11.20.2009

"Ghost" of Christmas Past



As we make the turn into Thanksgiving, all thoughts (in the Retail world) turn to the all-important Holiday Shopping Season. This year economist and retailers agree, there will be a rise in spending and moderate sales gains are expected in nearly every category. 

This outlook was confirmed and strengthened by the announcement of October's Retail Sales figures. Headlines captured the enthusiasm thusly:

While many view a win as a win, there are too many factors stacking the deck against a winning Holiday Season for the Retail Sector, and a closer look at these indicators  is enough to tamp down optimism across the board.

Starting with those "robust" October sales figures, the number came in at 1.4% over last year, and a paltry 0.2% if Auto sales are excluded. That (0.2%) number in itself is enough to cause concern, but coupled with the knowledge of that 0.2% was a year-over-year increase against last year's record-breaking -2.4% October number, which was even worse than the post-9/11 terrorist attack October of 2001. Including the increase, this year's number does not even get back to the 2007 level. So once again we have a case of media trumpeting a "win" in a situation that is much less "win" than "tread."

Next, the unemployment number is sitting at an official 10.2% (unofficial 16.5%), with the under-employment number at 18.8%. These are the largest numbers on record since 1983. There is no way you can have nearly twenty percent of the country's work-force fighting to meet their basic living needs and expect to have retail growth. The "ghosting" effect is to large to overcome. 

"Ghosting" is when a trend, negative or positive, impacts one segment of the population and the demographic groups that abut the affected, though not currently feeling the similar effects, change their behavior in anticipation of being drawn into the fire. Examples of this can be seen in the build-up before the housing crash, where people decided to purchase houses that were a bit more expensive than they would normally buy because their neighbors and families were enjoying gains in their housing values, or in the almost rabid quest to be vaccinated against the H1N1 virus in communities that have not experienced an outbreak.

So the ghosting number on an 18.8% under-employment number would stand at, minimally, 25%, which is an insurmountable number to overcome for an entire sector. There can be (and will be) a few winners, but this precludes any hopes of a positive number coming out for the December figure.

Another problem facing retailers this holiday is credit.

Every retailer (smartly) took steps, late last year or early this year, to reduce the amount of risk associated with consumer credit defaults by closing the accounts of the bottom 4-13% of store credit-card holders. The step that retailers took that confused me was the "tightening" of credit on even their most credit-worthy card holders. Even the best customers saw the amount of available credit on existing accounts shrank by 18% on average. This would mean a person with a $2500 credit-card limit, saw their available credit limit reduced to $2100 and in some cases $1500. 

While the drive to reduce risk by retailers can be understood, as it's not what they do (they sell stuff), what could not have been foreseen was the dramatic pull-back by financial institutions, the major credit-card issuers, this Spring and Summer. The fed just released a report that September saw a 10.1% drop in available revolving credit. Further, the expectation is that there will be a dramatic drop in credit-card purchases this November and December, anywhere between 10.1 and 28.3%! The tightening in both markets at the same time could prove catastrophic. 

That leaves cash, in a country with a negative savings rate. I don't think so.


Last year I was able to correctly forecast retailers begrudgingly adopting the arcane and formerly frowned-upon practice of lay-away. While it was a boon for those few who embraced the practice last year, this year the practice has exploded:


So we are looking at a sluggish October closing out the last quarter, record unemployment, a drastic reduction in available credit than last year and retailers embracing layaway early as a way to allay their concerns. There are two other factors that loom just as large upon the retail scene this year.

The first is the lack of a consensus must-have product, not just overall, but multiple categories are missing that "it" item. The Nintendo Wii seems to have reached it's apogee last year. The season's most anticipated game, 'Modern Warfare,' was released earlier this month, and with $550 million in sales within the first 5 days of release (including a record $350 million on day one), I doubt there will be much left on the table for that title post-Thanksgiving. There is no toy for toddlers that appears to be a clear winner. The trend in women's clothing seems to be sweaters, but will that really be enough to carry apparel? In accessory world, designer handbags have gone from non-issue (last year) to a nuisance (this year), as retailers struggle to strike a balance on how much to pull back. The only bright spot in the department store world seems to be UGG boots and that trend is now 6 years old. How much more blood is left in that turnip?
 
Every major phone carrier launched their signature cellphones early, as every month they choose not to compete against Apple's iPhone, they were losing 700,000 potential customers. 
And, speaking of iPhone, Apple chose to launch the next generation of their iPhone, the 3GS, in summer as opposed to holiday, so they are depending on their redesigned line of notebook and desktop computers to power another strong holiday season. 

The lack of a strong item to drive business is troubling. Especially considering most every retailer in America made a conscience decision to reduce inventory levels this holiday season in an effort to protect margins by selling more at regular price.

Last year's margin blood bath was evident early, as additional 40% off new markdowns were available in early November and by the first week of December, 60-70% off was not an unusual encounter. Additionally, there was so much merchandise and discounting became so prevalent across the board, swollen holiday inventories clogged the merchants books through the entire first quarter of 2009 and into the beginning of the second. 

This drove many of the country's biggest retailers into single-digit stock price territory. leadership at these companies have vowed to take a stand on both inventory and discounting.

Let's hope they have found the right balance.
The last, and perhaps the greatest, difference between Holiday 2008 and Holiday 2009, is optimism.
This time last year, Americans were terrifically optimistic. The Presidential election had produced a young, seemingly dynamic, clear-minded and decisive leader in Barack Obama. The Congress had rushed through, first a Troubled Asset Recovery Plan bill aimed at reducing stress in the country's housing market, then passed an $800 billion Stimulus Package to jump-start the stagnant jobs market. The Federal reserve made moves to stabilize  the Financial markets and, the end of a polarizing and unpopular President's term in office, was within view.
We can honestly say now that we are nowhere near that level of optimism this year, and much of that lack of optimism can be traced back to the failure of nearly everything on the previous list. The President is much less popular than a year ago, the TARP funds were not used as promised and therefore did not have an impact on the housing situation, over 50% of the Stimulus remains unspent, the Fed has come under fire for it's secrecy in dealing with the largest banks, economists are saying 2011 for a turn around and this President has 3+ more years in office and there are no elections with which to blow off steam. Optimism is really nowhere to be found.
I think this is too much for the retail industry to overcome. I am looking at a 2-2.8% decrease in sales for the sector and more than a few stores folding there tents for good. I feel there has not been enough emphasis on changing practices and getting smarter about winning market share since the downturn last September. Stores have focused, and maniacally so, on not repeating last years mistakes. But last year is gone. This economy presents, as I have laid out, a new set of circumstances. Looking back rarely assists in moving forward.
They are entering this year's gunfight with a knife.
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