October 23, 2008
BrainTrust Query: Holiday retail sales…a ticking time bomb?
By Don Delzell, Managing Director, Future Merchants, Inc.
The most optimistic forecasts for this year’s holiday retail sales start with a two percent increase, with many analysts now predicting a decrease. Yet none of those forecasts adequately factor in the impact of recent credit card practices: enormous upward adjustments in annual percentage rates (APR) and downward adjustments to credit limits for millions and millions of Americans. The impact of these two related practices threatens to turn the holiday into a disaster of unprecedented proportions.
Let’s put this into perspective. The National Retail Federation estimates that credit/debit cards account for 40 percent of all holiday retail purchasing. We have no way of knowing what portion of that represents additional borrowing. We can infer that in today’s climate, it would be substantial. Already, Walmart is seeing double digit drops in sales by credit cards…in September! Target, one of the few retailers who still own their credit facility, announced that credit terms had to be tightened in response to an estimated 10 percent loss rate on current accounts. What if 20 percent of holiday credit/debit purchases were going to be financed via new consumer debt? And what if that source dried up almost completely? It’s possible that a net decrease in holiday spending of close to eight percent or more might result, on top of the existing downward trend. We may be looking down the barrel of a double-digit decrease in holiday retail spending.
And that bleak outlook may be the result of the unanticipated actions of banks, which if taken out of context, might actually be correct short-term business decisions. Credit card providers, including JPMorgan Chase and Citi, have over the last 30 days unilaterally increased the APR on a vast number of consumer accounts, in one case from 8.99 percent to 29.99 percent! Calls to those banks elicited this response: if you decline the new rate, we’ll cancel your account.
Can we really criticize banks for taking these steps? If they know that consumers will have great difficulty servicing their existing debt (and these same banks hold mortgages, which indicate this is a fact), then isn’t it an appropriate action to limit further borrowing? And if overall risk rates are climbing and expected to climb further, isn’t it appropriate to increase “prices” to cover that risk?
BusinessWeek called attention to these trends in an article titled The
Next Meltdown: Credit Cards. Yet that article failed to see either the
impact these actions have on consumer spending nor the political implications
in the context of this month’s financial industry bailout. Consumer spending
is at a tipping point and could easily withdraw to levels never seen before.
The perspective needed here is the greater good. What happens when the average
American sees their credit card interest rate double or even triple? What
happens when the minimum monthly payment doubles in size just because of
the higher interest? What happens when their available credit evaporates?
What impact will this have on holiday?
Discussion Question: What impact do
you think the tightening of consumer credit will have on holiday retail sales?
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If consumers are determined to tighten their belts this holiday, the reduced availability of credit may not have a major impact, as holiday sales would be down anyway. That having been said, credit card debt is up 8%, and with personal money being tight, a natural inclination might be to reach for the credit card.
In some ways, the lack of credit, while being bad for retail, might be good for consumers. For years the country has binged on credit. Many Americans, particularly those near retirement age, have not saved enough. Perhaps one benefit of the current economic situation will be to get Americans to save more.
Either way you look at the situation, available credit or no credit, it is not going to be a good holiday for retailers.
Bob Phipps has it so right in his comment above.
What percentage of the current crisis is due to real core banking and economic issues and what percent is due to fear, uncertainty and dread (FUD)?
FUD sells newspapers. FUD drives viewership. But FUD is also driving the global economy into the ground. THAT’S a time bomb, and it’s not ticking. It’s screaming, nagging, yelling. And it is cutting off the very branch that we are sitting on.
Why don’t we ask this question…gas now costs $1.50/gallon less than it did 6 months ago. That’s an extra $27 in a consumers’ pocket if he or she has an 18 gallon tank. If that consumer fills the tank every other week, that’s an extra $108 pocketed between now and Christmas by every single commuter. What will that do to goose holiday sales?
I get frustrated with what feels like a self-fulfilling prophecy. Don’t we have an obligation to present all sides of the story?
The reasons for the crisis of confidence really don’t make any difference. We are here and now have to find a way to move forward. The question is which way is forward?
Holiday retail sales will be down. Unemployment, and fear will dictate the slow down. While a few of the credit card companies have dramatically changed the terms of their credit, many more have not. If you are a card member in good standing, I doubt there will be much if any change. If you are a habitually late payer you can look to be penalized severely. In other words people with good sense won’t suffer and people who are irresponsible will suffer.
Also, anyone who didn’t see this coming can’t blame the media. I have been hearing about foreclosures for two years. We heard about Countrywide financial 8 months ago. What do you need–a special delivery letter?
All one has to do is to look at retail sales over the last three months to get an indication of what holiday sales will be like this year. By every measure September was a disaster with sales decreases in virtually every segment of the business. The only retailers who saw increases were Walmart and a few other discounters along with warehouse clubs. For department stores, apparel specialty stores, home centers, consumer electronics retailers and others sales were down; in some cases they were down double digits.
Most retailers as well as those of us who study and observe the retail business tend to be optimists. Unfortunately, the number of economic factors that currently influence how consumers spend their money are virtually all negative. Believing sales will be anything other than disappointing for retailers and consumer products manufacturers this year is unrealistic.
I agree with Mark. Regardless of the climate come December, people are spooked. It may be a bad thing for retailers, but maybe it’s a good thing in the end. After all, is it a bad thing that there are now real repercussions for spending when you don’t have the money? At the very least, people will likely think twice before throwing it in the basket.
I agree with many of my BT peers. This is negative spinning on a topic that is not quite complete. The tightening of the credit crisis impacts new credit, not the existence of current credit cards. I have never heard of a credit card company asking for their cards back, since it is the interest from these cards which creates revenues for them. Even at higher than normal defaults, the credit industry is a huge cash cow.
The holiday season will certainly be impacted by unemployment and reduced spending from lack of funds because of the direct losses felt from investments and the stock market, but this is only a factor for the immediate future and has no relationship to the availability of credit.
I think the silver lining is that the news of the financial crisis is now many months old and consumers have proven that they do in fact know how to save money and pay down debt.
This Christmas will be tough for retailers, but we can all hope that the months of saving will result in a little bit of spending.
Despite current appearances, it’s the business of banks to lend money and it’s the business of retailers to sell merchandise. So it’s hard to foresee how retailers would allow their customers’ sources of credit to choke off demand completely without trying to prevent it collaboratively. It doesn’t do the banks any good–their customers are retailers, not just consumers–if they kill stores’ cash flow at the most critical time of year.
This may sound overly optimistic, and I don’t mean to agree with the NRF forecast of a 2% increase. I think it’s going to be a tough holiday season but I don’t think it’s going to be a complete meltdown caused by high credit card rates, either. There are a few positives heading into the holidays that may offset some of the gloom and doom:
1. The prospect of a new president (whoever he is) usually sparks a year-end shopping rally, if 1992 is a recent guide;
2. Gas prices at the pump are down about 40% from their summer peak, driving disposable income in an unexpected way;
3. Most stores are up against pretty dismal comps from 2007.
Yes, this may turn out to be the toughest season for comp sales in years, but the strong will survive if they had their financial house in order in the first place along with the right goods and the right brand positioning.
I think holiday sales will be down big time regardless of the credit card situation. People are scared for their jobs and personal finances. Rising APR’s will not help things. I believe this will be the year of “alternative” gifts. Baked goods, homemade gifts and low ticket stocking stuffers. I also expect corporate gift giving will be down.
What I find amusing is that the banks had no problem investing billions in mortgages in hopes of making a quick buck, but now are pleading poverty and expecting the American public to reline their pockets.
In this morning’s print version of The New York Times there is an ad for Neiman-Marcus offering gift cards in return for spending on the N-M card. When I first saw it I thought it was a Macy’s ad! This is clearly not a good sign and must be driven by fear and the reality of bad numbers.
Household debt (e.g., mortgage and credit card among others) has long been a problem and unfortunately, now there are even more people reliant on credit card debt for necessities, much less luxuries.
With the lack of liquidity and some of the knee-jerk (and downright jerky) reactions of credit card companies, this could be quite a shock though we have to remember that things get overdone on the downside just as they were overdone to the upside.
Data shows that most worker/families are living pay check to pay check, no matter how much they earn. That means without credit, they are not going to be able to afford those Christmas gifts.
This is just going to be a tough year for everyone.
Don Delzell’s comments are spot on. Because of the housing price crash, the credit crunch, the maxed-out credit cards, the over-tapped home equity profiles, and the stock market swoon, there is almost no one in this country at any income level who is not feeling the pinch. Yes, there is fear and uncertainty because the magnitude and wide swath of this is unlike any previous recession during my lifetime. Then, there are the job losses both current and still to come.
This holiday, the always prudent cash-only spenders will be even more careful than usual, and many of the “throw caution to the wind–I want it now” shoppers are simply out of credit and out of other sources of disposable funds. All the advertising and special deals retailers throw out there are not going to be able to change that.
At a recent baby shower I attended a middle aged woman told the group that she had already told her adult children that she wanted NO gifts from them this year for any occasion. Instead, she had told them she wanted every penny they would have spent on gifts to go toward paying down their credit cards.
Healthy and creative retailers will squeak by until the economy improves. Many others will fail.
I would guess that many consumers are using their credit cards just to get by each month and delaying the inevitable. That does not bode well for Christmas season purchases. I have not talked to anyone that is not planning on cutting back this year. The best financial Christmas present many of us could receive is a bottom in the stock market and a start of the climb back up of our 401Ks and IRAs.
The Grinch will be having the time of his life this year for the holidays. However, I do strongly believe that when it comes to holiday shopping this year, retailers will need to be more creative by offering attractive alternatives in gift shopping throughout the store that they had not previously considered.
There needs to be a “ton” of gifts available for under $10 and even under $5. Look deeper into your stores: your HBC section, for example, might have some hidden gifts and treasures. Same is true in your food sections and stationery supplies. Make suggestions throughout your stores with signs and more fanfare for these types of items.
Can we stop using words like, “ticking time bomb,” “great depression,” and “worst since?” PLEASE? I know it gets ink but really, what is the point to an article like this? No one knows and these type of things just continue to fan the flames.
Last night I was at a financial event and the story that kept getting repeated was that toxic debt related to credit cards will far surpass those of subprime loans. We will see.
All indications are that consumers are paying down their credit. Just last month there was a net pay down in credit cards. We know from several studies that the stimulus checks of last spring largely went to pay down credit. This trend will only accelerate if banks increase their interest rates.
As we face the Holiday Season and the consumer prioritizes how to split up each pay check, a continued pay down will hurt the Holiday selling season considerably. Even if a consumer wanted to make Holiday purchases on credit, there are few places to go. As late as last season, a consumer could tap a Home Equity Loan or credit line. That will no longer be an option for most.
Part 2 of course, to the ugly Holidays for retailers, is what it is going to do for profits. A big question is how much discounting will be necessary to get the 2% increase, or to meet last year’s sales, or even minimize the decrease. Would we all agree that discounting will be greater this year? If so, the season will be very, very RED.
As a tangent to this discussion, check out the article in yesterday’s Business Section of the NY Times.
Three busts in 8 years = biggest Xmas bust in 30+ years.
Dot com, real estate, credit and soon retail…make that four. Hang on to your hats (ps: that’s NOT “fanning the flames,” that’s calling a spade a spade).
Brightest view now is for 2010 in that the challenge of a brave new retail world is very exciting proposition. And, if we’re smart, we’re all thinking about and designing that new retail expression now and executing next year. There’s a lot to look forward to…of course, you may have to do it freelance.
I see a shift from “want to have” presents to “need to have” presents, and this is where retailers can salvage their holiday seasons. Basic apparel, energy efficient appliances, tools for projects that would have previously been hired out, even sewing/knitting wares are going to be top of many shopping lists. Toys (both kid and adult), sporting goods, high-end consumer electronics and other niceties will drop down several pegs. I’m not suggesting parents will be buying canned hams for their kids, but there will almost certainly be a move to more practical gifts.
When bucks are few but plastic is not
Woes of one’s world can soon be forgot.
Low priced toys will be displayed with care
Assuring all that Santa will soon be there.
There’ll be tightening of the brightening
And, of course, that prospect is frightening.
But the pressure to buy at Christmas time
Will create sales but they won’t be sublime.
And who’s to blame for dismal projections
Adjusted credit card rates or consumer rejections?
Every caution has been thrown in the pot
But there’ll be buying even if the fever isn’t hot.
This is going to be a good year for staples (basic consumer products, not the store.)
This year, all consumers are being affected, whether they are dependent on the next paycheck, or more affluent people who are freaked out after reading their 401K statements. It will be the rare shopper who goes wild and crazy this year. I predict a return to basics, with shoppers retrenching and going for staples they need instead of frills they want.
Why does NRF predict that sales will rise 2% this year?
This is just something we need to do. We can’t keep extending credit forever to deadbeats who can’t pay it back. What’s the point in selling more goods to consumers if they are not going to pay it off? Retailers can make up lost sales by charging irresponsible consumers 29% interest.
I like Aldi’s approach to credit card sales. They just don’t accept credit cards and they are growing and adding stores. I bet Aldi has a good Christmas this year.
One thing to consider is the impact that store closings will have on the per-store sales of remaining retail locations. Whether it’s Mervyns shutting down completely and pushing sales to Target, Kohl’s, and others; or various chains shuttering underperforming units; same-store (comp) sales might be surprisingly respectable this season.
I don’t use credit cards at all. My businesses are all pay-as-you go, and my personal purchases are all debit or graduated payments such as those offered by Bose, Jarden, and others. These graduated payment plans are key to the sales success of many products since they do not require a credit card or a credit check. Any time you see something advertised on TV for “3 Easy Payments,” it’s a graduated payment plan. Look for these types of products and companies to enjoy solid sales through the holidays. Additionally, when they advertise “But Wait, There’s More!,” the buyer can often purchase two gifts for the price of one (sort of).
We’ll still eat well, though, and that’s the essence of the holidays. History shows that when economic hard times hit us, family food expenses are the first to be decreased and the first to return to previous levels after adjustments are made in other, more long-term expenses.
It is my belief that cash will make a comeback and the trend toward debit cards will likely be reinforced. But it’s going to be somewhat tougher for retailers to close sales and build transactions, although debit cards may take up some of the slack. Credit cards are used by retailers to encourage sales by making it simple for the customer, and it is likely that credit card usage is going to decline at least somewhat. There are an enormous number of articles in print and online prompting people not to use credit cards to not stay or get in debt. Some of these stories are of the “10 ways to stay out of debt” type, and usually item number two or three is “Don’t use credit cards.” In some tips stories, readers are admonished not to use credit cards for small purchases, which may stealthily build up debt. There are also a number of stories on the major increases in APRs and how this will affect you personally. The environment now in the popular media is against using credit cards. On top of this are numerous stories on “Hotel Honda” about people who have lost their jobs and are living in their cars.
Prior to the credit crunch, changes were taking place in the way people paid for their purchases and credit cards were among the winners. In terms of the number of transactions (not value), in supermarkets, use of debit cards grew from 32% of transactions in 2003 to 42% in 2007, according to Packaged Facts. Credit card usage moved from 13% in 2003 to 25% last year. Cash nosedived from 22% to 11%. These relationships are likely to be reset with the credit crunch. Cash will make a comeback. Credit card usage will slow. Debit cards will grow due to the illusion that they help to control purchasing and excessive debt accumulation–although they don’t really. Consumers pay billions of dollars on overdraft fees annually with debit cards.
Net-net, it will be more difficult for retailers to generate sales due to the atmosphere against the use of credit, and, while serious, may not be quite as dire as it might seem.
I agree with David Livingston. The situation is ridiculous. Who is accountable for the greed? Us.
Who/what is responsible?
The subprime bubble.
Collateralized debt obligations–CDOs.
Credit default swaps–CDS (unregulated insurance contracts).
Credit cards.
Lending money created out of thin air to people who cannot or will not pay. Fabulous.
Regulation and controls are needed and more realistic growth aspirations.
With all due respect to many of the contributors, the point apparently has been missed. I read words like “if” and statements about the credit practices being applied only to those with poor payment history, and even an outright denial that banks would take these steps. Not to mention an outbreak of “shoot the messenger”!
The Businessweek article, and approximately 8 others in the last 5 days provide solid proof that these actions by the banking institutions are not an “if.” They are real, and no, they do not impact only the “subprime” account holders.
Beyond that, there was an intent in the article which I apparently missed: given these FACTS, what would intelligent retailers do?
And our accumulated contribution to that question was almost nil. Given the realities of the current economic and social situation, how can retailers become more effective NOW? And there are real answers, linked to actual data, which help retailers determine exactly type of actions to take.
Total retail spending: does that include autos? Gasoline? Because it looks like those categories will have an awful Christmas.
Does total retail spending matter to the stores whose competitors have gone under? Bed Bath & Beyond will get a bonus from Linens-N-Things’ demise. Applebee’s will benefit from the closing of Bennigan’s and Steak & Ale.
Will comp trends look better because so few new locations opened this year? Every chain’s worst competitors: their own new locations.
Unemployment is rising. Folks who’ve lost jobs and folks afraid of losing jobs generally stop spending on all but rent and groceries. The grocers have a great subsidy program for their customers and themselves: food stamps. But no one gets clothing stamps. Or shoe stamps. Of course, recent food commodity price declines will hurt supermarket comps.
Furniture stores: they’re in the worst crisis imaginable. Home sales are kaput and so is credit. Furniture is often purchased on credit when the family gets a new house.
So the sales trend for Christmas often depends on what categories you sell, and the weakness of local competition.
Even more urgent: will comp sales be supported by money-losing giveaways that ruin margins? The loss leaders, door busters, 5 AM opening sales, etc, will be more desperate than ever.
And even if customers make Christmas a priority, what do you think February 2009 will look like? The smartest shoppers will wait until then, because they’ll see more “closing this location” and “going out of business” sales. More than they’ve seen since the 1930s.
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If consumers are determined to tighten their belts this holiday, the reduced availability of credit may not have a major impact, as holiday sales would be down anyway. That having been said, credit card debt is up 8%, and with personal money being tight, a natural inclination might be to reach for the credit card.
In some ways, the lack of credit, while being bad for retail, might be good for consumers. For years the country has binged on credit. Many Americans, particularly those near retirement age, have not saved enough. Perhaps one benefit of the current economic situation will be to get Americans to save more.
Either way you look at the situation, available credit or no credit, it is not going to be a good holiday for retailers.
Bob Phipps has it so right in his comment above.
What percentage of the current crisis is due to real core banking and economic issues and what percent is due to fear, uncertainty and dread (FUD)?
FUD sells newspapers. FUD drives viewership. But FUD is also driving the global economy into the ground. THAT’S a time bomb, and it’s not ticking. It’s screaming, nagging, yelling. And it is cutting off the very branch that we are sitting on.
Why don’t we ask this question…gas now costs $1.50/gallon less than it did 6 months ago. That’s an extra $27 in a consumers’ pocket if he or she has an 18 gallon tank. If that consumer fills the tank every other week, that’s an extra $108 pocketed between now and Christmas by every single commuter. What will that do to goose holiday sales?
I get frustrated with what feels like a self-fulfilling prophecy. Don’t we have an obligation to present all sides of the story?
The reasons for the crisis of confidence really don’t make any difference. We are here and now have to find a way to move forward. The question is which way is forward?
Holiday retail sales will be down. Unemployment, and fear will dictate the slow down. While a few of the credit card companies have dramatically changed the terms of their credit, many more have not. If you are a card member in good standing, I doubt there will be much if any change. If you are a habitually late payer you can look to be penalized severely. In other words people with good sense won’t suffer and people who are irresponsible will suffer.
Also, anyone who didn’t see this coming can’t blame the media. I have been hearing about foreclosures for two years. We heard about Countrywide financial 8 months ago. What do you need–a special delivery letter?
All one has to do is to look at retail sales over the last three months to get an indication of what holiday sales will be like this year. By every measure September was a disaster with sales decreases in virtually every segment of the business. The only retailers who saw increases were Walmart and a few other discounters along with warehouse clubs. For department stores, apparel specialty stores, home centers, consumer electronics retailers and others sales were down; in some cases they were down double digits.
Most retailers as well as those of us who study and observe the retail business tend to be optimists. Unfortunately, the number of economic factors that currently influence how consumers spend their money are virtually all negative. Believing sales will be anything other than disappointing for retailers and consumer products manufacturers this year is unrealistic.
I agree with Mark. Regardless of the climate come December, people are spooked. It may be a bad thing for retailers, but maybe it’s a good thing in the end. After all, is it a bad thing that there are now real repercussions for spending when you don’t have the money? At the very least, people will likely think twice before throwing it in the basket.
I agree with many of my BT peers. This is negative spinning on a topic that is not quite complete. The tightening of the credit crisis impacts new credit, not the existence of current credit cards. I have never heard of a credit card company asking for their cards back, since it is the interest from these cards which creates revenues for them. Even at higher than normal defaults, the credit industry is a huge cash cow.
The holiday season will certainly be impacted by unemployment and reduced spending from lack of funds because of the direct losses felt from investments and the stock market, but this is only a factor for the immediate future and has no relationship to the availability of credit.
I think the silver lining is that the news of the financial crisis is now many months old and consumers have proven that they do in fact know how to save money and pay down debt.
This Christmas will be tough for retailers, but we can all hope that the months of saving will result in a little bit of spending.
Despite current appearances, it’s the business of banks to lend money and it’s the business of retailers to sell merchandise. So it’s hard to foresee how retailers would allow their customers’ sources of credit to choke off demand completely without trying to prevent it collaboratively. It doesn’t do the banks any good–their customers are retailers, not just consumers–if they kill stores’ cash flow at the most critical time of year.
This may sound overly optimistic, and I don’t mean to agree with the NRF forecast of a 2% increase. I think it’s going to be a tough holiday season but I don’t think it’s going to be a complete meltdown caused by high credit card rates, either. There are a few positives heading into the holidays that may offset some of the gloom and doom:
1. The prospect of a new president (whoever he is) usually sparks a year-end shopping rally, if 1992 is a recent guide;
2. Gas prices at the pump are down about 40% from their summer peak, driving disposable income in an unexpected way;
3. Most stores are up against pretty dismal comps from 2007.
Yes, this may turn out to be the toughest season for comp sales in years, but the strong will survive if they had their financial house in order in the first place along with the right goods and the right brand positioning.
I think holiday sales will be down big time regardless of the credit card situation. People are scared for their jobs and personal finances. Rising APR’s will not help things. I believe this will be the year of “alternative” gifts. Baked goods, homemade gifts and low ticket stocking stuffers. I also expect corporate gift giving will be down.
What I find amusing is that the banks had no problem investing billions in mortgages in hopes of making a quick buck, but now are pleading poverty and expecting the American public to reline their pockets.
In this morning’s print version of The New York Times there is an ad for Neiman-Marcus offering gift cards in return for spending on the N-M card. When I first saw it I thought it was a Macy’s ad! This is clearly not a good sign and must be driven by fear and the reality of bad numbers.
Household debt (e.g., mortgage and credit card among others) has long been a problem and unfortunately, now there are even more people reliant on credit card debt for necessities, much less luxuries.
With the lack of liquidity and some of the knee-jerk (and downright jerky) reactions of credit card companies, this could be quite a shock though we have to remember that things get overdone on the downside just as they were overdone to the upside.
Data shows that most worker/families are living pay check to pay check, no matter how much they earn. That means without credit, they are not going to be able to afford those Christmas gifts.
This is just going to be a tough year for everyone.
Don Delzell’s comments are spot on. Because of the housing price crash, the credit crunch, the maxed-out credit cards, the over-tapped home equity profiles, and the stock market swoon, there is almost no one in this country at any income level who is not feeling the pinch. Yes, there is fear and uncertainty because the magnitude and wide swath of this is unlike any previous recession during my lifetime. Then, there are the job losses both current and still to come.
This holiday, the always prudent cash-only spenders will be even more careful than usual, and many of the “throw caution to the wind–I want it now” shoppers are simply out of credit and out of other sources of disposable funds. All the advertising and special deals retailers throw out there are not going to be able to change that.
At a recent baby shower I attended a middle aged woman told the group that she had already told her adult children that she wanted NO gifts from them this year for any occasion. Instead, she had told them she wanted every penny they would have spent on gifts to go toward paying down their credit cards.
Healthy and creative retailers will squeak by until the economy improves. Many others will fail.
I would guess that many consumers are using their credit cards just to get by each month and delaying the inevitable. That does not bode well for Christmas season purchases. I have not talked to anyone that is not planning on cutting back this year. The best financial Christmas present many of us could receive is a bottom in the stock market and a start of the climb back up of our 401Ks and IRAs.
The Grinch will be having the time of his life this year for the holidays. However, I do strongly believe that when it comes to holiday shopping this year, retailers will need to be more creative by offering attractive alternatives in gift shopping throughout the store that they had not previously considered.
There needs to be a “ton” of gifts available for under $10 and even under $5. Look deeper into your stores: your HBC section, for example, might have some hidden gifts and treasures. Same is true in your food sections and stationery supplies. Make suggestions throughout your stores with signs and more fanfare for these types of items.
Can we stop using words like, “ticking time bomb,” “great depression,” and “worst since?” PLEASE? I know it gets ink but really, what is the point to an article like this? No one knows and these type of things just continue to fan the flames.
Last night I was at a financial event and the story that kept getting repeated was that toxic debt related to credit cards will far surpass those of subprime loans. We will see.
All indications are that consumers are paying down their credit. Just last month there was a net pay down in credit cards. We know from several studies that the stimulus checks of last spring largely went to pay down credit. This trend will only accelerate if banks increase their interest rates.
As we face the Holiday Season and the consumer prioritizes how to split up each pay check, a continued pay down will hurt the Holiday selling season considerably. Even if a consumer wanted to make Holiday purchases on credit, there are few places to go. As late as last season, a consumer could tap a Home Equity Loan or credit line. That will no longer be an option for most.
Part 2 of course, to the ugly Holidays for retailers, is what it is going to do for profits. A big question is how much discounting will be necessary to get the 2% increase, or to meet last year’s sales, or even minimize the decrease. Would we all agree that discounting will be greater this year? If so, the season will be very, very RED.
As a tangent to this discussion, check out the article in yesterday’s Business Section of the NY Times.
Three busts in 8 years = biggest Xmas bust in 30+ years.
Dot com, real estate, credit and soon retail…make that four. Hang on to your hats (ps: that’s NOT “fanning the flames,” that’s calling a spade a spade).
Brightest view now is for 2010 in that the challenge of a brave new retail world is very exciting proposition. And, if we’re smart, we’re all thinking about and designing that new retail expression now and executing next year. There’s a lot to look forward to…of course, you may have to do it freelance.
I see a shift from “want to have” presents to “need to have” presents, and this is where retailers can salvage their holiday seasons. Basic apparel, energy efficient appliances, tools for projects that would have previously been hired out, even sewing/knitting wares are going to be top of many shopping lists. Toys (both kid and adult), sporting goods, high-end consumer electronics and other niceties will drop down several pegs. I’m not suggesting parents will be buying canned hams for their kids, but there will almost certainly be a move to more practical gifts.
When bucks are few but plastic is not
Woes of one’s world can soon be forgot.
Low priced toys will be displayed with care
Assuring all that Santa will soon be there.
There’ll be tightening of the brightening
And, of course, that prospect is frightening.
But the pressure to buy at Christmas time
Will create sales but they won’t be sublime.
And who’s to blame for dismal projections
Adjusted credit card rates or consumer rejections?
Every caution has been thrown in the pot
But there’ll be buying even if the fever isn’t hot.
This is going to be a good year for staples (basic consumer products, not the store.)
This year, all consumers are being affected, whether they are dependent on the next paycheck, or more affluent people who are freaked out after reading their 401K statements. It will be the rare shopper who goes wild and crazy this year. I predict a return to basics, with shoppers retrenching and going for staples they need instead of frills they want.
Why does NRF predict that sales will rise 2% this year?
This is just something we need to do. We can’t keep extending credit forever to deadbeats who can’t pay it back. What’s the point in selling more goods to consumers if they are not going to pay it off? Retailers can make up lost sales by charging irresponsible consumers 29% interest.
I like Aldi’s approach to credit card sales. They just don’t accept credit cards and they are growing and adding stores. I bet Aldi has a good Christmas this year.
One thing to consider is the impact that store closings will have on the per-store sales of remaining retail locations. Whether it’s Mervyns shutting down completely and pushing sales to Target, Kohl’s, and others; or various chains shuttering underperforming units; same-store (comp) sales might be surprisingly respectable this season.
I don’t use credit cards at all. My businesses are all pay-as-you go, and my personal purchases are all debit or graduated payments such as those offered by Bose, Jarden, and others. These graduated payment plans are key to the sales success of many products since they do not require a credit card or a credit check. Any time you see something advertised on TV for “3 Easy Payments,” it’s a graduated payment plan. Look for these types of products and companies to enjoy solid sales through the holidays. Additionally, when they advertise “But Wait, There’s More!,” the buyer can often purchase two gifts for the price of one (sort of).
We’ll still eat well, though, and that’s the essence of the holidays. History shows that when economic hard times hit us, family food expenses are the first to be decreased and the first to return to previous levels after adjustments are made in other, more long-term expenses.
It is my belief that cash will make a comeback and the trend toward debit cards will likely be reinforced. But it’s going to be somewhat tougher for retailers to close sales and build transactions, although debit cards may take up some of the slack. Credit cards are used by retailers to encourage sales by making it simple for the customer, and it is likely that credit card usage is going to decline at least somewhat. There are an enormous number of articles in print and online prompting people not to use credit cards to not stay or get in debt. Some of these stories are of the “10 ways to stay out of debt” type, and usually item number two or three is “Don’t use credit cards.” In some tips stories, readers are admonished not to use credit cards for small purchases, which may stealthily build up debt. There are also a number of stories on the major increases in APRs and how this will affect you personally. The environment now in the popular media is against using credit cards. On top of this are numerous stories on “Hotel Honda” about people who have lost their jobs and are living in their cars.
Prior to the credit crunch, changes were taking place in the way people paid for their purchases and credit cards were among the winners. In terms of the number of transactions (not value), in supermarkets, use of debit cards grew from 32% of transactions in 2003 to 42% in 2007, according to Packaged Facts. Credit card usage moved from 13% in 2003 to 25% last year. Cash nosedived from 22% to 11%. These relationships are likely to be reset with the credit crunch. Cash will make a comeback. Credit card usage will slow. Debit cards will grow due to the illusion that they help to control purchasing and excessive debt accumulation–although they don’t really. Consumers pay billions of dollars on overdraft fees annually with debit cards.
Net-net, it will be more difficult for retailers to generate sales due to the atmosphere against the use of credit, and, while serious, may not be quite as dire as it might seem.
I agree with David Livingston. The situation is ridiculous. Who is accountable for the greed? Us.
Who/what is responsible?
The subprime bubble.
Collateralized debt obligations–CDOs.
Credit default swaps–CDS (unregulated insurance contracts).
Credit cards.
Lending money created out of thin air to people who cannot or will not pay. Fabulous.
Regulation and controls are needed and more realistic growth aspirations.
With all due respect to many of the contributors, the point apparently has been missed. I read words like “if” and statements about the credit practices being applied only to those with poor payment history, and even an outright denial that banks would take these steps. Not to mention an outbreak of “shoot the messenger”!
The Businessweek article, and approximately 8 others in the last 5 days provide solid proof that these actions by the banking institutions are not an “if.” They are real, and no, they do not impact only the “subprime” account holders.
Beyond that, there was an intent in the article which I apparently missed: given these FACTS, what would intelligent retailers do?
And our accumulated contribution to that question was almost nil. Given the realities of the current economic and social situation, how can retailers become more effective NOW? And there are real answers, linked to actual data, which help retailers determine exactly type of actions to take.
Total retail spending: does that include autos? Gasoline? Because it looks like those categories will have an awful Christmas.
Does total retail spending matter to the stores whose competitors have gone under? Bed Bath & Beyond will get a bonus from Linens-N-Things’ demise. Applebee’s will benefit from the closing of Bennigan’s and Steak & Ale.
Will comp trends look better because so few new locations opened this year? Every chain’s worst competitors: their own new locations.
Unemployment is rising. Folks who’ve lost jobs and folks afraid of losing jobs generally stop spending on all but rent and groceries. The grocers have a great subsidy program for their customers and themselves: food stamps. But no one gets clothing stamps. Or shoe stamps. Of course, recent food commodity price declines will hurt supermarket comps.
Furniture stores: they’re in the worst crisis imaginable. Home sales are kaput and so is credit. Furniture is often purchased on credit when the family gets a new house.
So the sales trend for Christmas often depends on what categories you sell, and the weakness of local competition.
Even more urgent: will comp sales be supported by money-losing giveaways that ruin margins? The loss leaders, door busters, 5 AM opening sales, etc, will be more desperate than ever.
And even if customers make Christmas a priority, what do you think February 2009 will look like? The smartest shoppers will wait until then, because they’ll see more “closing this location” and “going out of business” sales. More than they’ve seen since the 1930s.