By Kyle Shen

The slowdown in consumer spending cut many retail stocks in half in 2008, but retailers have seen a surprising rally recently. Many of the worst-performing stocks of 2008 — apparel chains, department stores and Internet retail firms — have done best in the last several weeks.

(See “Stocks: Have Retailers Hit Bottom Yet?” And check out BW’s Michael Mandel’s take on yesterday’s report that March retail sales fell 1.1%.)

For stockpickers, retail poses a dilemma: Based on recent data, there’s no simple way to tell where consumer spending is headed. So, with the current outlook so uncertain, one possible strategy for retail investors is to begin thinking very long term.

A recent report by PricewaterhouseCoopers and TNS Retail Forward examines major changes that could hit the retail industry between now and 2015.

The aging of the Baby Boom generation and coming of age of Generation Y will cause a change in consumer demand and spending habits, the report says. Retail stores that are able to adapt to the new consumer demographics will thrive while those unable to adjust will fail.

To survive in the next decade, retailers must adapt to a number of changing factors: 1. The new generation of consumers contains a more tech-savvy and more diverse group that holds different values than its parents. 2. The one-size-fits-all approach of the mass chain store format will not be viable. Stores able to respond to individual tastes will become dominant. 3. “The belief that bigger is better will break down—aggregation of small will be the new big,” says the report. The new consumer will be more intent on quality than quantity. Mass production models will not succeed. 4. Ability to keep close contact with customers through mobile devices will be important to maintain quality of service and product as well as receive customer feedback. 5. The still large group of Baby Boomers will remain active in the economy. However, their demands will shift from goods to service and healthcare. 6. Retailers may also expand in developing economies such as India and China. These growing markets have much more room to expand along traditional modes than developed nations. However, American companies will be “late to the game,” says the report, and will need to compete with both European and local retailers.

Fast and quality service and the ability to attune to individual tastes will be vital. Retailers must completely alter their business models. The report says:

Retailing will become an industry that realizes, more and more, that it must tailor its offerings to select customers, as opposed to the mass appeal approach of the 1980s, in order to win over customers and foster greater customer loyalty.

That means reacting more quickly to consumer trends. Realizing a trend as it happens will be too late, the report argues.

Kyle Shen is an intern in BusinessWeek’s Chicago bureau.

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