Retail Forecast 2005

A new year is upon us. Time to look into the crystal ball for a view of the next 12 months. Will retailers thrive in 2005?

To find the answer, we spoke with a number of retail experts around the country. Their comments share one common characteristic: a more subdued outlook than the hopeful optimism of a year ago, when predictions called for a robust 2004. For most parts of the country, the past year has simply not brought the rebound in cash-register activity that many anticipated.

Most forecasters believe that the softer sales environment will continue well into 2005. There is an important bright spot, however: Consumer confidence continues to stay relatively high. Nimble retailers can capitalize on this confidence by learning more about their customers and meeting their needs through new merchandise and service offerings.

SALES GROWTH SLIPS

"The beginning of 2004 was very strong but sales started to ease off in the summer," says Rosalind Wells, chief economist for the National Retail Federation, Washington, D.C. That softening trend is expected to continue: Most organizations join the NRF in forecasting a moderation in the growth of spending.

"It's very clear we had boom-like retail sales in the first five months of the year," says Scott Hoyt, director of consumer economics at economy.com, an independent research organization based in West Chester, Pa. "We are looking at a 2005 retail-sales growth that is somewhat slower than the past 12 months."

Smaller outlets will continue to face special challenges. "The past 12 months have been a rocky ride for the smaller retailers," says Jim Dion, president of Dionco Inc., a Chicago-based retail-consulting firm. "The power of the major chains continues to increase as the big get bigger and stronger. That puts tremendous pressure on independents."

SOFT EMPLOYMENT

The lack of enough good jobs is the No. 1 restraint on shoppers. Employment growth began to taper off in the summer of 2004 after a strong start earlier in the year. Low employment not only dampens consumer confidence but also reduces spending power. "Retail sales are really driven by income growth," says Wells. "And income growth depends on employment growth. That's been disappointing."

Furthermore, forecasters are concerned about the quality of the jobs being created. "My concern is that even if the employment rate picks up, are the new jobs the ones people need for their required income and benefits." asks Dr. Deborah Fowler, director of the Center for Retailing, a research and educational resource at the University of South Carolina. "I am hearing of a lot of people losing well-paying jobs, only to discover there are no new jobs similar to the ones they left. People who have lost $100,000 jobs are taking $30,000 ones. As companies and families downsize, they lose discretionary income and so they cannot buy the things they want."

Adds Dion: "The employment picture includes a lot of low-wage 'McJobs.' The purse strings of consumers are left relatively tight."

Is there hope for a turnaround? Some observers are still waiting for the hiring pickup that most were anticipating a year ago. One such optimist is Hoyt of economy.com: "We are expecting a gradual pickup in employment growth. Businesses seem well positioned and demand is strong enough that we expect some hiring." A long-overdue rebound in hiring would certainly be welcome and might turn the coming year into a major win for retailers.

For the time being, though, employers are holding their ground because of an ability to wring more revenues out of the same investment in workers and assets. "Productivity is still growing strongly, if not as fast as before," adds Hoyt. "That's good for the long run but in the short term businesses can get by with fewer employees." And taking on new hires is costly: "Employers are cautious because of high benefits costs," says Hoyt.

STIMULI DISAPPEAR

Retailers are affected by more than a weak employment picture. "We are seeing the disappearance of a number of economic stimuli that were important factors supporting sales in 2004," cautions Wells. Perhaps the most effective of these were the tax cuts of late 2003 and the ongoing rounds of mortgage refinancing. Consumers have mostly spent the cash gained from both, neither of which is expected to play a role on the economic stage in 2005.

Indeed, with interest rates gradually rising, some market observers are worried about the prevalence of adjustable-rate mortgages. Says Fowler, "We have not yet seen the effect of adjustable-rate mortgages. But I have started hearing people say their rates are about to go up and that causes some negative anticipation. If you have to spend more money on a house, that affects your discretionary spending."

Dion also sees potential danger: "There are a record number of adjustable-rate mortgages," he says. "And they are ticking time bombs. If any of the regional housing markets burst there will be a couple of million people with houses worth less than their mortgages."

CONSUMER DEBT

While some mortgage refinancing money has gone toward paying down charge cards, consumer credit still continues at record levels. "A lot of people have been delving into the lines of credit on their equity," says Dion. "That's bad."

But are consumers overextended.

"Who knows?" says Wells. "That's always a good question and it depends on employment and income. If that grows, people will pay off more of their debt or maintain it."

At the very least, high leverage is a risk for big-ticket sales. "Clearly consumers are leveraged and debt burdens are high," says Hoyt. "As interest rates creep up, it will be difficult for consumers to borrow and spend. So we are back to a key conclusion: Labor income will be the most important determinant of spending growth next year."

Speaking of debt, many observers are leery about the national deficit. "Consumers have to start getting concerned about the deficit we are building," says Dion. "They read about it in the paper but it has not yet hit home. We have had a tax cut in a time of war — this is the first time the nation has done that." Knowing that the deficit will lead to either higher taxes or increased interest rates is bound to have a depressing effect on shoppers. "At some point people will start looking at the numbers and saying 'Whoa! I have to start watching my pennies more.'"

Add to this litany of misery a number of other factors such as higher energy and gasoline costs, the continuing threat of terrorism and bad news from Iraq. No wonder people call economics "the dismal science."

WHAT YOU CAN DO NOW

Perhaps these aren't the best times for retailers, but there is hope: Both inflation and interest rates seem to be largely under control. Most important of all, consumer confidence remains high despite a modest dip early in autumn. That provides retailers with an important opening wedge: Thanks to the public's willingness to spend, smaller organizations can sidestep the larger economic issues by smart maneuvering.

Fowler advises sharpening your marketing skills by redefining your own customers and taking special pains to meet their needs. "Talk with shoppers and your associates to get a sense of who your customer is. Then base your policies and pricing and customer service upon the answer."

There are now two distinct consumer groups in the United States, adds Fowler. One seeks good value, the other efficiency. "If your customer is price-oriented, then discounted or everyday low prices are positive attractions. Time-conscious customers are looking for shopping convenience, customer service and quality merchandise." Know which group you serve.

Success, then, is customer driven — far more so in 2005 than ever before in recent retailing history. "In 2005 there will be some great independents who continue to do good business because they understand fundamentals and treat their customers well," says Dion. "No retailer can control the global stage. But all retailers can manage their businesses as best they can and be what they should be for their customers."

How To Keep Tabs On The Economy

Major economic trends have a profound impact on your cash registers. How do you keep tabs on vital factors. Check out these relevant Internet sites:

• The Dismal Scientist, sponsored by economy.com, is an Internet site that reports trends in the national and international economy. Analysis is presented in layman's terms at economy.com/dismal.
• The White House maintains an economic statistics briefing room for easy access to current Federal economic indicators at whitehouse.gov/fsbr/esbr.html.
• The U.S. Department of Labor capsulates many vital economic statistics maintained by the Bureau of Labor Statistics at bls.gov.
• The Conference Board tracks consumer confidence at conference-board.org.