Outlook Cautious for Retailers This Year
Jan. 15, 2002 -- Retailers may have done better than expected in December's critical shopping season, but the industry is still expected to face quite a few challenges this year.
Many economists and industry watchers say retailers will have to walk a balancing act between promotions and exciting new products to get consumers interested in buying this year.
December retail sales were $295.1 billion, the U.S. Department of Commerce reported today. That represents a smaller-than-expected drop of 0.1 percent from November, and a rise of 4.1 percent from December of 2000. But some analysts attribute the robust sales to the aggressive promotions and discounts that many stores offered to lure holiday shoppers into their stores.
And now that many consumers have filled their closets with bargains and bought their zero-percent-financed automobiles, some analysts say promotions may not be enough to stir consumer excitement in many stores this year. Instead, retailers are going to have to offer unique products, good value and even some entertainment to get shoppers to open up their wallets.
"I don't think sales are going to work any more," Walter Loeb, president of retail consulting firm Loeb Associates, said at the National Retail Federation's annual conference in New York.
"The consumer is still worried," said Loeb, who doesn't expect a turnaround in the industry until later this year.
Cautious Optimism
The National Retail Federation is optimistic that consumers will indeed be trolling for goods this year, with low interest rates and inflation, falling energy prices, mortgage refinancings and a steady stock market contributing to confidence.
The NRF is forecasting a 3.7 percent rise in sales at general merchandise, apparel, home furnishing and electronics this year from 2.2 percent in 2001 and is expecting the economy to recover in the first quarter of 2002.
Still, other economists say a turnaround may not be so imminent.
"It would be wrong to prematurely be celebrating the onset of a recovery," said Stephen Roach, chief economist at Morgan Stanley.
Roach says consumers' debt load, steadily rising unemployment rate and a general nervousness over the state of the economy will make many consumers reluctant to spend this year. He says the current recession has more to do with the purging of excesses of the late '90s boom than it does with the terrorist attacks of Sept. 11, and he expects weak consumer demand in the first quarter.
"Consumers are facing some pretty uncomfortable fundamentals right now," he said.
Luxury Is Out
Not surprisingly, the stores that will be most hard-pressed to attract customers will be luxury retailers, which will naturally struggle with consumers' reluctance to spend, and department stores, which have been suffering from a lack of brand strategy and tough competition, says Angela Selden, managing partner, managing partner for consulting firm Accenture's North American retail practice.
"The consumer has changed. He's downsized. He's avoided any kind of luxury," agreed Loeb.
High-end jeweler Tiffany & Co.'s holiday sales were down 2 percent, but the company also noted that its fourth-quarter and full-year sales would be at the upper end of its forecast because of cost controls and changes in its product mix.
Department stores, which have been hit by stiff competition from discount chains, must also carve out a niche this year in order to woo customers. Terry Lundgren, president and chief merchandising officer at Federated Department Stores, says the company will focus on offering unique products to differentiate itself from its competitors.
"If we all have the same merchandise, the customer is going to choose on one element alone: price," said Lundgren, who expects last year's trend for familiar, comfortable clothes to emerge into a craving for more fashionable items this year.
Problems Brewing
But all is not well even among the discounters and chain stores. December sales for Gap, the parent company of Banana Republic, Gap and Old Navy, were down 11 percent, and rating agency Moody's Investors Service cut the retailer's bond ratings for the third time in less than a year to one notch above junk status.
Kmart has also suffered from credit rating downgrades from both Moody's and Standard & Poor's and may even be headed for bankruptcy. That is one of the options the discounter's board members are discussing at their board meeting today.
"Bottom line is that we're in an environment in the U.S. where we have too much retail space, and a purging of unproductive space is a healthy, good thing for, particularly for players that remain standing, such as a Wal-Mart and a Target," said Salomon Smith Barney retail analyst Richard Church.
Kmart may not be alone this year. Loeb says he expects companies that don't offer consumers compelling value to fall by the wayside this year. Mergers and acquisitions could also be on the horizon for weaker players struggling to grow.
"I am concerned about bankruptcies," said Loeb. "Companies without focus are likely to have problems."
That's Entertainment
What will be successful remains to be seen, but the NRF says it expects consumers to continue to favor merchandise for the home and shy away from items that seem frivolous.
"Home furnishings will in fact benefit from this staying-at-home mentality of our customers," said Roger Farah, president and chief operating officer at Polo Ralph Lauren.
Another trend expected to woo shoppers is entertainment. Loeb says stores that try to entertain and inform customers with demonstrations like cooking classes or just outright spectacle — such as Toys 'R Us new store in New York's Times Square, which features a Ferris wheel and a life-sized Barbie dollhouse — will attract customers.
"Here's a store that was very mature and maybe a little bit dowdy," said Loeb. "They're putting excitement and theatre as a priority. It creates a new kind of opportunity."