December 28, 2010
American shoppers expanded their year-end purchases this holiday season by the biggest margin since the boom year of 2005, but retailers still face daunting challenges in the new year, from rising gasoline and cotton prices to an overabundance of stores.
U.S. retail sales, excluding automobiles, rose 5.5% between Nov. 5 and Dec. 24 compared with a year ago, according to MasterCard SpendingPulse, a unit of MasterCard Advisors that tracks sales by all types of payment.
Last year, sales rose 4.1% during the 50 day period, but those results were easy comparisons against the recession in 2008, when sales fell 6.1%.
“To sum up, the holiday season is a joyous one,” said Sherif Mityas, a partner in the retail practice of A.T. Kearney, a global management consulting firm. “Consumers are looking to spend again. They are more confident than they had been.”
The numbers were not reflective of a late December storm, which did not hit most of the East Coast until Christmas Day or later. The day after Christmas is traditionally one of the season’s biggest shopping days but retailers are expecting that shoppers will simply delay their purchases, not abandon them.
Just how long retailers’ confidence will last for shoppers and stores alike is the big question.
A consumer sentiment index released Thursday showed consumer moods were at their highest level in December since June. Recent surveys of chief executives and chief financial officers likewise show a growing number of companies expecting to increase hiring and spending over the next year.
This year’s improved job and stock markets, and the two percentage-point cut in employees’ payroll taxes that’s coming in January should make people a little freer with their money, according to J.P. Morgan Chase economist Michael Feroli. He forecasts U.S. consumer spending will rise 3.5% next year, the fastest pace since 2004.
During the holiday season, clothing posted the strongest gain, up 11.2% over the same period last year when apparel sales were roughly flat. Electronics sales rose only 1.2% this year, as a glut of televisions drove prices down and shoppers shied away from innovations such as 3D TVs. After several years of lackluster sales, jewelry was a standout category notching an 8.4% sales gain.
The day after Christmas, Kim Beaver, a 51-year-old housewife and mother of four from San Jose, Calif., was at NorthPark Center in Dallas shopping with family and sporting a white gold and diamond key necklace her husband had put under the tree for her.
“We definitely spent more this Christmas, because we had more to spend,” said Mrs. Beaver. “My husband got a new job as the chief financial officer at a solar energy company.”
But risks to consumer spending loom. Strained state and local governments may be forced to lay off more workers than previously expected, said UBS economist Maury Harris.
And rising energy prices could pinch spending on other items in the months ahead. This month, the average price for a gallon of gasoline has topped $3 a gallon for the first time in two years.
Rising oil prices hasn’t damped consumer spending yet, said Kip Tindell, chief executive of the closely held Container Store, a 49-store chain of home storage and organizing merchandise based in Coppell, Texas. But if oil prices rise significantly in 2011 “it will definitely affect retailers,” he said.
Another potential hurdle: The housing market. If slipping prices set off a new round of foreclosures, banks may rein in lending again. The saving rate has recently slipped—in November, consumers saved 5.3% of their after tax income, compared with 6.3% in June. Any fresh shocks to confidence could prompt them to start saving more, and spending less, said economists.
Oslyn James, a Brooklyn elementary school teacher, represents the shopper zeitgeist, a desire to spend tinged by caution. Ms. James arrived at Roosevelt Field Mall in Garden City, N.Y., ahead of the blizzard the day after Christmas to avail herself of the steep store discounts of between 60% and 70%.
Ms. James said she spent more on Christmas gifts this year, but plans to pare back her spending after the holidays. “I don’t know what the New Year will bring,” she said.
Over the past four quarters, consumer spending accounted for 68.6% of demand in the economy, up from 66.5% in 2007. The reason: With housing contributing less to the economy than at any time since World War II, and with businesses spending also down sharply, consumer spending is taking a larger piece of the overall pie.
Even if shoppers continue to loosen purse strings in the year ahead, the retail landscape is still littered with too many stores for all to prosper. The U.S. now has some 40 square feet of retail space for each person—the most per person in the world.
With the growing momentum of Internet sales—Web sales grew 15.5% during the holiday season—competition is going to get even more fierce, he said.
Meanwhile, retailers that specialize in creating inexpensive fashionable clothing such as Uniqlo, Zara and H&M have big expansion plans in the U.S. “Get ready for a whole new battle for market share amidst a stable consumer pie,” said A.T. Kearney’s Mr. Mityas.
Retailers have learned to better align inventory with the rate of sales to avoid panic discounting that erodes profits. Saks Inc. has been working to wean customers off of the hefty discounting that began in the throes of the recession two years ago, but has done so at a cost.
Offering fewer promotions, “clearly does affect growth,” Saks Chief Executive Steve Sadove said in an investor conference call earlier this month.
Saks forecast a “mid-single digit” sales growth for the second half of the year. But Mr. Sadove said growth would have been in the double-digit range had the company offered more discounts.
A major concern for apparel and home goods makers in 2011 is the impact of rising cotton costs on the price of products. Andrew Tananbaum, chief executive of Capital Business Credit, which finances small and medium-sized manufacturers, predicts that the wholesale price of items with “high cotton content” will likely rise at least 10% for goods that consumers will start to see in the summer of 2011.
The increase marks the first time apparel will be inflationary in at least 20 years. Retailers will likely take a between 3% and 5% hit on margins for cotton-heavy products to avoid raising prices too drastically, he said.
Rising cotton prices “is a real issue,” said Pete Nordstrom, president of merchandising at Nordstrom Inc. If prices go up by 10% or more, as predicted, retailers will have no choice but to pass along price increases to consumers, he said.
For more information, visit: http://online.wsj.com/article/SB10001424052970203731004576045742629998416.html?mod=WSJ_business_whatsNews