Luxury retailers are no longer immune to the jitters that have plagued other retailers in past spending troughs. In recent years, luxury retailers had been able to sustain strong growth by developing new entry-level brands and products to draw in ‘aspirational’ shoppers with lower incomes than traditional customers. Now those aspirational spenders who helped support high-end retailers in recent years are more susceptible to the economic downdraft than long-time clientele. Luxury retailers are no longer safe in their business.
The most vulnerable retailers are department and specialty stores in the middle market. These retailers offer a product mix that is highly discretionary and affected sharply by the loss of income or layoffs.
Small, independent retailers will also struggle. On the one hand, they know their customers extremely well and can merchandise effectively in a downturn. But with the higher costs of borrowing and with consumers looking for the best price possible, independents will be squeezed.
Locally owned shops usually can’t offer the lowest price because they are too small to buy directly from manufacturers and must cover the costs of their wholesale supply network. They are going to get hit like everybody else. Not surprisingly, discounters fare better than other retailers in recessions because they pick up more middle market customers. This trend was strongly evident in the 1991 downturn.
The Family Dollar chain, which sells most of its inventory for less than $10, has been taking steps for nearly a year to prepare for the current economic slump. The company’s target customer earns up to $30,000 a year, but the company is now expecting to see an increase in sales to people earning up to $40,000.
The company has shifted its inventory mix to more consumables such as cleaning supplies, food and paper products and away from more discretionary items, such as home goods. They look at their customers they would rather have a $1 lower price than 1,000 more points on the Dow. The trade down is a benefit for them but their focus is on the core customer.
Because the industry had so much time to see the problems coming, it has been exceptionally proactive in managing for the coming slump. Inventory-to-sales ratios are at historic lows and retailers have been extremely cautious month-to-month about hiring. Retailers are not going to get the panicky promotions that we have seen in some recessions. They have planned more conservatively going into this holiday season than in the past, which means they will make money on what they do sell. Nonetheless, costs are still going up, and if you don’t have revenue increases, it becomes challenging to grow profitability.
Indeed, according to a BBDO survey, chief marketing officers at 100 retail companies with sales of more than $100 million predict that same-store sales in the next two months will fall an average of 2.7% over last year’s figures, while 88% of those surveyed expect to offer more discounts and promotions than in 2007. In addition, while 20% of the executives forecast an increase in sales this season, 41% predicted flat sales.
Retailers’ top strategy should be to survive. Past holiday spending downturns prompted a rash of post-holiday bankruptcies and mergers. There will be some consolidations and store closings in the mid-market. West Coast retailer Mervyn’s, for example, recently closed its doors but perhaps not as many as in the past because most of the merger deals have already been accomplished.
In other times of weakness a strong player with deeper pockets would get more aggressive and try to steal share and business. Now that is also not happening this time. Everybody is going to hunker down and be very circumspect. The nation has excess retail capacity. Retailers will reduce locations or eliminate store openings. They should become aggressive on promotions and pricing not with the intent of grabbing business, but just hanging in there.