Retailers Expect Strong Holiday Shopping

Chances are good that Santa Claus will leave a nice gift under the tree of America’s retailing industry this holiday season, but stores shouldn’t expect anything too extravagant. While the consensus view of experts at Wharton and elsewhere is that holiday sales will be up this year compared with 2002, several factors, including the absence of a hot new toy or electronic gizmo, suggest that it will be a respectable, not a blockbuster, season.

 

There are several reasons for thinking sales growth will be solid: the accelerating economic recovery; tax cuts and a surge of mortgage refinancing, both of which have given people more cash to spend; some signs that employment is picking up; the continued willingness of merchants to discount their wares and hold pre-holiday sales; and evidence that clothing companies are putting some pizzazz into fashions.

 

At the same time any number of things – some already existing, some potential – could dampen spending: rising energy costs, which can cut into a shopper’s discretionary spending; consumers’ fear of racking up more debt; news in the coming weeks of corporate layoffs and rising claims for unemployment insurance; bad news from Iraq; and lousy weather that keeps people from traveling to stores.

 

“I think sales will be up over last year,” says William Cody, managing director of Wharton’s Jay H. Baker Retailing Initiative. But he adds that while retailers will see unit sales rise at a healthy clip, their dollar sales may be relatively modest because they will be selling goods at lower prices.

 

Cody says one key factor that will prevent sales from soaring is the absence of a  “must-have item” – a hot DVD, video game or toy – to get shoppers jazzed. What’s more, DVD players are becoming old hat and people no longer feel compelled to upgrade their personal computers every year. “It will be difficult for many retailers to differentiate their products other than on price, particularly for popular toys and electronics, which are more commodity-like,” says Cody.

 

Wharton marketing professor Stephen J. Hoch also foresees a solid Christmas sales season. “I’ve been following same-store sales figures for the last eight months and the climate has improved. I don’t think it’s dramatic, but I see no reason why the holiday season wouldn’t be other than okay.”

 

Wharton marketing professor Robert Meyer agrees, in part because he thinks “consumers will be optimistic about their current wealth and their own futures in November when they’re actually starting to buy.” Meyer also notes that by building inventory in the warmer months, retailers have helped guarantee better holiday receipts. “Once there’s all that inventory, higher sales become a kind of self-fulfilling prophecy. There’s pressure to sell the inventory, and you won’t see sales depressed by stock-outs. High inventories tend to breed high sales.”

 

Meyer adds that “the stock market has rebounded and people have lower withholding taxes, so they’ll be a bit more flush. There’s nothing disastrous in terms of world events. I’d be surprised in November if there isn’t a rebound in consumer confidence with people being more liberal about spending.”

 

Projected Sales Figures

The National Retail Federation, a trade group in Washington, D.C., predicts that holiday sales this year will reach $217.4 billion, an increase of 5.7% from last year. The federation released figures on Oct. 15 showing that retailers enjoyed sales increases in September that were better than expected – a seasonally adjusted increase of 0.2% over August and a 6.9% jump from September 2002. These figures included general merchandise; clothing and clothing accessories; furniture and home furnishings; electronics and appliances; and sporting goods, hobby items, books and music. Sales for the third quarter rose 6.3% from the year-earlier period – a better showing than the 5.8% rise that the federation had predicted.

 

“We saw a positive back-to-school season,” says NRF spokesman Scott Krugman. “In September there was a 10% increase in apparel sales year-over-year. Consumers are relating to the fashion trends that are out there right now. Strong apparel sales in the fall will lead to stronger sales in the winter.”

 

The U.S. Commerce Department released its own figures on Oct. 15 showing that retail sales in September fell 0.2% from August but rose 9.2% from September 2002. The Commerce Department numbers differed from those of the NRF because the government includes categories such as automobiles, service stations and restaurants in making its computations.

 

Last year, the NRF predicted that holiday sales for 2002 would increase by 3.5% from 2001, but they ended up rising only 2.2%. Krugman points to several reasons for the overly optimistic forecast. “Deep discounting, which basically can be called deflation in the retail industry, means consumers were buying the same amount as the year before but were not paying as much for it,” he says. In addition, there was uncertainty as to whether the United States would go to war with Iraq.

 

On Oct. 21 the NRF released the results of its annual Holiday Consumer Intentions and Actions Survey, which showed that the average person intends to spend $671.89 over the holidays this year, up from $648.85 in 2002. Most of that money will be spent on gifts ($518.44), with the rest being spent on decorations, greeting cards and postage, candy and food, and flowers.

 

The survey also found that price is king with many shoppers. Asked why they chose to shop at certain stores, 38.9% said they based their decision on sales or price discounts and 20.7% said they chose to shop at stores that boast every-day low prices. By contrast, 18.1% said they plan to shop at stores based on the stores’ selection of goods. Three-quarters (75.1%) said they plan to shop at discount stores, while 53% plan to go to department stores, 44.4% to grocery stores and 36.7% to specialty stores. Thirty-six percent plan to shop online.

 

ShopperTrak, a Chicago firm that collects and analyzes data about traffic in thousands of retail stores across the country, says a steady trend of increasing sales throughout 2003 shows no sign of abating for the holidays. “We do feel that this holiday season will be significantly better than last,” says ShopperTrak spokesman Jason Milch, who notes that in each week over the past six months retailers have seen sales go up from the year-earlier period. “We’re looking at a lot of momentum. We think that will continue and really boost holiday sales” by 4-6%.

 

Ken Goldstein, an economist with the Conference Board in New York, also anticipates a bright, but not necessarily “bang-up,” year for retailers. Goldstein notes that on a recent trip to a New York-area mall he had to drive around for quite some time before finding a parking space. “It’s not scientific but it’s indicative,” he says, adding: “Consumer income growth has slowed a little but there must be enough money in [people’s] pockets or credit-card balances such that they were already out there buying.”

 

One Wharton faculty member who says sales may remain flat this season is Marshall Fisher, professor of operations and information management and co-founder and chairman of 4R Systems, of Wayne, Pa. The company provides product lifecycle management software that delivers supply chain planning to retailers and manufacturers. “We at 4R don’t see signs that sales are headed up, as of this moment, to a statistically significant degree,” Fisher says. “There will be ups and downs due to seasonality and other factors. If you net those out, I don’t think there’s a strong signal either way. I won’t say we might not see an increase, but I don’t see a strong signal right now.”

 

A Splash of Color

Wharton marketing professor Barbara Kahn says a couple of issues always come into play when people are mulling over how much to spend: their level of confidence in the economy and their own futures, and a desire to hear good news. “A little bit of good news would be interpreted in a positive way and convince people to go shopping,” she says. “I do think we have seen some good news. Mortgage rates are really low and low rates act as a counter force to the consumer-debt rate.”

 

In addition, Kahn says she has seen more apparel manufacturers add color to their fashions, a good sign given that women’s fashions have emphasized grays and blacks in recent years. “It’s really important for marketers to come up with ‘newness.’ If you look at fashion, there has been a lot of somber clothing. But mostly what they’re showing in fashion now is clothes with more color. People need a reason to buy. Fashion has to show a noticeable difference and convince people that they’re out of date and need something new. Color is one way to do that.”

 

Wharton’s Cody agrees that designers have added more color to women’s fashions. But what is equally important, in his view, is the move by some companies, in both fashion and mainstream apparel, to drum up higher sales by emphasizing limited availability. For instance, he says that two companies that sell apparel for men, women and children – Zara, based in Spain, and Sweden-based H&M – as well as Coach, the U.S. leather-goods maker, all have launched marketing campaigns emphasizing that certain products or product colors are available for only a limited time before being pulled from the shelves.

 

“You have product that’s available for a short period of time and you have to come in the store now and get it or it’s gone,” Cody says. “It’s a great tool for a retailer to have. For one thing, you’re selling it at full price, but it also gets people to the store more frequently. The average Zara shopper comes into the store 10 times a year, whereas a Gap shopper comes in four times a year. If you get people in stores, you have a better chance of selling to them.” Zara has 10 U.S. stores, H&M about 40.

 

Department Store Woes

According to several people who were interviewed, department stores this Christmas will continue to lose business to mass merchandisers, such as Wal-Mart and Target, and to specialty retailers.

 

“Discounters will steal share from traditional department stores,” notes Wharton’s Hoch. “Department stores are less efficient operations. That’s nothing new. It’s been going on forever. Department stores are not going to go away, but their share of the pie is going to shrink. J.C. Penney tried to be a high-end department store; now they’re introducing carts and centralized checkouts like Kohl’s. Consumers clearly want a bargain and are interested in an efficient shopping experience. There are so many alternatives and information today both in the retail space and online that the discounters fit in better with the way we lead our lives. Time is limited. Malls are seeing decreased traffic. And except for teenagers, people don’t have time to spend there. Time spent at malls has declined 50% in the last 20 years. The malls are not doing great.”

 

Cody echoes that sentiment. “Department stores can’t compete on cost with mass merchants and they don’t have the cachet that they once had at the higher end because specialty stores are doing it better than they are.”

 

Job Fears

Many of those interviewed say that the level of unemployment – on the part of people who themselves are without work as well as employed people who see others without a job and may fear for their own – will loom large this Christmas. If unemployment falls, or at least does not increase, many consumers should be more inclined to spend.

 

“One piece of the puzzle that has to come together [for sales to increase] is jobs,” says Krugman of the NRF. “Businesses are starting to spend again and that will lead to jobs. As positive reports come out – and as positive news stories come out – about the economy, that will help build consumer confidence. You’re going to see a lot of ups and downs because a new report comes out every day. Doom-and-gloom reporting is a major factor. Consumers are influenced by that. If they’re reading a story that makes them worry about job prospects, they’re not going to be as loose with their purse strings.”

 

The lack of improvement in labor market conditions continued to dampen consumer sentiment in September, according to the Conference Board’s Consumer Confidence Index. The index stood at 76.8 in September, down from 81.7 in August. Wharton’s Meyer acknowledges that a decline in confidence can be worrisome to retailers. But he stresses that what really matters is how confident consumers will feel in November and December.

 

Wharton’s Hoch suggests that despite the rise in unemployment in 2002 and 2003, which he believes has now peaked, many families are better cushioned to withstand the loss of a job today than they would have been in years past. “If you’re a two-income family and you don’t want to make drastic changes in expenditure patterns to adjust to the shock of a declining family income, there’s more cushion. It’s a terrible thing to not have a job. But if you have two incomes and you lose one of them, it’s easier to smooth your spending out. You borrow for the future when you need it. Even with the increase in unemployment, retail sales continued to grow modestly in 2003.”

 

The Impact of Debt

One might suspect that an accumulation of news stories about rising consumer debt would strike fear in the hearts of consumers heading into the holidays. But marketing professor David Schmittlein does not see debt itself holding most people back from buying gifts.

 

“It’s dangerous to make predictions about spending based on whether debt has been going up or down at a particular time. The level of debt in this country keeps growing beyond predictions that it has to stop soon. One would be foolish to suggest we’ve reached the point where it has to stop now. I personally don’t think debt represents a significant barrier to the growth of spending this holiday season. The country would be better off in the long term if it did. But if sales are down this year, I don’t think the level of indebtedness will be the reason.”

 

Schmittlein says that uncertainty has more of an impact on how much money people are willing to spend than does the amount of debt they are carrying on their personal balance sheets. Although indebtedness has uncertainty associated with it, debt usually is amassed in a predictable way that most people can manage.

 

“People’s fear that they may lose their jobs is a more powerful source of uncertainty than debt. It is uncertainty about what their economic condition is going to look like that gives people pause. The certainty that they’re in a tight financial situation does not necessarily lead people to slow down spending. If somebody is in a situation where they get paid monthly and they pay credit card debt monthly and that debt doesn’t jump around month to month, then people will run up debt as far as they can, or at least are inclined to. But if their income is unstable, or if their indebtedness is perceived to be unstable from month to month, that can give people pause.”

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