Forecast 2004

Maybe the past 12 months weren't all they could have been for many retailers. But what lies ahead. Will 2004 bring merchants a bouquet of roses . . . or a bag of ashes?

That's the question we posed to some retail experts. Here's what they said.

Cash Registers Perking Up

The sky is beginning to brighten in at least one critical area of retailing: The registers seem to be ringing a little more often. "We are seeing retail sales increase as people are spending a little more money. That's good for all aspects of the economy," says Dr. Deborah Fowler, director of the Center for Retailing, a research and educational resource at the University of South Carolina.

Busier stores and a recovering economic environment, it seems, go hand in hand. "We are looking at momentum building in the economy and retail sales usually correlate pretty well with what the overall economy is doing," says Rosalind Wells, chief economist for the National Retail Federation in Washington. "We think the trend will continue into 2004. A rebound in consumer spending is leading the way and we are seeing some additional business investment adding to growth." She anticipates a growth of some 4 percent in the gross domestic product. That represents a robust increase from flatter 2003 levels.

While things may be on the upswing nationwide, regional factors affect the health of individual retailers, says Jim Dion, president of Dionco, a Chicago-based retail-consulting firm. "The Midwest always continues to hold its own. You don't get the real super highs or super lows since the region has a variety of industries. The Northeast is not doing badly. There is some softening out West and the Pacific Northwest has been under pressure. The South is really being hit hard because a lot of the manufacturing apparel mills have gone offshore."

Positive Factors For Growth

So will the general economic rebound continue through 2004? Crystal ball gazing is always risky, but Fowler suggests retailers need to consider a number of factors. For starters, she expects interest rates to remain low through the coming year because of the pending elections. That's good news because low interest rates encourage borrowing for business expansion and mortgage refinancing.

Interest rates, of course, don't exist in a vacuum. The Center looks at a number of other statistics in tracking the health of retailing. Fowler points to three as especially important: The consumer price index, which tracks inflation; the unemployment rate; and the productivity rate. "These factors, I believe, are most important in determining how the economy is doing and the prospects for retailing," says Fowler.

Inflation seems to be under control, and that can free up funds otherwise used to make interest payments for spending on goods and services. Consumers still have spending power carried over from the refinancing of mortgages. And the productivity rate is high, a good sign that companies are bringing efficiency to internal operations.

Dark Cloud: Jobless Ranks

Despite the generally rosy corporate and overall economic picture, there is one dark cloud: the jobless ranks. Many people are still out of work despite a gradual brightening of the corporate earnings picture.

"With the unemployment rate as high as it is, a lot of potential customers are unable to purchase anything except the necessities," says Fowler.

That's bad news because consumers so often hold the key to an economic rebound. "In the past, in strong economic recoveries the consumer has led the way," says Dion. "Today the consumer is a little gun shy — not fearing a recession so much as realizing that we cannot have the kind of job losses we are having without some concern."

If unemployment is the No. 1 monkey wrench in the sales engine, there is room for hope: Wells believes that the employment picture will start to brighten next year. The increase in overall wages and salaries, combined with other positive factors, should contribute to what she characterizes as "a solid consumer spending increase."

Yet there are other negatives in the mix. One is the prevailing mood of political uncertainty. "An election year often fills the news with more things to be worried about as opposed to more positive things," says Dion.

"So people are sitting on the edge of their seats."

Another negative factor is the war in Iraq, which is draining government money that could otherwise be spent domestically. The uncertainty of the extent of future American investment increases the risk factor for any domestic investments. "It's really hard to predict what will happen in 2004 because of the war in Iraq," says Fowler.

Indeed, larger world forces can scuttle the best-laid plans. "There are always geopolitical risks," says Wells. "In our forecasts we assume that nothing terrible like 9/11 happens again. Or any other kind of disturbance which would upset and unnerve people and therefore destabilize the economic progress."

What Retailers Can Do Now

So the forecast for the year ahead is unsettled if not challenging. What can retailers do?

Consultant Dion suggests developing a well-rounded improvement program in the areas of technology, sales and marketing. "So many retailers are looking for the silver bullet," he says. "But success is about getting 100 things a couple of percentage points better — not one thing 100 percent better. It's about educating yourself and staying current with the customer and the technology."

Prudent inventory management is also called for. "In an uncertain forecast you buckle your seat belts and make sure your inventory is in line — that you have not overbought," says Dion. "Start allying yourself with suppliers who can get you back into stock quickly if you need them. And get your technology right."

That last part refers staying abreast of equipment and software that can boost productivity. Says Dion: "In the past 15 years we have seen tremendous new tools in inventory management, but most retailers have not taken advantage of them. That's why turnover continues to be abysmal and hasn't budged in 25 years."

Many retailers tend to concentrate on gross sales, says Dion, rather than on the more-revealing figures about productivity of sales. "Maybe a retailer has had a 5 percent sales increase but should have had 30 percent," he says. "Retailers should look at three key measures: Average transaction, items per ticket and conversion rates. Any retailer who rewards people on the basis of improvements in those numbers will have a successful business."

These steps will be particularly important for small to medium-sized operators going up against mass merchandisers. "There is a tremendous amount retailers can do to compete against the big box stores — they just don't," says Dion. "In many cases the small and mid-sized retailer has better insight into the local customer and can assort the merchandise better and provide better services and better product knowledge and better everything. But they consistently do not. So by default they hand over the business to the big chains."

Plan For Success

While we await the rebound, retailers can put into place the solid ideas presented in this article, while reinvigorating their program to satisfy the customer better than the competition. "One of the most important things any retailer can do — especially the small and medium sized ones is to focus on customer service," says Fowler. "That will differentiate them from the major retailers."