Consumer Rebates Unlikely to Improve Sales Growth!

Implications: Someone once said, “if you can’t measure it, you can’t improve it”.  That’s today’s paradox today.  The numbers don’t reflect reality.  But we chose to believe the them anyway and fashion policy accordingly, making conditions worse for the consumer. The consumer rebate won't likely improve retail sales.  Here's why.

Analysis: The first rebate checks from the stimulus package approved by Congress will begin hitting eligible households in late May.  Depending on household composition, many individuals and families will have up to $1,200 of extra money in their pockets.  The question for retailers is: Will the extra money make a difference?  

According to an early estimate by the National Retail Federation, consumers will spend about 25% or about $43 billion on new purchases.  The remaining $125 billion will be used to pay down debt and offset increased cost of living expenses like food and gasoline.  However, a lot has changed since Congress announced the rebate in February.  For one thing, prices have continued to rise.  For instance, gasoline prices are now significantly above $3.00/gallon.  One analyst estimated that higher fuel prices would cost the average consumer an extra $400/year.  Food has also increased in prices.  Driven in part by higher corn and grain costs, staples in grocery stores have increased by about 20% and are still rising.  Granted, Americans only spend about 10% of their income on food, but a 20 % increase in food prices still means about an extra $800/year out of pocket.  

Inflationary price increases for these two categories alone will absorb most of the rebate and they aren’t the only things increasing in price.  Health care costs are expected to increase double digit in 2008, while heating and utility costs will probably increase by at least as much as gasoline prices.  The fact is, after the rebate, most US families will have a significant decrease in net cash available for discretionary purchases.  It is growth in disposable income that has been responsible for much of retails sales growth in the last two decades.  Now with income growth almost flat, credit markets eviscerated, and unemployment rising, more and more consumers won’t be able to achieve last year’s cash flow, much less, keep up with rising inflation.  Just how bad things are for the average consumer? 

It’s hard to quantify because of changes the BLS has made to how the consumer price index is calculated and how unemployment is reported.  That makes comparable measurement almost impossible with out significant adjustments for changes in methodology.  I won’t digress in to the history of the changes in these economic measures.  For anyone interested, read “Lies, Damn Lies and the Unemployment Rate”. The point is, if you use the standard for calculating the CPI in 1990, the inflation rate is a whopping 7% today and has been that order of magnitude for most of the last 8 years.  Factor that rate of inflation into any analysis of the consumers spending and it becomes evident that Middle America’s buying power has been significantly declining for years.  Off set by easy consumer credit and home equity loans, middle class consumers have tried to maintain their standard of living, while older purchasers on a fixed income or social security have had their incomes effectively cut by 40%.

This suggests that Congresses’ stimulus package isn’t likely to make much of a difference to retailers specifically or to the economy in general.  In fact, if true, consumers aren’t going to be the big driver of economic growth in the future, at least not in the first quarter of the 21st century.  That’s, unless the world’s largest free market can get its financial house in order. 

That probably starts with getting the numbers right which can’t happen until business executives, financial managers, and the academic community agrees that political agencies can’t be trusted to report both good and bad news accurately or in a timely manner without nonpartisan oversight.  Someone once said, “if you can’t measure it, you can’t improve it”.  That’s today’s paradox today.  The numbers don’t reflect the reality.  But we chose to believe the numbers anyway and conditions keep getting worse for the consumer. That's bad news for retailers.