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Retailers to Wage Psychological Warfare

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As the retail industry sifts through the rubble of its disastrous holiday shopping season, the next challenge begins: A struggle over the consumer psyche.

Despite hopes for a massive economic stimulus plan under a new Obama administration in January, consumer confidence plunged to an all-time low in December. In droves, shoppers declined to pull out their wallets and spend. Since deep discounts weren’t enough to move merchandise over the holidays, retailers who aren’t filing for bankruptcy in January are left with two choices: Find more ways to frantically slash prices, or, as one analyst recently put it, “retrain the consumer to pay full price.”

Debt_4642.jpg
Debt_4642.jpg

Illustration by: Matt Mahurin

It all chalks up to psychological retail warfare, beginning this month.

“There’s going to be a quite a battle between consumers and retailers,” said Meghan O’Brien, a Iowa State University economist who follows the retail sector. ” I don’t think consumers are going to spend money with the lack of abandon we witnessed during the record consumer spending expansion that has ended. The spending increases and seemingly limitless demand for goods has ended and retailers will have to find new ways to encourage spending growth.

“But consumers are more intelligent about their spending than retailers sometimes give them credit for. It could end up being empowering feeling for consumers, a sense that ‘We’ll decide when we spend money and where we spend it.’”

If the holidays are any indication, consumers so far seem to have made a decision – they’re not spending it.

The National Retail Federation predicted an anemic 2.2 percent increase in holiday sales, down from the traditional 4 percent annual increases of recent years. But early figures show sales looking much worse. Sales fell by 5 and half percent to 8 percent, if auto and gas sales are included, or by 2 to 4 percent if they not, according to MasterCard’s SpendingPulse report, a traditionally reliable indicator. Sales fell by double-digits in all categories compared to a year ago, from clothing to electronics.

The plunge would mark the first annual decline in holiday sales since the National Retail Federation began keeping records 15 years ago. Adding to the gloom: Even online holiday sales fell by 3 percent, their first decline since 2001, according to comScore, a firm that measures online traffic. Online sales had been growing by as much as 18 percent annually in previous years.

But NRF economist Scott Krugman, while acknowledging sales were lackluster, said he isn’t willing to call the holiday season a total loss.

SpendingPulse, he said, doesn’t measure after-Christmas sales. And government data on retail sales doesn’t come out until Jan. 16.

“It’s hard to say yet if this is the worst holiday sales season in 40 years,” Krugman said. “The week after Christmas alone accounts for up to 15 percent of the holiday season sales and that hasn’t been counted yet.”

But other reports also show a dismal picture.

Heavy discounting by retailers and bad weather “coalesced to produce the bleakest holiday season since at least 1970,” said Michael Niemira, chief economist for the International Council of Shopping Centers. Same-store chain store sales for the week ending Dec. 27 slid by 1.8 percent, compared to a year earlier, his group’s survey showed.

And then there’s January, which usually is the busiest month for retail bankruptcies. This year, it could be a tsunami, with some analysts predicting a “retail wasteland” with major retailers closing their doors during the next six months. Already the parent company of online toy seller eToys announced it has filed for bankruptcy.

That means more empty space at the mall. Niemira said he also expects new store openings to slow, with about 110,000 to 115,000 openings this year, compared to 150,000 store closings, the most shutdowns since 2001.

Niemira called the expected closings and bankruptcies “sort of a continuum” of problems in the retail industry beginning in 2008. Because bankruptcies and store closings are a lagging indicator, it also means that commercial real estate and retail still are in the early stages of their collapse. Consumers are likely to see closed stores and increasingly empty mall space all though this year and into 2010, even if the economy picks up, he said.

Even Krugman agreed that a flood of retail bankruptcies is ahead, given that retailers in trouble most likely won’t be able to find loans or credit due to the financial crisis. Despite the $700 billion Wall Street bailout by the government, credit remains much tighter than a year ago.

“Housing and the retail sector are tied together,” Krugman said. “If there was a retail bubble, it burst with the holiday sales season.”

That bursting bubble includes online sales, which had been expected to be a bright spot for retail, O’Brien noted. Only online retailer Amazon – which O’Brien called “a virtual Wal-Mart” – was a holiday season winner, calling this holiday season its best ever.

The sales debacle for most stores means the start of a struggle between retailers and customers to shape the shopping landscape.

Discounting has created an expectation among consumers for less expensive clothes, apparel or electronics – if they choose to buy at all. To survive going forward, retailers from Apple to Ann Taylor, which reportedly plans to close dozens of stores, will have to “create the perception that things are perpetually on sale. What we will see in the beginning of January is the illusion of deeper sales,” O’Brien said.

Whether retailers will actually cut prices and keep them low remains to be seen. Recent comments from a top industry analyst don’t seem to show retailers moving in that direction. From the New York Times:

“Many of the senior executives we’ve talked to are worried about how we retrain the customer to pay full price,” said Joseph Feldman, a retailing analyst with Telsey Advisory Group, an equity research and consulting company.

Customers can’t be blamed for being confused. Even before Christmas, some stores simply didn’t replace their inventory and for the first time in years left empty racks at Christmas shopping time, as any shopper could see. Stores like Toys ‘R Us had rows of bare shelves. Sales of gift cards declined sharply as consumers feared they would be worthless if retailers went of business. Some, retailers, like Circuit City and KB Toys, announced they were filing for bankruptcy even before the holiday sales season.

Retailers simply seem at a loss over handling the slowdown, O’Brien said. “If you’re not replacing inventory that’s silly,” she said. “Abandoning that basic principle is a big change in retailing.”

But predictions that consumers will permanently pull back on spending, or that retailers will change the way they do business, are premature, said Niemira, of the International Council of Shopping Centers. The economy could recover in a few years. Consumers might have pent-up demand for products. Retailers could return to asking full price.

“The question is what will be the lingering trends from this recession,” Niemira said. “Memories are short, and consumer memories are shorter than most. I’m very leery that anything is permanent. We just don’t know yet.”

When it comes to a retail sector turned upside down by the financial crisis, the only thing for sure, he said, is this: “It’s a whole new world.”

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