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

Jennifer Schonberger | Oct 15, 2008 11:45am 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 3 of a 3-part series.

Are you seeing or do you expect to see sales erosion from the upper echelon?

Reed: “I don’t expect to see a tremendous amount of erosion. I do think your affluent area will be impacted, but people will be looking for last year’s styles and I think you’ll also see outlet malls and folks who have off-priced brands do very well. So the affluent will spend money, but they’ll spend it more carefully. Now that the dollar has rebounded, foreigners who have been propping up Northeastern retailers are going to see a slowing in sales.”

Van Sinderen: “Absolutely. I think it will be across the board. Luxury is not immune to this slowdown. Think about the impact of the financial markets on the people who have a lot of money in the market. They’re hurting as well. We’ve already seen that reflected in Nordstroms’ and Neiman’s numbers.”

Gonzalez: “Absolutely, except for the savvy luxury brands. Take Louis Vuitton, for example. With the price of the euro, they know what the luxury tax coming in is, the price of the euro, the weak dollar. They’re committing luxury suicide. So, they started manufacturing their opening price points domestically, manufacturing in the United States.”

Liebmann: “Though the affluent shopper probably has the money, he/she is now feeling the pain of this economic situation, and is probably in the mind set of 1) I don’t know what the next few months will look like, 2) I don’t know what my bonuses will look like, and 3) and I’m going to pull my head in for a while. I really don’t need anything else and maybe I’ll stick to the necessities or maybe I’ll shop cheaper. We expect them to potentially pull back from the department or specialty store channels and do more necessity shopping in some of the more value-oriented retailers.”

Beder: “Yes. While they’re not tied as much to the general economy a lot of affluent wealth comes from real estate and the stock market, and the downturn in both will affect them. I think what’s happening is in these uncertain times is people are pulling back on buying very fashionable items and that has hurt the high end.”

Oil has deflated from its highs this summer. If oil remains at current levels, or pulls back even further, will we see consumer spending come back marginally?

Reed: “I would expect that you’d need to see a significant pullback in oil for consumer spending to come back. Spikes on the upside hurt sales a lot quicker due to psychology than drops in prices to the downside. So the lag effect on dropping gas prices is longer than a price spike on the upside. You also have to take into account job cuts.”

Van Sinderen: “There’s already been a major pullback in oil. It was at $147, now it’s in the $90 range. Gas prices are coming down and I think it’s a point of relief for the consumer, but I don’t think it’s enough to offset the other macroeconomic factors and pressures that the consumer is feeling. Also as we get into winter, home heating oil becomes an issue.”

Liebmann: “If we hadn’t seen this recent crisis, maybe people would have felt a little more assured with oil prices coming down a little bit. It will depend a lot on how cold the winter is. Even with oil prices coming down, if it’s a cold winter in the north that will take a huge whack out of people’s wallets. I think regardless, since gas isn’t coming down to $1.95 again, it will be one more source of caution that people will have to check off on their list.”

Beder: “Lower oil prices are always a good thing; however year to year it’s still up significantly. So I think if we continue to see gas fall below $4 to the $3-range and below, it will be a moral victory for consumers. Anytime you see those everyday occurrences of oil prices it makes the consumer feel better. So yes, I think it will be a positive.”

How do retailers adapt/respond to shoppers in this environment? What do they have to do to succeed the current climate?

Reed: “Aside from inventory management and tapered seasonal hires, they’ll cut back their expansion plans, perhaps even more than they already have. One incremental positive for other companies might be spending money on supply chain management software, or trying to tweak that software so you can look for more money in other places.”

Collins: “Beyond providing a fresh product that consumers want; we want to improve our customer service in our own stores. We want to make sure that we achieve the best customer service so that the customer not only recognizes that the product is a premium product, but that when they’re shopping in our stores they receive a premium level shopping environment that our sales team is able to explain.”

Gonzalez: “By offering of exclusive items.”

Liebmann: “There are a couple of things. One is retailers need to need to show sensitivity to the situation and let the customers know that they do understand and feel their pain. Also, everyone needs a little levity here. The other piece is just the fundamentals. It’s about helping people stretch their wallets by offering a variety of merchandise at different price levels to keep them in stores. Anything they can do to make the over all experience easier, more well thought out and the stores merchandised in a way that lets people see the right price, the right item that’s in stock, will go a long way to making people say this is the place where I will spend whatever money I have this season. The other thing that’s important for retailers to do is highlight items that they have that are different. If it’s the same old stuff, it’ll be another excuse for people not to spend.”

Beder: “The consumer wants value and with all the internal pieces, if you can’t offer value, you’re going to have problems. The consumer is not going to pay more than they paid in prior periods for similar items — even in the higher end. So if you can figure out a way to squeeze $5 or $10 out of your supply chain to then subtract from the price, that will drive business. So focusing on the internal is great, but retailers also have offer value within their categories to drive sales.”

Do you think discounters will be the sweet spot for this holiday season?

Reed: “Absolutely. That’s how our portfolio is structured. Stores such as Big Lots (NYSE:BIG) will pick up the incremental revenue.”

Van Sinderen: “Discounters will do well for holiday. They’ve picked up a lot of the trade-down phenomenon. Warehouse stores where people can buy in bulk are also doing well. Again it’s a value proposition. The businesses offering the best value to the consumer are the businesses that will probably do well for the holidays or at least outperform in comparison with the rest.”

Gonzalez: “Yes and for two reasons. One because there's so much merchandise in the industry where the discounters are not having to special order things or have things made for them. There's branded stuff out there for them to buy. Also I still see Internet sales increasing, but I don’t see any profitability for any of the fashion Internet websites.”

Liebmann: “I think there are two sweet spots. The discounters will be one — whether they’re the clubs, big-box clubs, or small-box discounters, including the dollar stores. I think the other sweet spot will be online shopping. It’s an efficient, relatively painless way for people to shop. They don’t have to get in the car and use up the gas and for the most part they don’t have to pay for shipping.”

Beder: “Discounters will do fine. I think they will capture some of the trade down business and probably outperform the general economy – though I think that’s somewhat built into the stock valuations now. Discounters are taking share and in a market like this they’ll take even more share going forward. The economic cycles really accentuate those type of changes.”

Which retailers are getting it right?

Van Sinderen: “The ones that are lower priced are getting it right and will fair better for like merchandise.

“Wet Seal (Nasdaq:WTSLA) is managing its business well and the fact that it is a low-price-point merchandise venue helps. However, there aren’t a lot of trends in junior apparel now that can really drive the business, so that’s a headwind.”

Gonzalez: “I see so much potential in the teen brands such as Wet Seal and Hot Topic (Nasdaq:HOTT), but they always miss one layer there that lets them have high peak moments and then they just drop dead. I think a lot of it has to do with the continuity of product. Now there are some companies that aren’t public that are adaptive and are getting it right. One of them is Forever 21.

“More focused retailers such as Lucky Brands are going to be ahead of the curve because they have the double mark up. They are manufacturers who are wholesaling to their own retail stores, so they have the best margins.”

Beder: “In some respects, players who did well in the first half will do well in the second half. Guess (NYSE:GES), which has an emphasis on reduced inventories and premium denim in the United States, is one. True Religion, which offers a premium denim, high-end product, which is still selling despite the economy being weak, is another. Warnaco (NYSE:WRC) – Calvin Klein here in the United States — is a brand that’s emerging and taking market share. There are still people offering unique products and getting decent pricing for it. In some respects it’s about how you get the premium dollar out of the consumer. These players can still do it.”