More Bad New For Retail Investors?

Implications: While early first quarter earnings have been better than expected and liquidity has improved in the credit markets, there is no sustainable consumer spending rebound insight.  That's bad news for retailers and investors alike. 

Analysis: Economists credit consumer spending for driving about two-thirds of US GDP for the better part of the last century.  However, that may be changing.  According to the New York Times, consumer confidence fell to a 26 year low in April as home prices continued to fall and gas, food, utility, and medical costs reached historically high levels.  All while record numbers of new home owners were losing their homes, unemployment increased and average income continued to decline.  

Optimists describe consumer spending as being ‘pinched’, but they are in denial.  The reality is most low to mid-market buyers are being ‘crushed” by escalating prices for basic, everyday goods and services such as food transportation, and shelter.  One recent CNN survey indicated 68% of consumers have had to change their eating habits and modify their lifestyle to cope with rising prices. Another poll showed that families with annual incomes under $50,000 were especially hard hit by higher gas and energy prices.  With median incomes of about $48,000, more than half of Americas ‘s 113 million households aren’t just cutting back, but trying to survive.  

The government would have consumers believe inflation is only 3.2%, but of course that’s a political illusion, not an economic fact.  That magnitude of inflation couldn’t cause all that pain.  However, if you measure inflation using the same methodology used in 1990, it’s at least twice the government’s published number.  Nonetheless, factor either number into the Commerce Departments most recent figures for growth in GDP and the domestic economy declined between (2.6%) and (5.4%) in constant dollars during the first quarter.  Using the same calculation, it isn’t surprisingly GDP also decreased in constant dollars during the fourth quarter of 2007.  That’s a recession by any practical standard.  

Today, retailers can follow one of two strategies.  First, cut back and maintain the status quo.  Second, aggressively steal the competition’s market share.  Short term, many retailers have chosen the former.  In part, their reasoning is business will return to normal in six to nine months.  Some analysts say the economy could rebound as early as the fourth quarter of 2008.  But, it remains to be seen if the weakness in fundamental economic variables will change that quickly.  For instance, the Fed’s most recent reduction in interest rates will keep the dollar low, despite its latest improvement.   Similarly, in spite of the G7’s promise to support the dollar, most European finance ministers are keeping overseas interest rates high; fearing higher inflation in their own countries.  

If the recession continues into 2009, retailers will have to look for growth by managing market share.  That’s when one retailer targets another competitor with the intention of stealing its business for a particular product or customer segment.  It sounds a little pedantic, but most retailers act to maintain competitive parity rather seeking a specific advantage over their competition. One reason is the process of matching off last years sales keeps planners focused internally.  Market share management requires merchandise strategist look externally for new business.  For instance, if Sears dominates the tread mill business, a competitor could develop a specific plan to steal that customer.  There are other strategies retailers could choose to grow such as expansion overseas.  But that kind of approach probably requires improved growth domestically.    

Regrettably, just how quickly that could happen isn’t clear. Consumers aren’t as cheerful about the economy as some investors are as the second quarter begins.  While traders point to better than expected first quarter earning reports and improving liquidity in the credit markets, all that cheer may be short lived if policy makers can’t reduce the rising cost burden on consumers.   

One critical problem is policy makers belief that one economic theory fits all situations.  Assuming, there is a salient and coherent economic strategy  at work and that’s a big assumption, its should be clear by now that lowering interest rates alone won’t reverse our economic decline, much less return the country to growth.  What is needed is massive investment by the government to renew our old infrastructure and a concurrent investment by private enterprise to leverage that new asset base to provide new jobs. Sadly, that’s not likely to happen and that’s bad news for retailers.