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Plastic Wrapped: Shoppers Back Away From Credit

The consumer credit bubble that helped Americans fill their closets and propelled unprecedented store openings is deflating.

Retailers are going to have to adjust to consumers using less credit.

The consumer credit bubble that helped Americans fill their closets over a prolonged buying spree and propelled unprecedented store openings is finally deflating — and bringing the fashion industry’s prospects down with it.

How many chains are ultimately impacted as shoppers once again become savers won’t start to come into focus until after the holiday season. But there is a consensus about one thing: 2009 won’t see any consumer spending sprees, and retailers will have to adjust pricing and inventories accordingly.


“By the end of January, we will have many fewer retailers than we do today,” said Charles McMillion, president and chief economist at MBG Information Services, who has been trying for years to raise the alarm on consumer indebtedness.

And it will take even longer to know how consumer attitudes toward credit are changing. No one is expecting a complete return to the Depression-era, mattress-as-savings-account mentality, but credit in all its forms is falling out of fashion.

“We don’t know how long it will last, but this is definitely a new attitude toward credit,” McMillion said. “The majority of households have probably been spending more than their aftertax income for four years. They were able to refinance their homes, and they were able to get loans of one type or another, whether with credit cards or something else. Now that they don’t have access to new debt, they don’t have any choice but to cut back spending.”

Even though people are shying away from new debt, declining values on homes and other assets means the amount of debt held, as compared with total net worth, has continued to rise.

Household debt to net worth reached a record 25.8 percent in the third quarter, above the 24.3 percent in the second quarter and percentages closer to 15 percent seen in the severe 1981-82 recession, according to McMillion’s analysis of the Federal Reserve’s flow of funds report this month.

As they watched the stock market implode and Washington take over large swaths of Wall Street, consumers were loath to take on new loans — or were unable to as banks reined in lending. Total consumer credit fell at an annual rate of 1.6 percent in October, according to the Fed. Much of this was driven by a steeper 2.5 percent reduction in nonrevolving credit, such as auto loans. Revolving credit, such as credit card debt, was down 0.2 percent.

“What we’re seeing is a dramatic retrenching in households in terms of the debt they hold,” said Frank Badillo, senior economist at TNS Retail Forward. “We’ve seen an expansion in the availability of credit by the financial industry that helped drive a boom in retail spending and retail expansion. Now that that easy credit has disappeared, it’s clearly taken away one of the key drivers of retail sales in recent years.”

Last week, TNS predicted sales would not see a clear rebound until 2010. So far this year, retail sales outside of automobiles and gasoline rose at an average rate of 2.3 percent, and the consulting firm expects that rate is slated to slow to 2 percent next year. Inflation-adjusted sales are expected to ultimately rebound to 4 percent growth, down from the 5 percent pace averaged over the past 10 years.

The downdraft in credit also means shoppers are going to be on the lookout for deals more than ever — and not just during this dismal holiday season.

“Consumers will be bargain shoppers,” said Sara Johnson, managing director of global macroeconomics at IHS Global Insight. “They’re definitely looking for ways to cut their monthly spending and put a little more away in their savings accounts or pay down debt. Going forward, we will see a higher savings rate than over the past five years.”

Some of this shift in attitude is simply an ebb in the usual cycle. Economists expect consumers to take a more cautious stance during recessions and therefore not run up credit card bills — no matter how much they want that Downtown tote from Yves Saint Laurent.

“Whether attitudes have really changed is something that only time will tell,” said Scott Hoyt, senior director of consumer economics at Moody’s Economy.com.

Consumers wanting to build financial reserves are going to have to actually put away savings rather than wait for the value of their stock portfolios or their homes to give them a boost.

In past downturns, consumers had somewhere they could sock away their money. For example, some investors who got burnt in the dot-com bust began pouring money into their homes in 2000.

“Now there doesn’t even appear to be a safe haven,” Hoyt said.

The government recently began selling Treasury bills that yield no interest, and investors jumped at the chance to put their money somewhere that was safe, even if it wasn’t profitable.

“What we’re going through now isn’t nearly as bad as the Great Depression,” Hoyt said. “The Great Depression impacted an entire generation in terms of their saving and spending behavior.”

But he added that today’s economy is “probably bad enough to have some impact on consumer behavior from a longer-run perspective.”

Despite all the comparisons with the Thirties, many economists said the economy is in better shape today simply because policy makers are acting aggressively, if not consistently, to avoid another Great Depression. The problem is, there’s really no telling where the meltdown that began with subprime mortgages and then spread to banks and investors and everyone else will take us.

“There’s little confidence in things being stable, and credit relies on an atmosphere of stability,” said Leon Nicholas, director of retail insights at MVI Retail Insights.

Even in a shifting economic landscape, characterized by recession, job losses and fears for the financial system, there are things stores can do to cope.

Layaways, a tactic that’s being promoted anew by Sears and Kmart stores, will become more prominent, Nicholas said.

Stores also might get more involved in issuing credit to shoppers. Wal-Mart Stores Inc.’s Web site on Friday was offering a credit card with no interest on Wal-Mart credit card purchases of $250 or more if the minimum payments were made and the balance is paid off in a year.

Nicholas said retailers are also issuing more cards with lower limits and special deals, such as six months to pay down debt.

Although charge cards with a limit of just $100 or $200 might be a relatively novel wrinkle, retailers have a long history with branded cards, which are used as marketing tools and appeal especially to loyal customers.

There is risk, however, whenever a retailer arranges credit for its shoppers.

The ratio of store-branded charge cards that were more than 60 days delinquent in November rose to 4.8 percent, up dramatically from 3.9 percent in August and 3.7 percent in November 2007, according to Fitch Rating’s Credit Card Index. Most of the cards in the index can only be used at the store where the consumer got them.

“Rising delinquencies will pressure card issuers and their retail partners during the coming year as Fitch expects a scenario akin to nearly one in eight cardholders defaulting on their store cards,” said Mike Dean, managing director, when the index’s shift was reported earlier this month.

Most retailers that operated the back-end financing of their credit card operations got out of that business earlier this decade, with Target Corp. and Nordstrom Inc. the most significant exceptions among fashion retailers.

There are benefits to credit card operations. Chains can control just how much to lend, and they also can pull in additional income, though they can be left with significant financial burdens when the economy sours.

“It’s a huge competitive advantage for the two or three retailers who were clever enough to keep their own credit card operations,” said James Smith, chief economist for Parsec Financial Management. “They can expand without having to worry. For the rest of them, they’re issuing a GE card or a Citi card or some other major lender who’s tightening the screws like there’s no tomorrow.”

But many consider credit card operations to be more of a liability than an asset as the credit markets tightened with the financial crisis.

Target’s net write-offs for bad debt nearly doubled in the third quarter to $210 million, from $107 million a year ago. As of Nov. 1, the discounter had allowances of $765 million to cover doubtful accounts, up 43.7 percent from a year earlier. In May, the firm sold a 47 percent interest in its credit card receivables to J.P. Morgan Chase for an initial investment of $3.6 billion.

Even as Americans scramble to save money, they have a long way to go to catch up with their counterparts around the world.

U.S. households will have saved 1.6 percent of their disposable incomes this year, according to the Organisation for Economic Co-operation and Development. Meanwhile, households in France, Germany, Ireland and Switzerland all would have saved more than 10 percent of their disposable incomes. And, observers say, if American saving rates approach those levels, retailers face an even tougher time.