Spanish merchants are in luck, because all signs indicate that during this Christmas season, Santa Claus and the festival of the Three Kings – a holiday that is celebrated in Spain and in some Latin American countries on January 6 – are going to bring them a good present. The general consensus is that this shopping season is going to be more successful than the 2002 season, which suffered the after-effect of economic uncertainty. However, the absence of any one blockbuster product eliminates the possibility of extraordinary sales growth. In addition, unlike other European countries, electronic commerce has yet to take off in Spain. And in Latin America, how are spirits?
Several reasons invite optimism: Solid economic growth, relative economic and political stability; continued tax cuts, which have put more money in the hands of consumers; increased confidence among both managers and consumers, and a longer Christmas season than usual.
But at the same time, some factors could restrain consumption: The high indebtedness of Spanish families; job cuts that have gone into effect in the past weeks; extraordinary events such as terrorist acts; and the climate, which could either encourage or discourage consumers to visit businesses.
According to Lluis Renart, a professor of business management at IESE, the high price of housing – which has doubled during the past seven years – could lead to two trends among Spanish consumers. “On the one hand, there is the wealth effect. Due to the revaluation of real estate, families feel richer despite the fact that they continue to live in their houses. This gives them a feeling of greater comfort and confidence.” However, the high rate of indebtedness of families stemming from high mortgage costs can produce the opposite effect. “It is possible that consumers feel restricted in their disposable income for spending,” adds Renart.
Unemployment – which is about 11.3% – is another variable that could influence the level of consumption. Nothing indicates that unemployment is going to increase,” Renart says. “There have been some job cuts, as in the case of Printer Industria Grafica, an affiliate of the German group Bertelsmann, or the Antena 3 television chain. There are some companies that have relocated their activities from Spain to countries in Eastern Europe. Nevertheless, there is a general consensus that those are isolated cases.
“In general, I believe that this Christmas season is going to be happy and that consumers will face it with optimism. There is a clear economic consensus that next year is going to be better than 2003, and the public is aware of that.”
According to INE, Spain’s national institute of statistics, the Spanish economy grew by 2.4% during the third quarter, largely because of private-sector consumption and investment. This growth rate is the highest since the fourth quarter of 2001, and it is twice the average rate among countries in the euro zone. According to the autumn report of the European Commission, this trend is going to continue and the Spanish GDP is going to grow by about 2.9% in 2004. That figure is much higher than the 1.8% of the euro zone.
Adding to these promising economic prospects is a recovery of confidence in 2004 among managers and consumers, after a year notable for a difficult situation on the global geopolitical scene and a prolonged decline in the stock exchanges. Pedro Solbes, commissioner of economic affairs for the European Union, confirmed that “the worst has passed and an improvement in indices of business confidence is obvious, as well as a slow but steady recovery in the confidence of consumers.”
“If we guide ourselves by macroeconomic indicators, this Christmas season should be a positive one for Spanish business,” states Antonio Díaz Morales, professor of marketing at the IE. The attitude of consumers is another key factor. “People think that they can … spend more or even ask for a personal loan, and not notice it too much thanks to the fact that interest rates are very low. Christmas is a suitable time to show other people how well things are going for you, [to show] your personal success.”
A Long, Long Christmas Season
It’s worth calling attention to the fact that the Christmas season has been starting up earlier and earlier. Nowadays the season includes November and it goes on until the second week of January, after the Three Kings holiday. As Diaz explains, “A Christmas attitude has been created in order to sell more products, even if I am not sure that consumers will spend more money. What happens is that spending is divided along the entire length of the year.” This has the effect of making sales less seasonal. “The Christmas season advances to November and the discount sales, which had begun during the second week of January, now coincide in some cases with the [Christmas] holiday.”
The Spanish Confederation of Commerce, which represents small and midsize business, also views this season with optimism. It predicts that 30% of the sector will increase its sales by between 6% and 7%. Those industries that will benefit the most include the food sector – above all, nougats, cava (a sparkling white wine), fish and seafood. Others expected to do well are electronics, toys (which, during this period bill between 70% and 75% of their annual volume), perfumes, gifts and accessories.
The toy sector is very seasonal and it stakes the outcome of its earnings reports on the last six to eight weeks of the year. “Spain is one of the countries that suffer more from this seasonality, as a result of the festivities of the Three Kings,” says José Antonio Pastor, director of marketing technology and communications at the Spanish association of toy manufacturers (AEFJ), which views this season with optimism because “the domestic market grew by 9% until September. That is an indicator that the Christmas season will provide very good results if these figures are maintained.”
The AEFJ hopes that Spain’s domestic market will compensate for the 19% drop suffered in [Spanish toy] exports this year. The causes of this drop can be found in the economic problems some European countries are undergoing, including Germany and France. Added to this are problems caused by the fall of the dollar with respect to the euro, because 70% of Spain’s toy exports have the European Union as their destination.
Another problem is that this sector, which is very subject to fashion, isn’t counting on any stellar product for this holiday season. According to Pastor, “This doesn’t mean that such a product cannot appear. Who imagined the success of the scooter?” That happened two holiday seasons back. In his opinion, those toys that will enjoy the most success this year will be classics of early childhood – toys targeted at infants and preschool children and, above all, dolls.
Last holiday season, the toy market handled 13.9 million units and some 324 million euros in business was transacted within the superstore segment and large specialized businesses, according to data from Nielsen, the consulting firm. The volume of units sold grew by 2% compared with the previous period, while total sales (measured in euros) grew by 5.5% thanks to the attractiveness of higher-priced products.
On the other hand, Díaz explains that there is a close relationship between the large film companies and toymakers. Notable examples include Warner Brothers and Hasbro, and Disney and Mattel. These sorts of alliances lead to the creation of action figures, videogames, and so forth. More than just a toy, he says, “This is a concept that generates a merchandising campaign that generates success. This year, there were two great box office hits – Harry Potter and the Lord of the Rings, whose third and final chapter will soon be released around the world. These two hits are going to be repeated during the Christmas season in branding the world of entertainment.”
“Consumers’ preferences have been translated into games and video games,” says Díaz. This trend is going to continue because there are fewer and fewer children in Spanish homes. (Spain has one of the lowest fertility rates in the world; 1.26 children for each woman.) Nevertheless, spending per child has increased. “They sell fewer products, but they are more expensive. Not having any brothers or sisters, a child entertains himself or herself more and more with video games that don’t require the involvement of other children. That’s why we are going to continue to witness growth in the sales of Game Boys and Play Stations.”
In the food sector, specialized Christmas products are going to continue the trend of recent years. Nougats, which sell almost 100% of their total production during this time of year, are a market that has matured in Spain; the sector needs to export in order to continue growing. During the last Christmas season, the nougat business moved 13.2 million kilograms worth 95.4 million euros, registering a 1.9% fall in the volume of sales although the market value remained stable, according to Nielsen.
The trend among consumers in the food sector is toward increased [per capita] spending at home. “They continue to spend the same amount but with fewer people,” says Díaz. Moreover, they are looking for products that have higher quality. “Signs show that the wine they consume is getting more expensive, and so is the cava.” This can be explained not only by the decline in the number of family members. “In Spain, per capita income has improved a great deal in recent years.” According to data from Nielsen, overall sales of sparkling wines (including cider, champagne and cava) grew by 3% during last year’s Christmas season.
Consumers have also recovered their confidence in fish, a year after the oil spill by the Prestige along the Galician coast, according to indicators in the 2003 Barometer of Consumption. Experts confirm that consumption levels have returned to normal levels.
Where will consumers get all these products? Since approval of the Law of Commerce of 1996, which prohibits selling products at a loss, hypermarkets have given up ground to supermarkets. According to Javier Álvarez, who is at DBK, a consulting firm, “Hypermarkets have seen their ability to expand limited by current legislation from autonomous communities (regions into which Spain is divided) that restricts the granting of new licenses. At the same time, this has led to a revitalization of supermarkets, which are being developed more in those urban environments where there is still a possibility of growth. Consumers don’t carry out a great deal of purchasing each month, so it doesn’t pay for them to travel by car to the hypermarkets.
Once again, Spaniards will turn to perfumes, books and electronics when it is time to give presents. When it comes to home consumer electronics, “consumers will look for products that are new and a bit elitist, such as large plasma screens,” Renart says. As for very expensive products, sales volume in terms of unit numbers will not be very high, but the numbers will be high in terms of euros billed. Digital photography and computer equipment will also be a big draw over the holidays.
Electronic Commerce: A Divide with Europe
Europeans are hard on the heels of Americans when it comes to electronic commerce. According to consulting firm Forrester, Europeans will be spending some nine billion euros in online sales over the holidays, not very far from the 10.3 billion that Americans will spend. Nevertheless, online sales in Spain will only amount to 130 million euros, which is less than 1.5% of the entire continent and far behind the figures in the United Kingdom and Germany, two countries that together represent 63% of all online [European] sales.
Why is there such a large gap between Spain and its northern neighbors? According to Renart, the key problem is “the relative absence in Spain of product that is worthy, interesting, attractive and which really creates value for the user.” For this reason, online Christmas sales are not expected to represent a great boom in Spain.
Electronic commerce in Spain is going to grow as penetration of the medium and awareness increase, observers suggest. Nevertheless, several factors have impeded electronic commerce from developing at the same pace as in other European countries. They include a distrust of credit cards; the low level of penetration of catalog sales and television sales that precede online sales; and the fact that shipping costs are still considered unnecessary. “Little by little, the individual efforts of companies that provide a good service by means of the Internet, such as Iberia Airlines, will go toward creating an environment,” predicts Renart.
However, according to Díaz, there are other factors to consider. “There is something that differentiates Spanish consumers from the Northern Europeans or Americans. In the first place, there is the climate. In the second, there are the distances. Our experience is to go out on the street and go shopping.” He adds that “Christmas time is when it makes less sense to buy online. It has something to do with the Christmas atmosphere that you cannot sense when you’re buying online. When you buy a gift for someone, you need to use your senses in a way that you cannot manage over the Internet: Your sense of touch, your sense of smell… Buying online is very rational, and the Christmas holidays are very emotional.”
Christmas, Latin American Style
According to Carlos Sicurello, director of the department of commercialization at the Universidad Argentina de la Empresa (UADE), the Argentine school of management, sales during this Christmas season will also grow in Latin America. The recovery can be attributed to “a growth in consumer confidence,” he says. In fact, the index of consumer confidence prepared by Torcuato Di Tella University (in Argentina) grew by 26% compared with November of last year.
This opinion is shared by Marcos Cobra, a professor of marketing at the School of Business Administration at the Getúlio Vargas Foundation in São Paulo, Brazil. “People are in a better mood, and this also influences their consumption,” Cobra says. However, it is not just a question of optimism. What is empowering the average consumer these days is a feeling of getting some compensation for financial difficulties they’ve experienced in recent times. “Thus, purchases have this emotional meaning: I deserve it, and I’m going to buy this present for myself,” he explains.
According to Cobra, this Christmas season will be better for Brazil’s elite than for its middle class. The technological innovations that hold first place on the wish lists of the middle class are digital photography devices, DVD players, and the latest portable and mobile computers. Meanwhile, clothing and shoes will also enjoy popularity among consumers.
For Cobra, this year-end has to be better than last year’s, although the level of sales will continue to be low because a large part of the money from work bonuses and Christmas bonuses will be used to pay off previously contracted debt. The money won’t wind up going entirely into new purchases.
“Uruguay and Argentina are also in a recovery phase,” Cobra says. “What we notice in university circles is that those two countries came out of the ICU (Intensive Care Unit), but their situations are still delicate. The population still has few financial resources.”
But some outstanding sectors exist. “Those who work in markets for luxury products are doing well,” Cobra adds. “They don’t have any problems because they are selling to bankers; people in the great industrial sectors. Normally, it’s the middle class that suffers the most during these crises. Businesses find it hard to make a sale because the population is [financially] strapped.”
