No prop up for Retailers this year

Consumers cannot be expected to prop up retailers as they have in past downturns as Wall Street unravels and the economy confronts its crucial holiday spending season. Even luxury stores, whose customers have been immune in recent years to retail price sticker shock, are expected to take a hit this time.

Most consumers were already struggling with high food and energy prices, shrinking home equity and concerns about their jobs even before the financial crisis hit with a vengeance. Now, those with big exposure to real estate and stock market investments are suffering as well.

It has been a bad year for the consumer already, and this latest round of developments has probably not fundamentally changed the situation. The people affected now are the upper end who have or had accumulated wealth and have lost a third of it. This is the one affecting the luxury sector.

Research forecasts a 2.5% increase in spending for the period between October and January, but after accounting for inflation of more than 4.5% that’s actually a decline, and puts this holiday season on a par with downturns in 2002, 1991 and 1981. The end-of-the year sales period is critical for retailers because spending during the holiday season can account for 40% of retail sales, and more than half the industry’s profit. Moreover, consumer spending accounts for 70% of GDP.

Consumers are extremely pessimistic. This news does not bode well for retailers who are already bracing for what is shaping up to be a very challenging holiday season.

The good news for retailers may be that they were already expecting a weak season. Warning signs of trouble were brewing before the holidays a year ago as credit tightened, home sales declined and gasoline prices were on the rise. Now, with a severe stock market collapse and a growing list of corporate layoffs, retailers are braced for hard times.
Amazon is already seeing weakness in purchases over $1,000, in particular. Build-a-Bear workshop, the St Louis-based specialty stuffed animal chain, is emphasising its $10 products. On The Today Show, Neiman Marcus unveiled its traditional holiday gift catalog for the ultra-rich, including the Dallas Cowboys’ end zone of the soon-to-be-replaced Texas Stadium for $500,000. But later in the program, Neiman Marcus also presented some lower priced gift ideas, including slippers, pajamas, popcorn and a selection of teas in the $100 price range.

While all consumers are suffering, affluent individuals have been more heavily exposed to highly leveraged positions in real estate and equity markets. Those consumers are now feeling the effects of the financial crisis as housing, equity and emerging markets all pull back at once. Financial advisors failed to rebalance portfolios and poured investments into high-performing categories just as the bubble peaked, setting their high-net worth clients up for today’s shocks.

People whose net worth has dropped from $5 million to $3 million, for example, “are feeling anxiety that they have never felt in their lives”. People in this income bracket were business owners who worked a lifetime, or across more than one generation, to accumulate wealth that has now evaporated. The volatility you see in the market is something you rarely see day-to-day in a business, and it’s a new experience. They felt very comfortable at $5 million; at $3 million, their retirement and lifestyle are in jeopardy.

There will be a Christmas and there will be gifts, but it will be a lean Christmas. Who wants to run up all these credit card bills when no one is sure what the future holds? Gift-givers will be looking for value-driven products or will splurge for something that is new and special. If they are going to part with their money, there better be a compelling reason.