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Is Christmas Shaping Up to be a Disappointment for Retailers?

18 december 2009

“According to ShopperTrak RCT Corp retail sales on Black Friday increased about 0.5% versus a 3% increase in 2008. Looking back, whether those sales were really black or shades of gray depends in part on expectations. Notwithstanding conservative sales plans, I think most retail executives expected better results, especially after Goldman Sachs’ chains store index for the week ending November 21 “spurted” about 3.3% ahead of the comparable week last year. Now, with Black Friday behind them, merchants have to reconsider what sales growth for the next 24 days will be like,” says Nicholas White, an expert writing for

That won’t be easy, he says, because consumers are buying differently this year. For instance, according to the National Retail Federation, about 13% more shoppers were in the stores this year, but they bought about 8% less. Clearly all that buying, in addition to online sales, culminated in the marginally small sales increase of 0.5%. What does that mean for retailers for the remainder of the Christmas season?

For one, lower margins as consumers continue to cherry pick the best value (lowest margin) items. For another, some antidotal evidence suggests a disproportionate number of consumers made personal purchases on Black Friday purchases, which begs the question of how much of that business came at the expense of December sales. Now, its apparent consumers were mostly looking for the “big deals” over the Black Friday weekend. That should have come as no surprise to retailers since almost every piece of consumer research for the last six month said shoppers were buyers only when the price was right. While it remains to be seen, Black Friday’s lower average sales may mean retailers got the mix wrong despite their goal of maintaining margin this year. If so, not much of that 0.5% sales gain will flow to the bottom line.

Increased personal purchases contributed to that meager increase too, meaning less spending on gifts and lower average selling prices too. Historically, there isn’t a lot of comparative data on personal purchase behavior during Black Friday. However, “according to the latest Consumer Reports Holiday Poll, 66 percent of shoppers will be buying something for themselves [this year]”. That’s the good news; the bad, personal purchases almost invariably are lower price than gift purchases. Again it’s a mix issue, which ultimately depresses profitability despite the marginally small sales gains.

The big winner on Black Friday appears to be online retailers or the ecommerce sites operated by bricks and mortar retailers. According to an article by the Good News Economists, web analytics company Coremetrics reported online spending increased 28.6% for apparel retailers and 151.7% for department stores. Those are large increases, but likely represent equally large transfer sales from bricks and mortar store fronts to their virtual counterparts. Just how much of that online sales growth was purely incremental is uncertain. Nevertheless, what appears certain is actual in-store sales may have declined for some retailers, declines which were likely off-set by much higher ecommerce productivity. That’s assuming Coremetrics research was accurate.

Moving forward, Coremetrics also said online sales increased about 11% by the evening of Cyber Monday. That substantially better than the 3% ecommerce sales grew between November 1 and November 27, but substantially less than some of the Black Friday results. Late evening sales may improve that number since sales picked up later in the afternoon this year according to John Squire Coremetrics’ chief strategy officer. Still, just how much of that sales growth was incremental is problematic. Add ecommerce sales are often high value items with reduced margins with lower price points and you have another dynamic depressing sales growth and lowering gross profit too.

One underlying factor for many Black Friday consumers that was different from 2008 was they were through shopping by the end of the long promotional weekend. By that I mean other than food, candy, and miscellaneous stocking stuffer, consumers bought all the essentials they wanted for gifts, however they defined essentials, as well as, some personal items they had put off buying during the last quarter. If true, Black Friday’s deals and the weekend promotions that followed may well have sucked the wind out of any anticipated sales growth retailers had planned for in December. That would be consistent with research that over 60% of consumers planned to buy less this year and would be much more discerning about what they bought to begin with. Moreover, Black Friday promotions really started in early November, so it is reasonable to believe a significant part of December’s business could have been pulled into Black Friday events.

So, sales for the next four weeks could be substantially lower than expected as the remainder of this seasons buyers wait for even better deals. That despite retailer’s insistence they will maintain margins this year. Still, every indication is consumers are prepared to wait for the deals on the products they want rather than overspend cash budgets or go more into debt. Partly, consumers remember last year and every previous year for the last decade when retailers cut price to achieve sales budgets. But it’s also a matter of necessity for many Christmas shoppers this year.

The fact is, with an U6 unemployment rate above 17%, jobless benefits nearing their end, working hours continuing to decline, and winter fuel bills increasing, this Christmas is in the midst of a depression for tens of millions of America households, though that may not be evident to casual observers who accepts the prosaic assessment that the recession is over.

That acceptance is in part because this recession is a politically correct one in that it doesn’t disturb the senses with pictures of thousands of out of work Americans and their families standing in bread lines or soup kitchens overflowing with hungry mouths to feed. Today, we have a safety net that makes the struggles of the jobless invisible and in so doing makes our current economic malaise more palpable to the collective conscience, while legitimizing the message that our consumer driven economy is returning to normal.

 Despite that politically correct demeanor, any such normalcy requires a consumer supported by increasing wealth such as higher wages, increased liquidity, and rising asset values, which certainly doesn’t describe today’s Christmas shopper. Simply put, consumers can’t realistically spend more, because they don’t have the money to spend. That notion shouldn’t come as a surprise to anyone since Americans are significantly less wealthy today than a year ago, which has just begun to be reflected in changes the consumer’s buying behavior. That may be a politically incorrect statement, but it’s also financial fact. One that is well understood by millions of heads of households as they stretch weekly pay checks to their limits even after cutting back on luxuries and basics alike for much of the last 24 months, even if it’s an obtuse notion by policy makers and politicians alike.

If profits are the measure, this Christmas is shaping up to be disappointment for many retailers and investors alike. But, that may not be the worst of it. Consumer’s interest in online shopping along with its lower prices and lower margins means bricks and mortar retailers may be even further over stored. That will lead to even further store closures, more retail layoffs, and reduced real estate values as consumers accelerate their use of ecommerce to save money; possibly compressing half millennia of retail change in to the next decade.