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For a battered California economy that’s endured crushing hits from the housing market collapse, shrinking consumer spending, a tight credit market and natural disasters like fires and floods, 2009 could deliver even more painful blows — and already-hurting retailers may absorb a large share of the pain.
This story first appeared in the January 7, 2009 issue of WWD. Subscribe Today.
California is locked in its worst budget crisis, with Gov. Arnold Schwarzenegger declaring a financial emergency amidst a Legislature deadlock on how to close a two-year budget gap that grew to $42 billion, as job losses and stalled consumer spending cut income and sales taxes.
The City of Los Angeles, which has a $7.1 billion budget, is faring poorly as well — its deficit for fiscal year 2008-09 grew by $30 million in December alone, to $86 million from $56 million, largely due to lower-than-expected property and sales tax collections. The deficit for fiscal 2009-10 is expected to be $433 million.
“Things will certainly get worse before they get better. Residents and businesses are really hunkering down for the next year,” said Jack Kyser, chief economist for the Los Angeles County Economic Development Corp. “This is a very rough environment for retailers, and there will be more bankruptcies and store closings, to be sure.”
While retailers slashed prices earlier than ever, sales of apparel and luxury goods fell by double digits, according to a SpendingPulse report on retail sales, with sales down 8 percent in December through Christmas Eve.
With recovery not expected until 2010, economists and retailers foresee tough times in the first half of 2009, and will need to sell spring merchandise at full price to hold profit margins.
“I don’t know how much more you can cut after going to 80 percent,” said Lisa Kline, whose namesake boutique chain tried to keep discounts at levels to lure consumers yet maintain some semblance of profits. “The early sales and discounts from the big chains are just killing specialty retailers.”
Following the worst holiday shopping season in years, 2009 projections are dismal for most retailers.
After her billionaire financier father took a stock market beating, teenage Russian designer Kira Plastinina, for example, shuttered recently opened U.S. stores, including shops on trendy Robertson Boulevard and Beverly Drive. Other boutiques, like Presse, Built by Wendy and the iconic Tracey Ross were also casualties of the tanking economy.
To hang on, many stores have changed strategies, revising expectations downward, drastically scaling back inventory, carrying merchandise at lower prices and altering marketing plans to compete for the fewer dollars being spent.
“Apparel is tanking; there’s just no way to keep women’s [clothing] on the same level it was a year ago,” said Kitson boutique chain owner Fraser Ross. “It’s accessories and gift sales that are really pulling the weight, and our sales staff knows to cater to the girls coming in — they’re the only ones spending right now.”
There are a few rare bright spots on the landscape, however, with e-tailers like Amazon.com and Orange County-based Buy.com posting record sales.
“We saw the best Black Friday and Cyber Monday to date,” said Buy.com chief Neel Grover. “We’re reaching a broader demographic than ever, skewing younger and to more women, as we’ve nearly doubled our product categories.”
Michael Mente, co-founder of revolve.com, dropped projections for the new year and expects his Los Angeles store to account for less than 5 percent of Revolve’s overall sales.
“We want the store to be one of those places in L.A. people just have to go to, but clearly that’s going to be a few years down the road because the timing isn’t right,” Mente said. “When the big stores cut prices, we have to follow suit. It’s a tough game. We just try to have different and unique items, that something special you can’t find elsewhere.”
Retailers who hang in by finding leaner ways to operate, though, could find opportunity as others in the marketplace go under.
“People will have to find a number of smaller ways to make up for the losses,” Kyser said. “It will be an interesting time to see who survives and how.”