Many Happy Returns

I was reading Ray A. Smith's article (U.S. Retailers to Report Grim Results)  on the Wall Street Journal website regarding the much anticipated December retail numbers due out Thursday and something sparked a memory of an unusual experience I had yesterday. 

Allow me to share and expand.

I went to my neighborhood Costco (a retailer who's praises I have sung on numerous occasions) yesterday and, as I approached the doors, saw something I have never witnessed before, a line to get in.

Mind you, yesterday's weather in Chicago was in the upper 20's, maybe 30, maybe.

Yet and still there were about 8-12 people standing in an orderly line outside the store. As I moved closer and closer I noticed the line extended some ways inside the store as well.  While walking and searching my wallet for the always misplaced membership card required to enter, I started wondering if the few items I needed was really worth standing in freezing weather.

Just as I resigned myself to the idea, I noticed the line was not to get inside the store, but an extension of the "Returns" line that was now, literally, winding outside the store.

The sight of that line and the thought, sparked by Mr. Smith's article, drove home a point I had not considered, how tough January business is in the retailing business.

This January, much like this December, is sure to be perhaps the worst month for retailing in, excusing the hyperbole, modern history.

Three things are needed to make a Perfect Storm in retailing:

• First, an uncertain economy. A bad economy is one thing, but "better the devil you know", they say. In bad economy, people have already made adjustments and pared down their spending habits. In uncertain economy, which is really a bad economy where people refuse to accept that reality, people attempt to maintain their lifestyles regardless of how difficult the reality of doing so is. This leads to large spending expenditures, followed by mass returns, pawning and borrowing. Sound familiar?

• Secondly, you need swollen inventories. Swollen inventories take up room needed to show new goods, inhibit buying teams from investing in newer, more relevant merchandise and forestall payments to vendors, banks and other creditors. If you consider we just came through the worst holiday season on record, and 4th quarter is when retail inventories swell to their highest levels, inventories are now HUGE, everywhere. This is why you are seeing, "Buy 1 Get 2 Free" signs in place of, "66% Off" signs popping up in stores. They seem to be the same thing,and while the latter gives customers merchandise for 1/3 the price, the former gives customers merchandise at 1/3 the price, but additionally removes two more items from the store's inventory. Inventory is a major problem at virtually every retailer right now.

• Lastly, you need reduced consumer foot-traffic. This point is not as obvious as it seems. Of course January is going to be infinitely slower than pre-Holiday business. However this January is sure to be slower than most because of something I wrote about in November, the greatly reduced number of gift cards sold this past Holiday Season. Gift cards ensure future business, period. When customers decided to steer clear from purchasing gift cards over the holidays, the message was clear, "We are not sure if we will be back, or if you we will be here when we do." The combination of loaded gift cards and huge discounts would have made for a festive January in retailing, instead we have the opposite effect.
  

Coupling these three factors with record rates of merchandise returns brings the problems many retailers face more clearly into focus.

A Perfect Storm has descended on the entire retail landscape and will have a disastrous impact on this, the last fiscal month of the calendar year. Look for Thursday's numbers to be bad, and this month's numbers to only accelerate the inevitable thinning of the retail herd.