NEW YORK — Although consumers seem to be increasingly resilient to the economic uncertainties plaguing the market, many retail experts are concerned that a daily drumbeat of negative news — especially during a presidential election year — could curb their spending habits.
Moreover, retail analysts agree that the current jobless recovery coupled with rising prices at the pump could prove to be damaging.
“Americans are trying very hard to live a normal life despite all of these happenings,” said Kurt Barnard, of Barnard’s Retail Trends Report, adding that the job picture is “the one real fly in the ointment.”
Kristin Bentz, a trend analyst with Kinney and Kinsella, a marketing and creative services firm, said, “The bottom line is: If you don’t have a job, and if gas and heating oil expenses go up, that eats into household budgets. So you can’t afford to gas up the car and you can’t go shopping.”
From a retailer’s perspective, there are other concerns. In an April 7 speech to the Little Rock Regional Chamber of Commerce in Arkansas, Wal-Mart president and chief executive officer Lee Scott said the company was troubled about rising fuel and health care costs, calling on the federal government to reform the latter, according to a report in the Arkansas Business Journal. Wal-Mart shells out $2 billion annually on health care, according to Scott.
In his 40-minute talk, Wal-Mart’s ceo also said he was concerned that negative political ads — presumably those sponsored by Kerry or liberal lobbyist MoveOn.org — would portray the country as in bad shape and inflame consumer worries over unemployment and outsourced jobs.
The unemployment rate has been hovering just below 6 percent for the past few months. Most economists get jittery when it rises above that mark. Meanwhile, there have been signs that middle-income consumers are increasingly making more cost-conscious, value-driven choices.
Target Corp.’s March results, for example, which were driven by the flagship division, were strong enough that chairman and ceo Bob Ulrich said the company expects to outperform first-call earnings per share of 45 cents. Comp-store sales rose 7.8 percent at Target Stores.
Warehouse clubs also have shown recent strong results, propelled in part by middle-income shoppers who are choosing to buy food in bulk and then are finding deals on everything from apparel to personal care products while in-store.
A spokeswoman for Natick, Mass.-based BJ’s Wholesale acknowledged the role the chain’s 78 gas stations have played in recent weeks in attracting shoppers. Gas sales have increased during that period, she said.
“Anytime there is a national spike in gas prices, consumers become more conscious of their gas purchases and seek lower-cost alternatives, making BJ’s a destination during a time when consumers are looking for ways to save money and time,” she said.
On the West Coast, retailers are optimistic. “In all honesty, I don’t think we’re seeing anything negative in consumer spending right now,” said Jim Famalette, ceo of Gottschalks, based in Fresno, Calif., noting comps at 63 department stores in the Western region rose 11 percent in March over last year.
“I personally think we’re seeing the economy slowly recover,” he said. At Gottschalks, consumers are responding favorably to color (pink), short skirts and flip-flops this spring. Famalette believes California residents, who have suffered the highest gas prices in the country, have largely adjusted to prices of $2 a gallon or more. On the terrorist front, Famalette believes consumers have accepted that a possible attack could occur but is hard to predict. “We don’t let it dictate our lives anymore,” he said. “There isn’t a person out there who hasn’t seen their financial condition improve with the improvement of the stock market, either.”
Michael Gould, chairman and ceo of Bloomingdale’s, described consumer spending as enthusiastic. “Regular prices and better prices are selling. But the world is fragile, and each quarter going forward, we’ll be up against tougher comps. But we still see tremendous opportunity ahead, though not of quite the same magnitude that we’ve been seeing recently. The gains will not be the same, but it will still be terrific. The key for us rests in upscale, limited-distributed merchandise.”
Britt Beemer, chairman at Charleston, S.C.-based America’s Research Group, said he’s not surprised Americans have so far ignored the daily doom and gloom in the news. But he quickly added that rising fuel prices could cause some spending ripples. “Americans are more resilient than you think,” Beemer said. “Since the first of the year, consumer spending has been pretty good.”
However, Beemer said if the violence in Iraq continues to worsen, he fears stock prices could fall, which would erode consumer confidence.
Deborah Weinswig, equity analyst with Smith Barney, said she’s not seeing a decline in overall store traffic. “Compared to what the country has been through, it has been a distraction,” Weinswig said. “When you talk to senior management in retail, they talk about a major event. Since that has not happened, and as long as the violence isn’t on our soil, it will be a distraction.”
Retail analysts say that what’s helping clothing, accessories and footwear sales are the new fashions and bright colors this spring. They’re helping to make consumers feel better. In addition, most observers said tax refunds are helping to protect the top line, which offsets higher, fuel-related transportation costs.
However, Marshal Cohen, chief industry analyst of The NPD Group, said retailers in the past year have changed the way they evaluate business operations. While change in weather patterns has traditionally been the mitigating factor when retailers evaluate weekly and monthly sales results, some observers note retail executives are now looking at the news and its impact on the consumer.
As the nation saw in the days post-Sept. 11, shopping is just as psychological as it is emotional. And with so many more influences today affecting the consumer mind-set, people have changed the way they shop, Cohen said.
Kenneth Wasik, director of the consumer products group at investment bank Houlihan Lokey Howard & Zukin, said consumers are influenced by the spate of negative news, especially after three years of wallowing in a soft economy.
Wasik said he is concerned over the ongoing world conflicts as well as its impact on commodity prices, including oil and shipping costs. “Americans have been used to decreasing prices on everything, and I wonder if we will see a turning point when prices creep back up, whether it is apparel, personal care or home goods,” Wasik said.
Meanwhile, some are saying that growth in consumer spending is expected to wane starting in fall 2004, the first decline since spring 2003.
That’s the conclusion drawn from a Deloitte Research Index of Consumer Spending, released on April 12. The expected decline is largely the result of fewer tax reductions. The index comprises four components: tax burden, initial unemployment claims, real wages and real home prices.
Carl Steidtmann, Deloitte’s chief economist, observed, “A lot of the growth in spending over the last couple of years has been driven by tax reduction and mortgage refinancing. While there’s improvement in the employment picture, it is not enough to replace the stimulus in tax reduction and refinancing.”
So far, there seem to be some uncertainties on the horizon: overseas political concerns, rising mortgage rates and higher gas prices. However, Steidtmann isn’t too concerned about their impact on the consumer.
“What ultimately drives consumer spending is the fundamentals of a consumer’s finances. Consumer confidence historically lags spending. In the most recent report, most retailers said that sales were good in March, yet the confidence [index] fell. As for mortgage rates, you’re seeing a relatively orderly rise and rates that are still low by historic comparisons. While it won’t have a big effect on housing, it will affect refinancing, where it has been one major source of consumer cash in the last two years,” he said.
Steidtmann expects that consumers flocking to the extremes in retailing — luxury and discounting — will continue for a long time. “It tends to be more extreme during a recovery. The polarization of the performance of the retailers is a reflection of the demographics of the population, and income and wealth distributions. Recessions tend to hit hard on the middle class,” he noted.
Regarding fuel prices, Steidtmann said, while they’re going up, “in real terms, they are not anywhere near any of the prices in the early Nineties and late Eighties.” He explained that while gasoline purchases as a percentage of total retail sales was 6 percent at its peak in 1978, filling up the tank today represents just 1 percent of total retail sales.
“You can have a pretty sharp rise in gas prices and not have a slowdown in the economy,” Steidtmann concluded.
Stephen Gallagher, economist at SG Cowen, also felt that the consumer so far isn’t about to pull back on spending levels, but did indicate that there might be some risk ahead.
— With contributions from Katherine Bowers, Kristin Young, Vicki M. Young and David Moin