Retail roundtable: The Grinch who stole retail sales (Part 2 of 3)

Jennifer Schonberger | Oct 15, 2008 11:55am EDT | Comment

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Halloween hasn’t arrived yet and already retailers are spooked by what the upcoming holiday season will bring. SmallCapInvestor.com spoke with a panel of experts to gauge just how lackluster this holiday sales season will be, and to gain insight into retailers' strategies and overarching trends. This is part 2 of a 3-part series.

Given soft consumer demand, how much of an emphasis will retailers place on cost management and inventory management compared with prior year cycles?

Reed: “They’re going to watch inventory as much as they can. You’re going to see a lot less inventory this year. But, it looks to me they’re moving beyond inventories and just straight out job cuts.”

Collins: “We’re taking a conservative posture as it relates to building inventories. We want to avoid excessive inventory, so we are being more prudent with our production plans.”

Van Sinderen: “What you saw happen a few months ago is different than what you’re seeing happen today. So, I think it’s ongoing management that you’re constantly modifying. Fall has been surprising for retailers. Even though they’ve been planning inventory fairly conservatively, some have been surprised by how soft business has been. If you were planning your business one way a few months ago, you’re probably planning it even tighter now.”

Gonzalez: “They're going to adjust their inventories too late in the game because they’re such a big machine that can't stop mid-season and change gears. So they're going to cut back on inventory that's going to be reflected in the spring, which is when they're going to do their sales.

“What happens now is that department stores plan their spring buys based on this season's forecasts. If they feel like they're overbought, especially with the same repetition or ugly stuff, they're going to buy less for spring. We really feel that right after the elections and right into spring, which is January, February and March sales, there's going to be a huge boost in confidence, people are going to go shopping in gusto and these department stores and chains are not going to have anything.”

Beder: “Inventory management this year has been the buzz word for retailers. It takes about six months to get to your target inventory lows. By this time last year, most retailers realized that business was not going to be solid. So this time you’re going to see inventory management in the third and definitely the fourth quarters. Retailers are trying to get less product to give them some potential to maintain the market.”

Will we see job cuts instead of typical new hires this holiday season, as retailers struggle to cut costs?

Reed: “You’ve got mass affluent retailers who are suffering, department stores who are suffering and you’re going to see further job cuts. In terms of seasonal hires, I think you’ll still see seasonal hires but it will be much weaker than in the past.”

Van Sinderen: “Retail is one of the areas where job cuts have already started to happen. I don’t think you’re going to see a wave of job cuts around the holidays. You’ll see muted seasonal hiring this year and some will cut back on hours. They’re all trying to provide service, but on the same token they need to ratchet down payroll. After the first of the year is when we’ll see more significant staff cuts because you need to keep more people on the floor during the holidays when there are spikes in traffic.”

Liebmann: “They will be cautious about their payroll. But I think there’s a realization that if you don’t have people on the floor, the chances of you actually making some sales are tough. I think many retailers will do a lot of business online. It’s going to be one of the areas we’ll see really pick up over the holidays.”

Beder: “We saw that last year. I think that will continue. With less inventory comes less need for people, cleaner stores and less need for temporary help.”

What trends should we watch for this holiday season aside from a dire economic climate?

Reed: “Look for Halloween to be a non-event. Look at retailers who have more credit card purchases than usual as opposed to debit card purchases. More and more shoppers are paying with credit cards than cash and that’s not a good sign.”

Collins: “In today’s environment consumers are not going to buy things that are similar to what they already have. If they’re going to buy something it’s going to be something that’s fresh and compelling. So you’ve got to continue to innovate and really give them a reason to buy because just doing what you did in the past isn’t good enough.”

Van Sinderen: “There’s a move toward value and lower price points. I think you’re still going to see continuation of the trade down phenomenon, trading down to lower-priced items you have to buy, and I think it’s also deferring purchases — not buying as much as you would normally buy. I would expect gift card sales for most retailers to be down. Also people don’t want to drive as much with gas prices still being fairly high, so you’ll see more shopping over the Internet. You’re going to see a lot of merchandise on sale and I think some people will wait until after Christmas.”

Gonzalez: “Everything has a full circle and I believe that the private label has reached the point of saturation where it doesn't have that cache anymore. People don’t want generic, they want things that are more unique. They want the brand.

“Another is the interactive use of technology. I don't think retailers have embraced that the way that they can and should. Retailers also need to expand into foreign markets by opening stores in South America or across Europe and Asia. They should be all over those markets, especially with the weak dollar, our things are bargain price and they have high brand recognition.”

Beder: “There are still going to be some hot items out there in terms of apparel. I think you’re going to see a very strong response to premium denim, or fashion denim. Denim is definitely going to be the bottoms for this year. People want something different, something unique and denim is the only fabric that really works for that in terms of bottoms. I think we’ll also see a shift to comfort and to things that make people feel good, such as all-encompassing sweaters.”

How will gift cards play into holiday sales this year?

Reed: “We’re seeing data that shows that gift card purchases will be down substantially. It really boils down to the difference between convenience and the impression you give when you give a gift. I think that the other reason is that people are just going to spend it themselves and they’re going to spend less.”

Collins: “We’re in the process of introducing gift cards. We’re going to offer them at all of our retail stores this year and we would hope to use it as another way for customers to be part of the buying season.”

Gonzalez: “The gift card has become very broad spectrum, and people are not buying as many gift cards that are store-specific. I think it’s going to hurt a lot of the retailers’ numbers — especially now when Visa, MasterCard and American Express offer gift cards that you could purchase in any store.”

Liebmann: “We’ve been seeing a decline in the use of gift cards — down from the high 60s to the low 60s (%). While many think it’s an efficient way to give a gift, they just aren’t sure it’s the best value. I think we’ll see the marginal decline in gift cards continue as well as sort of a refinement. Gift cards to specific stores may see the sharpest reduction, giving way to greater use of general cards for the mall, American Express, Master Card, or even cards for super markets — cards that people can use for anything.”

Beder: “This Christmas cycle will see a slowdown in the expansion of gift cards, and I look at back-to-school as a guide for that. People are going to buy gifts so they can spend less money than they would buying a gift card.”

The credit crunch has deepened considerably this year — especially in the past month. How will the credit crunch affect mid to small retailers this year? Are they seeing their credit lines tightened?

Reed: “We’re seeing surveys that half of those retailers are seeing tightened credit lines and the General Overview of Senior Credit Officers continues to show less willingness to loan. That’s one of the reasons why lean management is an extremely high priority. Though, even if they control their costs they’re not going to get a lot of credit from a P/E multiple from the Street on that. Revenue growth is where you get a lot of credit.”

Collins: “We have no debt and we’ve got sufficient working capital to operate our business, so we’re not impacted by it.”

Van Sinderen: “It depends. If you’re a small independent retailer you’re probably going to struggle to get credit. The banks just aren’t lending. If you already have a credit line in place and you’ve got terms with that credit line it’s probably not going to change. Banks are going to be tight with covenants. If you have a revolving line of credit they’re going to be more inclined to stick with those covenants.”

Beder: “There are two sides. One is that credit for consumers is going to be a drag. You’re seeing consumers pay down debt and lose their credit lines — so that will be a negative for the sales part. In terms of retailers, most retailers don’t have a lot of debt. Retailers learned from the last major slow down that cash is king and with lower inventories comes a greater focus on cash. If you look at most retailers, they are not heavily indebted and that’s one of the things that gives us confidence they can weather this.”

How have recent financial events of the past month (failure of major investment banks, passage of the bailout bill, and Europe’s troubles with the credit crisis) effected consumer sentiment and will it have a lasting impact into the holiday season?

Van Sinderen: “The psychology has been damaged by all of the events that the media has played up. People are afraid for a lot of reasons and that’s impacting purchasing behavior, which has become apparent. I think this will continue because there is nothing on the horizon that that I can see that will really lift consumer psychology into the holidays. Morale is low among shoppers. Consumers don’t have the disposable income that they had nor do they have access to credit. The bailout plan does help psychology to some degree, but I don’t think it lifts it to the point where people are going to go out and feel like they’re flush with cash and spend a lot.”

Reed: “Recent financial events will definitely have an effect on consumer sentiment. The Sept. 26 sentiment number was up for the third month in a row, but it’s backward-looking. That day the bailout failed, U.S. money markets seized up again. Europe is in a shambles and massive injections of liquidity have been coordinated by central banks worldwide. Consistent negative headlines will put pressure on sentiment until markets “clear up.” Consumer spending during the holidays will be muted initially. Unless the financial crisis is put to bed soon, the holidays are going to be a “Grinchmas.”

Liebmann: “We’ve seen how America shops for 20 years. This mood and mind set is pretty entrenched. When you think about things that have confronted the American shopper over the last seven or eight years, the dot com bubble’s burst in 2000 for instance, they’ve become very cautious shoppers. That prudent mindset is engrained at this point and the most recent financial crisis has put even more pressure on them to be prudent. Even if the market stabilized I think this consumer is basically saying ‘I don’t know what tomorrow is going to look like, so I’ve got to stay cautious.’ ”

Beder: “Yes, the economic bad news is going to continue to be stressful. However, I think that once we’re through the election, which has been a major source of uncertainty for people, that takes away a negative and that will be a nice positive. I also think that people have held back over the last four or five months, and I think at Christmastime you can get people to come back and do a little more shopping. We’ll probably see less stress come Christmastime than we’re seeing now.”

Read part 3 of our 3-part series.