Retail Forecast 2007

"Fasten your seat belts and prepare for landing." That directive, so familiar to airline travelers, seems just as appropriate for today's retailers. Rather than being strapped into a jumbo jet, though, store owners are riding an economy that's showing signs of slowing down after several years of growth.

If a downshift in the business climate signifies a bumpy ride in 2007, most analysts advise a response closer to prudence than panic. "We have long been hoping for a soft landing," says George Whalin, president of Retail Management Consultants, San Marcos, Calif. "And it looks as if that's exactly what we're going to get."

Leading economists support Whalin's prediction. "The bottom line for 2007 is modest growth," predicts Scott Hoyt, director of consumer economics at Economy.com, a research organization based in West Chester, Pa. "It will not be as good as what we have seen in the last few years, but it won't be recession-like either."

THE MARKET MODERATES

The numbers tell the tale. Gross domestic product (GDP) — the most widely used figure for gauging economic health — is expected to come in around 2.9 percent in 2007, according to Economy.com. That's just under what's considered "normal growth" for the economy over the long term. It's also a good deal lower than the 3.5 percent growth anticipated when 2006 results are fully tallied.

While GDP represents the sum total of all final goods and services, equally important are "core retail sales" — a figure that excludes the sometimes distorting effects of automobile and gasoline revenues. Hoyt sees that number increasing by some 5 percent in 2007. That's a distinct drop from the 7.5 percent expected for the final 2006 tally, which was a solid increase from the 6.8 percent of 2005.

"The shift from strong economic growth to a slowdown has occurred," concurs Rosalind Wells, chief economist for the National Retail Federation (NRF), Washington, D.C. "We will experience growth below the economy's potential in 2007. The trend can be described as a soft landing rather than a hard one, which leads to recession."

ENERGY COSTS MOUNT

Consumers — and retailers — are getting hit especially hard by the rising cost of energy, and in particular the on-again, off-again price hikes at the gas pump. Consumers often delay optional purchases in order to fill their tanks. To add insult to injury, gas prices are causing shipping and wholesale prices to climb.

Higher shelf prices, of course, give shoppers just one more reason to delay purchases. "That spike at the gas pump last summer was like a 2by-4 hitting the consumer," notes Jim Dion, president of Dionco, a Chicagobased retail consulting firm. "It really discouraged spending."

Will the pain continue? Everyone's asking that question and many analysts believe, in fact, that the biggest wild card for 2007 is the cost of energy. "I think one of the biggest concerns is that while gasoline prices have fallen they may start to go back up," says Dr. Barton Weitz, executive director of the Miller Center for Retailing Education and Research at the University of Florida.

If energy costs do rise, earnings may suffer. "Retailers will start to feel some pain and will have to absorb some of the increased cost required to deliver merchandise to them," predicts Jen Millard, director of McMillan|Doolittle, a Chicago consulting firm. "The consumer will not allow increased costs to be solely passed onto them. So there will be pressure on margins."

HOUSING SOFTENS

Housing is the second major factor affecting consumer shopping habits. Most observers expect a further erosion. "The housing market will not provide the same stimulus in 2006 as it has in recent years," forecasts Wells. "The period of home equity extraction, which fueled a good deal of consumer spending, has come to an end."

We are seeing a fundamental change from recent years when low interest rates and an increase in the value of homes encouraged people to take out second mortgages. "With rising interest rates there is a difficulty selling homes and moving into new homes," reports Weitz. "People are mortgaged up now so they are more reticent about going out to shop."

The silver lining here is the recent cessation of the Federal Reserve's drive to raise interest rates. "With slower growth and easing gas prices, concerns about in.ation (one of the main reasons for raising rates) are abating somewhat," says Sophia Koropeckyj of Economy.com. "Now we see the Fed actually lowering rates twice over the next year, first to five percent in the first quarter of 2007 and again to 4.75 percent during the second quarter and after that holding them level."

JOBS HOLD STEADY

Most retailers are vitally interested in the jobs picture. After all, consumers need incomes before they can spend money. The news remains basically good in this area. "Clearly we have seen some slowing in employment growth, and that's a negative in terms of retail sales growth," notes Hoyt. "But labor markets are still tight with unemployment running below 5 percent. So the bottom line is that total wage and salary income growth will remain supportive of spending, but there will be little prospect of any acceleration."

Maybe unemployment has remained low, but there's been a good deal of publicity recently about the persistent problem of stagnant average wages. The fact is that paychecks have not kept pace with corporate profits. While this is a problem that must be addressed, most observers do not feel it is a deal breaker in terms of retail sales. "Stagnant wages do not affect consumer activity as much as the presence of jobs themselves," asserts Whalin. "What dictates whether people buy is whether they have a job and can pay their bills. For most people those conditions apply."

WHAT TO DO NOW

Faced with a softening economy and relentless competition from the big box stores, specialty retailers need to maintain a firm grip on selection and service. "There is a lot of pressure on smaller retailers to distinguish themselves by offering unique products to cater to the community they are in," says Weitz. "This is exactly what the larger, national chains have a difficult time doing: Every store kind of looks like every other store. And when they try to adapt individual stores to the local market, they do it from a corporate headquarters so they are not as sensitive to what the shoppers want."

The service angle is equally important, adds Weitz. "Recognize the customers and help them out individually. Again, this is something large retailers have a difficult time doing because of their lean investments in labor. They often have part-time workers who are not as committed to providing service."

Finally, trim down the stock in your storage shed. "The catch phrase of the day is 'It's the inventory, stupid,'" advises Dion. "Retailers have to get a lot better at controlling their inventory and not get overexposed. You don't need to keep 60 to 90 days of inventory. Keep a minimum amount and establish relationships electronically with trusted suppliers."

Broaden your selection to include what competitors lack. And keep a sharp eye on your price tags.

If 2007 presents retailers with some real challenges, then, there are also opportunities for retailers to better serve their markets. "Consumers are a resilient bunch of folks," says Whalin. "It tends to take a lot to make them stop buying."