Uneasy Shoppers Mean Big Changes in Retailing Now and in the Foreseeable Future

Implications: With consumers more uncertain than ever about just how much, what, and where they will buy back-to-school products, middle market retailers need to rethink their offer now and in the future.  Here's why

Analysis: Just what July retail sales growth will be is any bodies guess.  Overall June’s sales figures were better than expected.  But most of the department store sales growth came from Wal-Mart.  Excluding their gain, June sales were significantly below the core inflation rate.  That means average department store unit sales declined for June as average sales prices lagged inflation driven price increases.  

That’s bad performance regardless of the spin pundits put on it, plain and simple. Whether July will be any better will depend on strength of back-to-school sales.  However, unlike in years past were there was a strong expectation of solid sales growth for B-T-S products such as branded apparel, computers, and sundry  school items, retailers are less optimistic this year.   

The fact is consumers are sending mixed messages about their back-to-school shopping plans.  One characteristically optimistic survey by the National Retail Federation predicted B-T-S sales would increase about a 5.5% this year.  In this instance 8,000 shoppers said they would spend about $594 this year versus about $563 last year, with electronics sales growing the most.   When compared to June sales, that projected growth is about 34% higher than the average department store increase of 4.3% in June.  But it is a whopping 190% more than June’s retail department store’s sales gain without Wal-Mart’s numbers.   

However, other research isn’t so optimistic.  One survey by Deloitte LLP “found 71% of consumers planned to spend almost $100 on average less on back-to-school items this year”.  Using NRF averages and combining the two surveys, the remaining 29% of back-to-school shoppers will have to spend an average of $912 per person or 62% higher than last year’s average sale to achieve the NRF’s projected B-T-S average sale numbers.   Regrettably, numbers are all over the place.  It remains to be seen if retailers really have a handle on just where sales are going now.  Last years sales mix, units sold, and average sale prices are virtually meaningless for forecasting purposes.  That means demand forecasting models are generating random numbers as much as anything else.  That’s especially true for slow turn, higher priced products typical of luxury items such as national name brand gifts, jewelry, and watches.  

If the NRF numbers are correct and Wal-Mart’s growth rate continues, July B-T-S sales won’t be the big  bounce for non-discount department stores this year as in the past.  That leaves August for retailers like J.C. Penney and Macys to catch up.  But that’s problematic too.  In fact, it’s hard to write a creditable storey why discounters like Target and Wal-Mart won’t run the table on traditional department stores during the fourth quarter this year and in the foreseeable future, unless middle market retailers change.    

For 2009 mid-market retailers will need to rethink their entire offer if the macroeconomics dosn't change dramatically.  By that I don’t mean that price increases flatten out, but decline significantly  It’s a mistake for retailers to think that the demand will rebound and buying behavior return to pre-slowdown patterns if transportation, food, utility, health care, and shelter costs remain at their current levels long enough.  Under that scenario, demand will be stagnant as most of consumer’s disposable income will continue to be used for necessities.  That’s even more true if wage growth remains flat and average income declines as the population continues to grow.    

Some analysts will disagree.  Their argument is that disposable income will increase as alternative energy sources come online and consumers switch to more fuel efficient cars.  But alternative energy isn’t cheaper, only less subject to foreign manipulation.  Moreover, average gasoline engine efficiency would have to double to reduce net gasoline expenditures to 2005 levels.  That’s probably not going happen for decades, if ever.  Regardless, whatever the savings, much of it will be used to offset increased technology costs and loses from the disposal of existing trucks and SUV at depressed market prices.   

Another reason retailers need to rethinking their product offer is it's uncertain politicians and special interest groups will ever allow energy prices to revert to their historic levels.  If true, consumers will continue to be faced with higher costs because of new energy taxes, even if commodity prices decline.  In effect, this years back-to-school sales, less the bump from rebate checks, may mark the norm for the future, not the exception and retailers might as well get a head of the curve now.