Full Shelves, Emptier Wallets Worry Retailers

Nov. 21, 2007 — -- This holiday season, the nation's retailers face some formidable obstacles to getting Americans in the mood to shop.

A slump in the housing market, tighter lending standards, higher energy and food costs all combined to form the proverbial perfect storm in consumers' pocketbooks, putting them in a tight-fisted frame of mind just as the holiday shopping season starts.

Added to that, unseasonably warm temperatures this fall kept shoppers away from the mall where retailers were selling gloves, scarves and sweaters.

And if all that wasn't enough, analysts say that for this season there are no must-have items, especially when it comes to apparel.

"In 10 years of doing this, I've never seen anything like it," said Deb Weinswig, retail analyst with Citigroup Investment Research.

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With the lack of a TMX Elmo-style toy, experts predict this holiday, like last year, will be another "digital Christmas" as people clamor for even lower-priced flat-screen televisions and iPods.

The most wonderful time of the year could turn into the most worrisome.

"I think it is going to be a tough year," said Bear Stearns' retail analyst Christine Augustine

It could get worse. The ABC News/Washington Post weekly Consumer Comfort Index found Tuesday that 68 percent of Americans believe the national economy is getting worse. This represents the highest level of pessimism about the U.S. economy since 1990, right before the economy fell into a recession.

Good, But Not Great Sales

For the holiday season, the National Retail Federation forecasts that shoppers will spend $474.5 billion. This includes spending on everything from sweaters to electronics to gasoline to food during the months of November and December.

While this amount represents an increase of 4 percent from last year, it's a slower rate of growth compared with previous years.

"Shoppers will be a little more conservative with their spending as they become aware of the softness in the economy," said Tracy Mullin, CEO of the retail trade association.

On average, the NRF predicts shoppers will spend $923 during the holiday season. The International Council of Shopping Centers estimates the amount will come in a bit more, at $1,116 this season.

But the dour economic mood this season could lead shoppers to "trade down" and shop at a lower priced retailer. For example, a Nordstrom's regular might do more shopping at Macy's. A Macy's shopper could look for gifts at J.C. Penney.

"Our findings suggest that consumers are tightening their wallets this year more so than last year," said Tod Marks, senior editor with Consumer Reports.

Discount retailers like Wal-Mart and Target could benefit from these tougher economic times. The NRF said its surveys show 68 percent of shoppers plan to shop at lower-priced merchandisers.

"The consumer will be looking for value, and lower-income households will be very cautious in their spending," Michael Niemira, chief economist with the ICSC, said in a press release.

Tired of Jingle Bells Already?

Worried, many retailers kicked off Christmas even earlier. Leading the pack was Wal-Mart.

The nation's largest retailer started holiday promotions earlier this year, hoping to prevent a repeat of its dismal sales last year when it tried to appeal to a more upscale shopper. On Oct. 1, it announced lower prices on select toys. Then on Oct. 18, it cut prices on 15,000 items, a 20 percent increase in the number of items cut the previous year. The day after Halloween, it offered "Black Friday" prices on five items to drive customers to the store.

But Christmas in October may not have made a difference.

"Retailers are looking to start the season earlier, but consumers just aren't ready," said Marshal Cohen, chief industry retail analyst with the NPD Group. "The hesitation comes in because there isn't that one must-have item coupled with the fact that consumers are conditioned to expect deeper discounts as it gets later in the season."

With 32 days between Thanksgiving and Dec. 25, that just gives shoppers more time to play a game of "chicken" with retailers on prices. As Christmas falls on a Tuesday this year, retailers hope a full extra weekend of shopping will lead to monster sales results, and shoppers hope that if they wait till then, there will be bigger price cuts.

"It's going to be a great year for consumers," said Augustine at Bear Stearns. "There are going to be excellent deals, the best deals in five years, even in electronics."

If You Offer It, Will They Come?

What worries many store managers: Where are the shoppers?

In the past 12 months, traffic has been down compared to the previous year for every month except once, according to ShopperTrak, a Chicago-based group that tracks mall foot traffic. For November and December, the group estimates traffic will be down 2.5 percent compared with last year, which was off 1.7 percent from the previous year.

What's to blame for disappearing shoppers? Higher gasoline prices, for one thing.

"There has been a lot of pressure with gas prices where they [shoppers] are trying to organize their trips and spending less cash on gas," explained ShopperTrak's co-founder Bill Martin. While his group predicts a 3.6 percent increase in sales this holiday, the worry, he said, is that if traffic trends continue to drop, so will sales.

As result, retail watchers predict a slew of promotions and advertising this holiday just to get shoppers to go to the mall.

As gas prices rise, one possible beneficiary, is online businesses. Forrester Research, a technology research firm, estimates a 21 percent increase in online gift buying, pushing total sales up to $33 billion. Consumer Reports estimates that 65 percent of shoppers will do some shopping online, many lured by the offers of free shipping.