News Release: Faculty Experts, Finance and Economics, Research

Nov. 24,  2008

Will Retailers Have a Merry Holiday Season?

From Knowledge@Emory

As the holiday shopping season approaches, retailers are traditionally shivering with anticipation of scoring their biggest sales numbers of the year. But this time around, their dreams of gold may be replaced by a lump of coal as retailers stare down a weak economy, the loss of thousands high-paying Wall Street jobs, and signs that the nation has slipped into a recession. Some deep, lasting changes may be ahead, say faculty from Emory University’s Goizueta Business School.

There was some hope that the results of the November 4 Presidential election might help boost the economy, but they were at least temporarily fazed on November 5, when the Dow closed down nearly 500 points.

“Retailers had plenty to be nervous about earlier this year and the numbers have declined since then,” observes Reshma Shah, assistant professor in the practice of marketing at Goizueta Business School. “First, there was a summer slowdown as high energy prices hurt the economy, then the important back-to-school fall season also fell below expectations as the mortgage crisis got worse and the banking crisis began to emerge.”

As Black Friday—the day after Thanksgiving traditionally considered the start of the holiday shopping season—approaches, the numbers studied by retailers continue to show signs of stress.

In September, $375.5 billion was generated from national retail and food sales, down 1.2% from the previous month and an even one percent fall from the year-ago numbers, according to the U.S. Department of Commerce Advance Monthly Sales For Retail Trade and Food Services bulletin issued in mid-October.

Then consumer confidence, which had edged slightly higher in September, fell sharply in October to an all-time low, according to the Conference Board Consumer Confidence Index. At the end of October the bellwether signpost stood at 38 (1985=100), down from 61.4 in September.

“With few exceptions, same-store sales have been falling,” says Shah, referring to reports that department-store sales fell as consumers backed off on clothing and accessories purchases. “Discretionary purchases are most at risk, which is why we saw companies like Sharper Image [known for pricey, high-tech gadgets] and home furnishings retailer Linens-N-Things file for bankruptcy.”

Sharper Image was later purchased by a group of investors, while Linens-N-Things was liquidated.

“In an economy like this, more consumers may turn to deep discounters like Wal-Mart,” adds Shah. “Over-leveraged consumers shopping for children’s Christmas gifts, for example, will likely avoid expensive items like [Mattel Inc.’s] American Girl line of dolls, and settle for something with a lower price.”

The retreat in consumer spending has even affected Internet transactions, as retail e-commerce sales growth slowed to six percent in the third quarter compared to the year-ago period, according to comScore Inc., a provider of Internet information.

In contrast, e-commerce retail sales grew 12% in the first quarter and 13% in the second quarter on a year-over-year basis, according the Reston, Va.-based company.

The current downturn presents unique problems for companies, says Shah.

“Traditionally, a down market is a good time for a firm to invest its brand and try to capture market share from competitors,” she says. “But with challenges in so many segments of the economy, companies may fear that we have not yet hit bottom, and may therefore hesitate to increase their expenditures. We’re likely to see some more retailers go under before the economy recovers.”

Consumers do not want to be a Grinch during the Christmas holiday season, but “the fact is that credit is tight and people whose savings have been slammed by the stock market are not likely to be in a mood to spend much,” says Rajendra Srivastava, a professor of marketing at Goizueta and executive director of Emory’s Marketing Institute. “Other than deep discounters like Wal-Mart, the outlook for retailers may be rocky for the next few years. In this environment, when a retailer like Target catches cold, a chain like Sharper Image gets pneumonia.”

Retailers that want to survive will have to implement a shorter delivery cycle and will have to learn to keep much lower inventory levels, Srivastava adds. “Their operations will have to driven by information.”

Most retailers have 15% to 20% of their capital invested in land and buildings, while 80% of their capital is tied up in inventory. “That does not leave a lot of room for a bad decision,” he says. “Those stores that failed to foresee the economic downturn, and that's most of them, bought too much. Now they face the prospect of getting rid of their excess merchandise on pennies to the dollar, or they are cancelling orders at the last minute and spreading panic amongst their suppliers. The only winners are discount stores like TJ Maxx that buy branded goods at distressed prices and resell at deep discounts. It looks like brands still matter, but only at a bargain.”

Unlike some industries, where excess supply may be taken off the market through mergers and acquisitions, retailers on the skids tend to go bankrupt, Srivastava observes.

“That can be traced back to the fact that most of a retailer’s assets consist of inventory,” says Srivastava. “Why would another company buy it during a down market? We’re likely to see fewer retailers as more companies go down in this recession.”

The widespread practice of outsourcing may be another casualty of the weak economy, he adds.

“Outsourcing to a long distance manufacturer may cut unit costs, but it also means each order has to be large enough to justify shipping and other costs, and the elongated supply chain leads to stretched-out delivery times,” he says. “That’s not a big problem when the economy is humming, but can lead to problems when retailers are trying to reduce their orders to more quickly respond to market shifts.”

Srivastava notes that long-distance outsourcing may be replaced by offshoring, where companies set up their own manufacturing facilities in relatively cheap labor locations, like Mexico, that are closer to their sales market.

“China may be cheaper than Mexico,” Srivastava says, “But Mexico is a lot closer to the U.S. market.”

A recession may offer some opportunities, says Greg Thomas, director of research and programs at The Emory Marketing Institute.

“During a recession, companies that are already in a strong position may grow their operations in selected markets,” he notes. “To encourage growth, retailers can enhance their offers in attractive markets, such as remodeling specific stores. This can help hone their focus in key markets.”

Healthy retailers also can seek out acquisition targets, since other, weaker retail properties may be more attractively valued in a downturn, he adds.

“Lowering cost drivers, by taking such steps as purchasing assets in a downturn, can provide a firm with an advantage vis-à-vis the competition,” he says. “Stronger retailers can also try to attract top talent from struggling retailers. They can also target the customers of underperforming retailers.”

Relating a recent experience, Thomas notes that he “saw a shuttered Eckerd’s store. The Walgreens across the street put up a sign that said ‘Welcome Eckerd’s Customers.’”

Similar strategies can be done online, he adds, by purchasing the domain name of a defunct competitor and forwarding the traffic to the acquirer’s website.

“CompUSA recently hit rock bottom and TigerDirect took over the brand and is keeping it going online and even is keeping some of the stores in Florida open,” he notes by way of example. “Circuit City recently announced it is closing 155 stores, which provides Best Buy an opportunity to target Circuit City’s alienated customers over to Best Buy stores for the Christmas season.”

To help support sales retailers can also shift their assortments and promotions toward a value focus, says Thomas. “If customers perceive a good value, it can convince them to open their wallets,” he says. “Additionally, driving customers to the Web can be productive since it can lower the cost of sales through efficiencies—like product assortments that are larger than those that are available in-store, and drop-shipped items that reduce inventory levels—while increasing cross-sales opportunities.”

Brick-and-mortar retailers also can seek ways to drive traffic to their stores.

“Saks Fifth Avenue recently held an event to support breast cancer research, and the store did quite well in terms of sales,” says Thomas. “Customers may feel like holding back in a downturn, but supporting the social cause helped them to justify a shopping spree.”

Rethinking segmentation positioning and targeted events, tie-in promotions, and product assortments can take on even more importance in a recession, since there are always some households that weather the storm relatively unaffected, he adds.

“A retailer that captures these customers in a downturn may find that they do not change their shopping habits when the economy picks up,” says Thomas. “So finding these segments of unaffected groups can be useful in driving profit over the long term.”


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