. One of these individuals was a friend of mine, and I remember her fury. Few members of Gen Z wish to blend in with the pack. Rather, individuals want to stand out among their peers, be original and unique. It’s difficult to achieve this with traditional retail models, which is why practices such as renting and consignment are on the rise. 

Gucci Cat Eye sunglasses

These practices allow young people to seek out the pricier brands that they would otherwise sport. Renting and consignment open doors to the segment of the fashion industry normally closed off to those pragmatic spenders, allowing for increased opportunities for originality. Gucci’s brand is unique, and now it can be accessed by multiple social classes. The classic pair of Gucci Cat Eye sunglasses retails for $485, but you can rent them at 85% off, wear them for your week-long  staycation in San Clemente, and then send them back.

The same can go for unrivaled vintage items on the Real Real and other similar consignment sites. In 2019, It’s almost too easy to be unique, just ignore the Forever 21’s of the world. In 2019, It’s almost too easy to be unique, just ignore the Forever 21’s of the world.

Gen Z Has a Heart

With fast fashion, it’s difficult to be one-of-a-kind. But fast fashion poses a problem exponentially more severe: its threat to the environment. Purchasing vast amounts of cheap clothing and tossing it after a few uses is terrible for the planet. According to the Ellen Macarthur Foundation, textile production accounts for 1.2 billion tons of annual greenhouse gas emissions. To put that in perspective, that’s more than maritime shipping and international flights combined. Moreover, when these garments are washed, they release plastic microfibers that contribute to ocean pollution. Big names like Stella McCartney have called for change in the fashion industry, urging high and fast fashion alike to change the way they do business. This change will come in the form of rental and thrifting, and while it will help the environment, it will also be very lucrative. 

As represented in the graph above, Gen Z genuinely cares about the ethics of the companies they support. It’s the rise of the conscious consumer. A generation that grew up using the internet knows exactly how to access any and all information about the practices of brands and companies. If they find that a brand does not actually support a cause they claim to align with, or if some sector of their company is participating in socially or environmentally detrimental activities, they will lose business.

Recently, the fitness giant SoulCycle,  experienced black-lash after a member of its leadership planned to host a fundraising event for President Donald Trump’s campaign. As the president is widely seen as the embodiment of nationalism gone wrong, many young people raised their voices on social media against SoulCycle, claiming they would take action. A study compared sign-ups at various locations across the country before and after the news hit. There was an average decline of 12.8%, which is a very notable shift for a fitness company. 

Model Chrissy Teigen tweets for SoulCyle boycott.

On the other hand, if a brand is actively crusading for a cause that makes sense for them and improves some sector of society, they will generally see an influx of business. Urban Outfitters has come out with their own clothing rental service, Nuuly, for itself and its subsidiary brands (Free People and Anthropologie). Additionally, Bloomingdales has created their own rental segment of the company, My List, which allows customers to rent different pieces of clothing, also allowing them to purchase the product after the rental period. Like the others, RealReal, a luxury consignment company, promotes re-commerce and environmentally friendly methods of consumption. 

These brands are promoting a change in the fashion industry, and young people have and will take that into account when choosing where to spend their money. 

Luxury Retail’s Snootiness Needs to Go

(Gen Z alone will account for 40 percent of global consumers by 2020. (Mckinsey fashion thing)

Some luxury brands like Chanel and Louis Vuitton are showing resistance to the trends of rental and thrifting. They believe that these practices force their products to appear second-hand. But those who purchase them don’t find this to be true. They see it as giving something a second life. Wearing something with a rich history and remaking it as their own. It all depends on how you look at it, but what’s certain is that these luxury brands have an opportunity to expand their audience to the youth who crave originality and rarity. According to McKinsey’s State of Fashion Report, Gen Z will account  for 40 percent of global consumers by 2020.

Moreover, it doesn’t seem like high fashion has any choice but to change their businesses. Luxury stocks are down, and according to a Forbes article, Goldman Sachs and many other financial institutions are claiming that luxury sales growth is and will continue to slow. You can check this yourself and put actual numbers behind it. And the stock price might be a consequence of many different factors. You might want to look at annual sales of Gucci and LVMH as a proxy. 

Tiffany & Co Instagram Marketing, the example for all luxury brands

But digitization and joining in on the trends of tomorrow could help these brands maintain their dominance. Euromonitor claims that luxury sales grow online at a faster rate than physical retailing. Social media sites like Instagram have released features that allow users to purchase products  directly through the application, simply by clicking on an influencer or company’s post. Generation Z is relying on social media and the internet more, and the antiquated luxury brands must capitalize on this behavior to stay afloat. Tiffany & Co has used social media like no other luxury brand has. The company has truly taken advantage of social media marketing, and the luxury world must look to them as the example. At the conception of their business, the RealReal partnered with the infamous Kardashian family when the women released 200 pieces from their closets onto the consignment site. The traditional fashion landscape wouldn’t expect wealthy members of the elite to participate in thrifting behavior, but there the Kardashians were, supporting the brand. 

The RealReal’s stock is performing tremendously well. While it’s still in its early stages and slightly volatile, most fashion brands exhibit similar trends. The Nasdaq reports a relative strength index of 59.84, which means it’s solidly within the ideal 30-70. Every day, more and more Fashion companies are adding themselves to the lucrative field. Rent the Runway, one of the first luxury rental services, had so many orders they had to put their entire operation on hold to catch up. In the very near future, fast fashion will be obsolete and the industry will be sustainable and cost-effective. Gen Z has a message for you, and it’s to “Buy Less, Wear More.”

Sources