Retailers Assess U.S. Banking Crisis
By Tom Ryan
Although inventories and expenses have already been slashed in response to the slowing economy, the current Wall Street crisis is apparently causing many retailers to re-examine their pricing, promotions and inventory plans for the holiday season. Even marketing messages may need to be softened as consumers grapple not only with shrinking 401Ks and home values but a loss of faith in the financial system.
“This is like watching a car crash, but the two vehicles haven’t hit yet,” Marian Salzman, chief marketing officer for public relations agency Porter Novelli, told the Associated Press last week before the U.S. government’s bailout plan was announced. “Is this the worst week, or are we waiting for the other shoe to drop?
The bailout of financial institutions announced on Friday is designed to free up credit for consumers as well as companies albeit with tighter restrictions. But, as the Washington Post noted, “the economy remains fragile with consumer confidence flagging, spending down and unemployment at its highest level in five years. The turmoil on Wall Street could further slow spending, the economy’s key engine.”
Economists told the newspaper that the more stringent credit standards would
be the most immediate impact of the financial crisis for businesses and consumers.
Those with the weakest credit ratings and most questionable assets are likely
to find loans more expensive and harder to get, while those deemed good credit
risks could be largely unaffected.
One channel expected to be particularly hard hit is luxury stores. The strengthening dollar has been hurting tourism traffic in metropolitan cities, but layoffs and lost bonuses on Wall Street are also expected to reduce high-end spending.
“New York City is at the epicenter of the slowdown,” wrote Goldman Sachs analyst Adrianne Shapira in a research report. “The slowdown will undoubtedly ripple beyond NYC to impact others tied to high end spending.”
But Michael Dart, a principal at consulting firm Kurt Salmon Associates, told The Associated Press that he believes all stores will have to rethink their plans given an “unprecedented” chain of events that could depress consumer confidence even more. He does expect dollar stores and discounters will have more opportunity to gain market share this holiday season.
Discussion Questions: How do you think the Wall Street crisis will play out at retail? Which retailers do you think will be hurt most? How should stores respond?
I think we have seen the consumer already begin to hunker down and prioritize their spending dollar. The holidays will just bring more of the same. The retailers that focus on supporting those new tendencies like cooking at home, can be opportunities for places like Chef Central, Barnes and Noble, department stores that can position cookware in a way that provide solutions in a way that still bring a level of personal indulgence to their consumers.
I am sure that consumers are moving to private label, but I would want to see more information if this is a whole new area of purchasing as a result of making more meals at home before as a retailer I drive up my “lowest end,” “generic” brands as the solution to the economic mess. Those retailers that can make the prepared at home experience better or more enjoyable may find long term consumers.
Most retailers will do what retailers do best–meet the needs of their customers no matter how reduced. This type of economic challenge couldn’t come at a better time–the holidays. Anyone who disagrees grossly underestimates the resiliency and spirit of Americans. We can make do until this blows over, and the strongest retailers will be there waiting for us on the other side. In the meantime we will absolutely not allow conditions to dim our holidays. There still will be family, joy, gatherings, and great food to take our minds off our troubles and remind us of the important things in life. A great way to begin to restore consumer confidence. It was similar during the 2001 holidays.
When every financial columnist in the country is begging consumers to scale back and not incur additional debt retailers need to be very careful that their marketing does not make them look irresponsible and greedy by urging strapped consumers to buy more, more, more. Many American families have full closets and can literally go months without purchasing anything new beyond food, a few household staples and maybe a stray replacement appliance here and there. As Ed Dennis points out, the plastic and home equity millionaires are about done. The classic “pay as you go” consumers will be sitting tight and secure in their purchasing philosophy.
The decade-long over saturation in Retail will result in a thinning of the heard this holiday season. It will be bloody but is probably ultimately a good thing for the country, for consumers and for the retail industry.
Consumers don’t know what is going on and will not change any habits until such time as the dollar value loss starts to impact them the same way the price of gas did. Most Americans don’t yet know that they are broke. This realization will come to call when MasterCard and Visa start cutting credit lines and quit lending money. This is only a few months down the road. It may get here in time for Christmas 2008.
Retailers will begin to close locations in the first quarter of 09. Only the very best, financed with the deepest pockets will survive in their current form. Say good buy to Circuit City and all the other weak chains out there. The ripple will impact commercial real estate which is already weak and unemployment will pass 15% by summer 09. Tighten up your belt, it’s going to be a wild ride.
It’s tempting to cut marketing budgets in a downturn–and put the squeeze on the cost of selling: travel, entertainment, presentation and due diligence . . . anything that can possibly keep earnings where they were before the company started losing sales.
But what a mistake!
What you want to do instead is stay visible in the marketplace–or even boost your presence–to take advantage of the fact that some of your competition has pulled back. So you might actually be able to pick up market share in the vacuum those absent voices have left–and be much better positioned for growth when the business climate improves.
And you want to give your prospects the same level of attention and care you did in good times–with the same quality marketing materials, the same travel and entertainment, conference presence and more. Because you don’t want prospects and industry observers whispering that your company must be in trouble if they can’t afford the basics the way they once could.
Now, a recession is a great time to look for deals from your own suppliers–to make sure you’re getting the best prices, and make sure you’re not blithely spending your people’s expense accounts into oblivion.
But as I learned at my mother’s knee: If a big bump in sales can’t solve a problem once and for all, it sure can’t hurt.
I agree: “Tighten your belts.” Huge discrepancies in income will segment shoppers in a way never before seen in this country (the GINI index is higher than the depression, now more in line with South American countries).
The impact on retail will be that consumers at all levels will be focusing on necessities and will be trading down or looking for value. Mid-tier retailers will be the luxury of the middle income quintiles of income. Walmart will continue to rule; as will price clubs for the middle tiers. Bottom tiers will shop absolute low price points (Family Dollar type stores)…and there will be more shoppers in this segment.
Real high end luxury retailers, Bergdorf’s for example, may continue to see its die-hard shoppers, but won’t pull in new customers during this time.
I expect most retailers will have some rough months ahead of them. This will be an opportunity for the very best and smartest retailers to take advantage of their weaker competitors’ mistakes. The weakest operators will most likely not survive the next year and that will provide a greater reward for the survivors.
There have been economic times that were very forgiving and would allow marginal retailers to hang on. I don’t see that happening over the coming winter season. This is also probably the worst time that I can think of to be in an aggressive expansion mode, but I would guess that some are.
I was recently talking (before the acceleration of the financial crisis in the last two weeks) to a private shopper at Bergdorf Goodman. Bergdorf Goodman is a world-renowned, very-high end, luxury goods department store in New York City. She related that over the last year she has not seen purchases being cut back at all. But, she also indicated for the first time recently, her clients are actually asking for the prices.
Next week, she may experience something different. The financial sector in NYC represents about 10% of the jobs. But, it represents over 35% of the payroll. It is estimated that between now and year end, the city will lose 30,000 to 40,000 of those jobs. Up until now, the high end of the corporate ladder has not been cut substantially, now it will be.
The luxury market will finally suffer. There will be no substitute for the luxury retailers.
The retail environment has been challenging for many retailers already and while this isn’t going to help, many of those affected by last week’s events are (or should have been) already feeling the effects. Clearly things are worse for the NYC economy.
That said, there are retailers at all levels that are at least holding their own in this environment. Those that have already invested in CRM capabilities and are shifting marketing spend (even while decreasing total marketing expenses) to more directly accountable activities will continue to do so and spend where they can generate returns.
While I wouldn’t want to be selling big ticket items requiring multi-year interest-free financing, there are select smart merchants who will focus on their existing customers and outperform their competitors, both now and post-recovery.
Let’s face it, there weren’t a lot of smart banks that emerged as shining examples of management over the past month. But there were a few. JP Morgan Chase, Citibank, and Bank of America are in better shape to be players a year from now than they are today.
Smart retailers will use this crisis the way smart banks did. They will reach out to new partners, and even make key acquisitions. They will forge stronger relationships with suppliers and customers. They will have confidence that risky, extreme business models never worked in the first place, and will not work now.
Middle-of-the-road retailers will be hurt most. People always gravitate to the deep discounters during troubled times and, when they want an indulgence, will go to upscale stores.
It’s an uphill battle for retailers for the next few months. Even if the meltdown isn’t as bad as reported, we are still dealing with a deep-seated mental and emotional issue that has depressed consumer confidence. Upmarket goods may suffer but they are still higher margin so even if volumes are off by 25 percent, it should still be a profitable season for the luxury market.
Mid-range grocers and mass merchandisers will have to work on pricing and marketing to bring back customers. We need to give the customer an excuse to spend money again so the shopping experience is crucial in getting folks back into the store. Expanding loyalty programs, new products and better service are just a few ways to make shopping fun again. Get creative and reap the rewards.
It is gut check time. We are going to see some more retailers going down while some others thrive.
I believe retailing in the months to come is going to have to become far more intelligent and savvier than it has been before. Given that the dollar will take a hit with all the money thrown at the financial sector to bail them out, gas will only become dearer. This means that the pressure on the number of trips will be maintained, if not increased. As a result, food retailers (especially in the grocery and mass sectors) would do well to offer some sort of bundling, discounting or just offering good solid assortment to consumers–helping them optimize each trip to the store.
Like most people have already mentioned, cash-strapped consumers are also more likely to eat at home. So some relevant categories like cereal, bread, deli meats, eggs etc, are more likely to see an increase in consumption, and retailers would need to increase the inventory they carry for these products.
Non-food retail also will have positive and negative impacts. Given fewer dollars to spare, the average home owner would need to make repairs herself and as a result, consumption at hardware stores for basic maintenance and repairs is likely to increase. Luxury retailers are likely to suffer, but I believe it will be more of a local effect in New York, Chicago and San Francisco. Other luxury stores in Colorado, LA and some other upscale cities would not see as much of a negative impact. Regardless, they will be under pressure.
All in all, I think different parts of the retail industry will be affected differently. Some sectors actually stand to improve performance provided they can provide good relevant products, services and messaging to a more circumspect consumer.
I feel that the consumer has been traumatized the past six months by the spike in gasoline prices, and the current crisis only adds to the disquiet. Gas prices have had a psychological impact disproportionate to their actual increase, which can’t be minimized, and that even when gas prices stabilize it will be a while before consumers respond.
The current crisis only reinforces the feeling of uncertainty about the future, even as real estate prices appear to be bottoming out. While I feel there’s a fair amount of pent up demand for discretionary goods, it’s going to be a while before consumer confidence can be restored, and even then spending patterns are likely to be permanently altered in significant ways.
We haven’t even begun to feel the pain. Once Congress has decided to bail out Wall Street–to the tune of $700 billion–we will all feel the pinch.
Let’s put this into perspective. The war costs about $300 billion per year, yet in one fell swoop of a pen, congress intends to spend twice that to bail out greedy Wall Street. How will congress find that “non-existent” money? They will print it. This weakens the dollar and forces inflation. Inflation will lead to higher prices for everyone on everything. Anyone who thinks the effects of this won’t be felt soon has never taken an economics class.
Congress should never have pushed lenders to give loans to people who couldn’t afford it and banks should never have gone against their better knowledge to approve these loans. Greed caused this mess and now responsible tax payers will be stuck bailing them out. There won’t be much left for necessities, let alone luxuries for most people. Yes, retailers and everyone else WILL be affected.