Drowning the little bit of optimism retailers have felt since the late Christmas surge, Stephen Roach, chief economist at Morgan Stanley, on Monday predicted “a double-dip recession,” where demand goes up and then plops down again. That’s happened in the last five of six recessions, Roach observed, while attending the National Retail Federation convention at the Javits Center here, during a session on what drives shareholder value. Roach’s comments echoed those late last week of Federal Reserve Chairman Alan Greenspan, who downplayed the prospects of a quick recovery in the economy.
December retail sales figures ended better than expected, but still were not that great. With the uptick, the convention could have started on a high, but Roach stated that the recession is more about “purging the excesses of the Nineties, than with Sept. 11,” meaning it will be potentially tougher to pull out of than some retailers believe. The nation may not yet be ready to “restart the demand engine,” he said.
The recession and when the economy will bounce back, fallout from last year’s weak comp-store sales performance and the uncertain futures of Kmart and several players in the department store sector were the primary concerns at the convention, which began Sunday and concludes Wednesday. There was also an undercurrent of concern about the future for apparel and the monotony of malls and sameness that pervades most of America’s retail floors. However, some retailers said the cycle is swinging back to fashion, and that the country is ready to move away from the boredom of basics.
“We’re in a period of stagnation,” added Walter Loeb, president of Loeb Associates, who joined Roach on the panel. “I don’t think there will be a quick recovery. The consumer is still worried about employment, debt and the stock market. Maybe we will be coming out of recession in the last part of the year.”
Consumers have “downsized” their spending, though retailers will respond through tighter controls, Loeb added. He characterized the current level of consumer spending as very moderate.
“It’s going to be a business-led recovery,” said Roger Farah, president and chief operating officer of Polo Ralph Lauren, one that is sparked by capital investments and rebuilding inventories, as opposed to a consumer-led recovery. That means retailers could very well lag in the recovery.
Farah said the number one priority for his company was international expansion, and that Polo Ralph Lauren’s business in Asia and Europe, representing about $1 billion in volume, could be as big as the U.S. business, at $3.5 billion.
Despite the worldwide downturn in luxury spending, Farah said: “Europe might represent a great opportunity for accelerated growth at high margin. We have enormous upside in this luxury product.”
According to Terry Lundgren, president and chief merchandising officer of Federated Department Stores, the top priorities are simplifying the shopping experience, including: faster transaction times; adding categories that customers want Federated to sell, such as children’s shoes; making its value proposition clear through different advertising and marketing, and not a price-cutting message; adding excitement to the assortments through exclusive products and more private brand merchandise — it will step up wholesaling to retailers it doesn’t compete against, and continuing to open smaller stores.
Both Lundgren and Farah agreed that the nation is entering a fashion cycle, and that the trend to basics has run its course.
Leonard Lauder, chairman of The Estee Lauder Cos., cited “a huge imbalance between what stores are selling and what they are buying from Lauder.” However, he expects a surge in replenishment in the first half, though he’s concerned stores will be too cautious. Like others at the NRF, Lauder complained that stores lack entertainment, such as cooking lessons and fashion shows. “Stores can learn a lot from what retailers did in the Thirties.”
Angela Selden, managing partner, North American Retail Practice, Accenture, sees 2002 as a year of reinventing, in preparation for better sales in Christmas 2002. However, Selden said she questions whether retailers have the courage to innovate. She advised luxury stores to reach broader consumer segments and identify new brands to sell. Further bringing down the mood was Bill Wolf, managing director and head of the retailing industry group for Goldman, Sachs, who said the run-up of retail stocks has pretty much run its course. He also suggested retail buyouts may be on the rise. “The level of inquiry from leveraged buyout firms is the biggest it’s been in 10 years. They’re asking what are the interesting retailers to invest in.”
There was little consensus on what quarter the recession will end, but generally, economists and analysts at the NRF Monday predicted:
Unemployment will approach or hit 7 percent.
Another rate cut by the Federal Reserve this month.
The impact of past rate cuts and a possible stimulus package won’t be felt until at least the second half of 2002.
Retailers should be planning for better business in 2003, and using this year to implement change, like redirecting businesses, closing poor-performing stores and investing in technology to drive sales through better inventory management and targeted marketing.
But there is no consensus in their crystal balls. Among the most optimistic was Jonathan Lipsky, chief economist at J.P. Morgan Chase & Co. He predicted that the recession would conclude in the next couple of months and would be the mildest recession in the last 30 years. He forecast that consumer spending would gradually increase to a sustainable level of 2.5 to 3 percent this year, but not the 5 or 6 percent seen in the Nineties.
In her own presentation, Roz Wells, chief economist for the NRF, was also on the upbeat side, characterizing the recession as mild, with the economy poised for a U-shaped or gradual recovery path that will begin to be evident in the first quarter this year. She forecast that general merchandise, apparel and furniture and home furnishing (GAF) sales will grow 3.7 percent this year, compared with 2.2 percent seen in 2001.
She cited some pent-up demand for fashion, low interest rates, falling energy prices, mortgage refinancing and stock market picked as positives, though not pent-up on the durables side, to drive consumer spending.