Will It Be a Merry (or Not) Christmas for Retail?
Many analysts view the retail industry as being fundamentally strong and see little indication consumers will drastically reign in spending during the upcoming holiday season.
Still, there are worrisome signs for retailing and the economy, such as rising household debt, steep energy prices and a downturn in the housing market. New job creation has been modest at best and many of the positions being created are at the lower end of the economic scale. The federal government’s debt remains at an unsustainably high level, with little resolve in Congress to reduce the spending on entitlement and defense programs considered necessary to get the budget under control.
Howard Davidowitz, chairman of Davidowitz & Associates, believes retailers are sending out subtle signals that their businesses and others may be in for a rough road ahead.
“Some of the largest retailers are saying their business isn’t doing so good. Let’s listen to the whispers before the roars,” he told CNNMoney.com.
“Wal-Mart says sales are slowing. Home Depot posted declining same-store sales last quarter. Target warned of weakening same-store sales. Gap has struggled with falling sales for a long time. This is a signal that we’re going to see some softness this holiday season,” he added.
Craig Johnson, president of retail consulting group Customer Growth Partners, took a different view.
“I hesitate to draw a retail-wide conclusion just from looking at Wal-Mart, Home Depot and Gap,” he said.
“Each of these companies has their individual challenges. Gap has struggled for several years now with its merchandise and advertising. It’ll be bogus for them to blame their problems on the economy.”
Janet Hoffman, managing partner at Accenture, is another who doesn’t see the same scenario developing as suggested by Mr. Davidowitz.
A recent study by Accenture found consumers were spending the same or more for back-to-school shopping as they did last year. Based on historical performance, the same should hold true for the Christmas holiday shopping season.
“Retailing overall isn’t in trouble. However this year we will see a clear segmentation of winners and losers,” she said.
Mr. Johnson holds to a similar view. “Retailing has been very robust for three years now. So clearly there’ll be some softening on the margins,” he said. “The good retailers will continue to thrive even if consumer spending slows.”
Discussion Questions: What factors (energy prices,
household debt, housing market, jobs, federal debt, etc.) do you believe will
have the most profound effect on consumer spending over the next year? What
will be the net effect on retail industry performance?
This is somewhat like a weather report in New England or going to the track. Some of us will be right; many of us wrong; but will it be because of luck or our knowledge (of weather, horses, retailing)?
In the small stores that we work with, we are always speaking about how there are available reasons each day to fail and always things to blame but, on the same token, there are always ways for the smart, passionate retailers to win as well.
If you find the best products and present them in the most exciting way to target customers that you properly communicate to, you are going to win in all but the worst circumstances (that are outside your control) such as that 20 inch snow storm in New England that the weatherperson had said was going to miss your town, but didn’t.
The factors polled are somewhat uncontrollable and will certainly have an affect on the retail industry. However, there is one that is not polled but worthy of mention: competitive brand differentiation.
Consumers have more choices–and methods–to buy product this holiday season then ever. Where (and how) they spend will be based on factors such as brand allegiance, convenience, shopping experience, product selection, etc. If you dig into any retailer’s consumer research today, the two themes that come through most often are “make it easy for me” and “value my business.” Look around…how many brands are doing both well?
Big Boxes are slowly creeping into each other’s niche categories. They expect to keep ramping up customer spending, yet, other than a few retailer leaders we are all familiar with, aren’t doing that much to make their brands and stores a differentiated, valued experience.
It seems that this is a bigger issue than Holiday. Rather, it’s a long-term health issue. Just my two cents from the trenches, but it certainly makes sense to attach ourselves to what we can control and do all that we can to evolve the retail experience to support the two things customers want most. If done right, customer brand allegiance will assure continued health–through all seasons and competitive threats.
Christmas will be merry for the smart retailers. I don’t believe any of those “sky is falling” factors will have any meaningful effect on holiday shopping. I’m sure retailers who have poor holiday sales results will be the first to blame energy prices, household debt, etc for their failure to produce results.
There might be mixed results for retailers. Obviously, factors such as energy prices and the overall economy will have an impact. The mixed results for a retailer will also be influenced by the demographics of their shoppers. Retailers who cater to lower income families will have a tougher time increasing same store sales than those retailers catering to the upper income buyers. We are already seeing that at the Wal-Mart stores. To really be successful at holiday time this year, retailers need to be smart. They will need to find ways to overcome the worrisome signs that are out there.
People spend when they are feeling good and they spend when they are feeling bad. The thing we should be concerned about are the wild cards — a terrorist attack on a mall or malls; further disruption of the oil pipelines, etc. Also, there are social and psychological factors to consider. It’s August and we’ve been in Iraq for about 41 months. It took us about 45 months to win World War II. So…given all the hype associated with the midterm elections, we may have a doom and gloom zeitgeist spread across the land. My bet? It’ll still be a good holiday season.
Fuel prices alone have taken an additional 1% out of consumer’s disposable income (real) so far this year, but disposable income is still up around 3% vs. last year. There are a lot of counter-balancing forces, but from this vantage point, I’d call for a net 6-7% (nominal) growth rate in holiday shopping vs. last year. Last year, the gain was closer to 9% over 2004, so there’s your “slowing growth” prediction.
Investors try to look ahead. The Dow Jones US Retail Index is up 3% over the past 5 days, compared to 2% for the overall Dow and the S+P. Obviously, much can happen between today and Christmas. Let’s see if gas prices go to $4 or what happens to the stock market after the November election or the housing bubble gets more headlines or if a hurricane wrecks the East Coast. And all those gift cards mean Christmas doesn’t end until February. Will Christmas markdowns start the day after Halloween or before?
Another interesting stat indicates that consumers are likely to keep the cash flowing this holiday season. Personal savings in the National Income and Product Accounts (NIPA) reached an all time low in 2005 and actually dipped below zero (-.3%). This supports the conclusion that the general public is acquiring more debt, but the more interesting point is the trend. This stat has been generally declining since the early 1980’s. One could conclude that the spending habit is strong enough to weather short term assaults on personal finances.
Also, with online holiday sales growing about 30% annual since 2002, Internet retailing should benefit from any frugalities in reaction to higher energy prices. Gold and silver products should see sharp declines which should release some spending for other gift categories. Conclusion: spending will shift but not slow down.
How much of a pinch are gasoline, heating, and cooling costs taking out of consumers’ disposable income? How high is their current debt? Of course the desire to purchase gifts will not decrease but the amount of money being spent may decrease if consumers feel pinched, stressed, and uncertain about the future.
We had this subject a year ago. And what were the Holiday Season results? Pretty good for most retailers, and related companies.
This year, gas prices pops up, not to mention the forgotten Iraq mess, as possible barriers for consumer not spending.
Well, the consumers have again proven most economists and financial gurus wrong. Shoppers are still spending at a decent clip, given increased gas prices, the Middle East mess, and Feds tightening the cost of credit and lending.
The big three factors that may sway consumers from the Holiday Season could be more closel tied to such issues as: 1) inflation/higher Fed rates, 2)lost jobs, and 3) the war (a more psychological point than the first two).
Let me throw in another key problem that has more impact on the year’s retail sales than the Holiday Season: continued lost pension programs that are ‘rattling the cages’ of many Baby Boomers! Hmmmmmmmmmmmmmm
Wal-Mart, Gap and etc’s views are not 100% right. They have their own reasoning. This Christmas is going to be good compared with last year’s business.
Whatever energy or gasoline price increases, it is not going to stop people from spending. Christmas comes once a year and people have problems throughout the year. People’s attitude is let’s have a great Christmas.