Proceed with caution — that seems to be the mantra for shoppers heading into the new year, and retail analysts couldn’t agree with them more.
This story first appeared in the January 12, 2010 issue of WWD. Subscribe Today.
As the U.S. economy remains sacked by this “severe recession,” consumers are still staring down the double-digit unemployment rate and a sharp decline in household wealth. “There is going to be this continued shift from spending to saving in 2010,” said Ryan Sweet, a senior economist with Moody’s Investors Service.
No immediate relief is in sight, considering Moody’s expects the unemployment rate to peak at 11 percent in the third quarter of this year. Another inhibitor on personal spending is the fact that, through the end of last year, household wealth fell 19 percent below its peak in the second quarter of 2007, resulting in a loss of $12 trillion, Sweet said.
“Consumers were more active than anticipated in the fourth quarter, likely encouraged by moderating declines in labor compensation and higher equity prices. Also, consumers have some cash available via federal government transfers, but this pace of spending will be difficult to maintain,” he said. “Consumers are still deleveraging, and their access to credit remains impaired. Combined with a double-digit unemployment rate and difficult hiring conditions, this points toward a more moderate pace of spending in the first half of this year.”
He added, “Growth in apparel sales will lag overall spending for most of this year. Consumers seem unconvinced that the recession is over. Consumers will remain focused on building a savings cushion and because apparel is somewhat discretionary, sales will struggle this year.”
Last week many companies reported December comparable-store sales that beat their own expectations, and which led to a bevy of upgraded fourth-quarter earnings guidances from retailers including Macy’s Inc., Kohl’s Corp., Nordstrom Inc., Limited Brands Inc., Aéropostale Inc. and, in the red-hot off-price channel, The TJX Cos. Inc. and Ross Stores Inc.
Last week’s news was in sharp contrast to the dismal numbers of December 2008, which were marked by widespread declines, deep discounts and consequent low margins and excess inventory.
Macy’s noted a strong performance at its Bloomingdale’s unit in reporting a 1 percent increase for the month. Gifts and designer labels were key to that lift, the company said.
While chairman, president and chief executive officer Terry Lundgren cautioned the nation’s high unemployment, tight credit and deflated home values are still in play, he said he was encouraged by recent trends.
“I believe we can take market share,” he said. “Comps are going to become easier, particularly in the first half of 2010, but the consumer has more clarity today than in over a year, in terms of their jobs, their financial status and their credit situation. I think the consumer is significantly more positive than a year ago. The overall situation is easier to read. I’m not saying it looks great, but we can plan for it better than we did in the past.”
Christine Chen, senior analyst at Needham & Co., expects shoppers to spend a little more freely this year, and their perception of value is not necessarily mandated by price. A $100 sweater with details that make it look as though it should cost $200 is more tempting than a $10 sweater that looks like it cost $5, she said.
The uptick in holiday sales shows that “clearly the consumer did come out and spend when she needed to,” Chen said. Even luxury sales were up, albeit against last year’s weak numbers, she said.
“The luxury consumer is tip-toeing back. Maybe the aspirational luxury shopper is having a difficult time, but those consumers might represent a small number in the luxury sector. “
More middle-of-the-road retailers could be facing a tougher time because “they are not value or special,” Chen said.
“There is not a mentality of going out and spending every dollar you have. But if you are saving more, that does help with spending,” she said. “Based on last week’s retail sales numbers, it seems consumers are feeling better. Things seem to be stabilizing.”
Having been bombarded with news about the shaky economy and the slow-moving global recession, several consumers shopping in Midtown Manhattan recently said they will try to shop more responsibly and live within their means. Interestingly, several said they planned to maintain their annual clothing expenditures but will be more selective, with discounted merchandise continuing to be a major selling point.
Leafing through a sale rack at Saks Fifth Avenue on Thursday, Alicia Hernandez Chavez, who lives in Mexico and Italy and travels extensively as a published college professor, said, “We’re all saving. Why are we here? Shopping for sales. That is all I will buy.”
Interestingly, consumers are more willing to disclose their thriftiness, which used to be withheld as a matter of pride, according to Gallup’s chief economist Dennis Jacobe. In its “Do you enjoy spending or saving more?” survey, 58 percent of respondents favor saving and only 40 percent relish spending. “There has been a dramatic change. Consumers are talking about what they bought, where and how much they saved by not shopping someplace else,” Jacobe said. “People are actually taking pleasure from not spending as much and being part of the demographic that shops less.”
Leaving Saks Fifth Avenue’s flagship empty-handed Thursday, Jan Jones said that was the first department store she had been to in months. She now only buys what she needs and is shopping more online “so she won’t be tempted.” Jones said, “I have already changed the way I spend my money.”
Her friend and fellow Tucson, Ariz., resident Vickie Terzano said she will only go into stores if she knows what exactly she wants. “I will zero in on that one thing. I am not one to browse,” she said.
Despite their focused approaches to shopping, each said they expected their annual clothing expenditures to remain unchanged next year — $1,000 for Jones and “a little more than that” for Terzano.
New York-based journalist Amber Michelle said she does not plan to tighten her personal spending this year. “I’m lucky enough to have a full-time job. I have always been very fiscally responsible and never run up credit card debt. If I have the money to spend and I see something I like, I buy it. It is more an issue of time for me,” Michelle said.