Lackluster Retail Landscape Talk of NRF Conference

At a conference typically dominated by data technology and store gadgetry, the ailing economy and retail's sharp slowdown took center stage.

NEW YORK — At a conference typically dominated by data technology and store gadgetry, the ailing economy and retail’s sharp slowdown took center stage.

This story first appeared in the January 17, 2008 issue of WWD.  Subscribe Today.

Retailers, reeling from a steep sales drop in December, came in record numbers to the National Retail Federation’s Annual Convention and Expo at The Javits Center here, and for few good reasons. “They’re looking for answers, and to commiserate with colleagues,” said NRF’s president and chief executive officer, Tracy Mullin. She cited a “tremendous” increase in attendance, to more than 18,000 from an expected 17,000.

In years past, things like markdown optimization and RFID created the stir. But this week’s gathering was all about recession — whether it is on the horizon or has actually arrived — and all the external factors that are bringing stores down, such as the subprime mortgage debacle, the falling stock market, inflation, declining employment and Wall Street layoffs.

And, in coping with adversity, retailers can sometimes be their own worst enemy.

“Retailers suffer from the disease of thinking increasing same-store sales by itself is a great solution. It isn’t. You have to grow sensibly,” advised Farooq Kathwari, chairman and ceo of Ethan Allen, the home furnishings chain. Despite being in an anemic sector, Kathwari estimated a fourth-quarter operating margin of 13 percent coming off a 1 percent comp gain. His point: Don’t pursue sales at the expense of margins.

“Tough times create an opportunity to get market share,” said Kathwari, so he’s got his chain on an aggressive strategy to relocate stores where he thinks he can gain market share. Sixty percent of the stores in the 300-unit chain have been relocated in the last six years.

Even for a discounter, the industry’s price-cutting seems out of control, as Kathy Doyle Thomas, executive vice president of Half Price Books, the Dallas-based 100-unit chain selling new and used books at 50 percent off, suggested. “People love a good value, and books are a great value. But discounting is the biggest problem. We are a discount seller. We sell at half price, but the problem is we feel we have to discount more than half price.”

Along with snowballing discounting, analysts and retailers cited other disturbing trends and said to watch for:

– A very tough first half, though economic stimulus from the government, including tax breaks, could bolster the second half. NRF projects a 3.2 percent sales gain in the first half and a 3.8 percent gain in the second.

– A spike in mortgage rates, with a wave of rate resets expected in March and April.

– Further declines in mall traffic.

– Stepped-up store closings, similar to those already made by Macy’s Inc., Gap Inc. and Zale Corp.

– Wall Street skepticism on new retail concepts, following several disappointing ventures that haven’t met rollout expectations, including Forth & Towne, which closed last year, as well as Martin + Osa, D.e.m.o. and Bigelow.

Ira Kalish, global director of Deloitte Research, sees a silver lining. The economic downturn could put downward pressure on oil prices, though the declining dollar could increase it, said Kalish during his NRF presentation. For now, however, oil prices are impacting food prices, and overall, there is a more inflationary environment globally. “We are already seeing a major slowdown in consumer spending.”

In the years ahead, Kalish sees the top trends in retail being:

– Social responsibility with the environment, food and product safety.

– Increasing commodification and shrinking margins, as shoppers try harder to get the best deals.

– Tapping unexploited niches, particularly at the high end, such as Whole Foods focusing on pricier, higher-quality food.

– Retailers selling services to increase share of wallet, such as Best Buy’s Geek Squad that makes house calls to service electronics.

– Emerging market investment in developed markets.

– Greater multichannel integration, and more online retailers investing in stores.

At NRF, store closings were on everybody’s mind. “Usually, we see 2 to 3 percent [of a chain’s store base] pared at the end of the year. It will be bumped up to 5 to 6 percent this year,” said Brian Tunick, managing director of equity research specialty retail at J.P. Morgan, in a session on real estate. “There’s been negative mall traffic for five years. What is going to happen if consumers really slow down? If mall traffic gets even more negative, some companies are really going to feel pinched.”

“Everyone is slowing down square footage growth,” said Deborah Weinswig, managing director and senior analyst at Citigroup. She characterized 2007 as “the most difficult year in my career of 11 years….Everybody was shocked at the speed of how sales slowed.” Asked if she believed a recession is coming, she replied: “I am there now.”

Referring to the possibility of mergers, Michael O’Hara, president of Consensus Advisors, said: “For companies that are historically valued as standalone, now may be a chance to review [those ] perceptions.”

On the bright side, J. Crew, Justice, Zumiez, Delia’s, Hollister, Urban Outfitters, aerie and Gymboree were mentioned by analysts as the healthy ones on the growth track. In addition, consumer perceptions of Wal-Mart are improving, after the world’s largest retailer instituted sustainability and green store programs, and experienced a better Christmas season than Target.

International retailers spotted at Javits said that, outside the U.S., business isn’t necessarily better. “What happens in one part of the world gets replicated in others,” said Andrew Jennings, group managing director of retail for Woolworths in Cape Town. “The marketplace in South Africa is in line with the rest of the world. It slowed down considerably,” due to rising interest rates and restrictions on retailers extending credit as part of a government strategy to curb inflation.

“Retailers can learn a thing or two from ‘Dancing With the Stars,'” said Andrew McQuilkin, vice president and managing director of FRCH Design Worldwide. “You have to perform better each day than the day before or you run the risk of being eliminated.” In this age of cutbacks, McQuilkin advised: “Don’t mess with any consumer touch points,” whether it’s door handles, the surface of cash wraps or the lighting in the fitting rooms. “If you are going to change anything, change the lighting. It’s the one thing that has the most impact. The best lighting is the lighting you never see. You only see how it effects the product.”

Despite all the talk of recession and retail cutbacks, the technology expo was not to be ignored. At the IBM booth, visitors viewed Moschino and Alberta Ferretti fashion shows in 3-D inside a dark room. As models strode the runway, select products such as shoes and perfume appeared to float in the air. IBM has no plans to market the technology, but sees it as a way to improve the customer experience.

Fujitsu and its partner, AbsoluteSky, showed an unusual approach to RFID being tested by Staples in Canada. Expensive items such as laptops are tagged with active RFID chips, which are pricier than the typical tag but have a powerful signal, and readers are located in the ceiling, so Staples knows at any moment when something is in the wrong place or stolen. Thus far, Staples has reduced out of stocks by 21 percent, theft has been zero and gross margin has increased 2 percent on the tagged items. The tags are reusable and cost 8 cents each.

Holt Renfrew is using customer marketing software from SAS, which also unveiled new software to assort sizes by individual store and set everyday prices.

At the X08 Store of the Future Pavilion, the theme was “beyond the walls of retail.” Retaligent, which makes clienteling software, showed a scanning system that could track everything that goes in and out of a dressing room and record reasons why customers rejected items, such as poor fit. Fit Just Right unveiled a service for retailers that aims to let shoppers know what size they will be in any garment. (Companies such as Zafu and MyShape take slightly different approaches to the same problem.)

Other big topics at NRF were the environment and carbon efficiency. In one session, Brenda Mathison, director of environmental affairs for Best Buy Properties, characterized the company as the leading recycler of consumer electronics. Best Buy is producing green products and packaging in its Insignia private label line, and encouraging partners such as Sony and Panasonic to do the same. “We’re a $40 billion company,” she said. “There’s no department that environmental affairs doesn’t touch, from the merchant team to legal to public affairs.”

Kevin Hagan, REI’s director of corporate responsibility, said, “Sustainability took a big turn at REI two years ago.” For example, the chain recently launched eco-sensitive organic cotton T-shirts.

In another panel, Dan Pink, author of “A Whole New Mind,” took a contrarian point of view. “The level of well-being of the middle class is breathtaking,” he said. “The U.S. has more autos than it has licensed drivers.”

Another indicator of abundance is “too much stuff,” Pink said. “Homes are getting larger, households are getting smaller and self-storage is a $22.6 billion industry….We’re in a world of affluence that’s in search of meaning. Does the world really need another retailer? No. We need a better world.”

— With contributions from Sharon Edelson and Cate T. Corcoran