Like children peeking at gifts wrapped in glittering splendor, retailers look forward to the holiday season with the highest of hopes - the hustle and bustle of blossoming sales and turning profit numbers black. But this year, analysts see no sugar plums dancing - only wilting sales numbers. This has many concerned.
The reasons for lackluster projections include:
The National Retail Federation is forecasting only a 4% increase this year, which is slightly below the 10-year average of 4.8%. This represents the slowest holiday sales growth since 2002's dismal 1.3%.
Anthony L. Liuzzo, Director of the MBA program at Wilkes University, projected a "meager 3.5%" growth for 2007. TNS Retail Forward, a retail consulting firm, agreed holiday sales will grow at their weakest pace in five years but predicted gains will be even less at 3.3% - down from 4.6% in 2006.
And Howard Davidowitz, chairman of Davidowitz & Associates, a national retail consulting firm, is even more pessimistic. "I think we'll see a very soft holiday, probably between 1[%] and 2%, which would be the lowest growth rate in 20 years," he said.
Davidowitz offered a reason for the slump: The consumer has never been more in debt. "For the last five years, consumers have spent more than they made," he said. "That's the longest negative savings rate since the Great Depression."
Obtaining revenue from other resources is likely out of the question this year with the housing market decline, according to Davidowitz.
"During the past few years, consumers have refinanced their homes to make up for the shortfall to a tune of $3 trillion," Davidowitz said. "Because of the current real estate market, that option is no longer on the table. The consumer is pretty much underwater."
"These are the people who are most affected by the rise in gas prices and probably the increases in insurance costs and property taxes as well," said Barton Weitz, Executive Director of the University of Florida's Miller Center for Retailing Education and Research. "They could also be the same people suffering the effects of some of these subprime loans."
Retail Forward Senior Economist Frank Badillo agreed. "We expect to see an increase in job cuts and job insecurity to occur just before the holidays, creating the biggest chill on holiday sales we've seen in a while," he said.
"These cuts tend to skew toward blue collar workers, hurting down-market households more than up-market households."
Davidowitz noted that most of the major retail chains are already suffering and revising their projected fourth quarter earnings downward. "The giant chain sales don't look too good," he said.
Even with declining sales, David-owitz forecasted a few possible winners this season. "Drug store chains are doing well," along with wholesale clubs, luxury market and Internet retailers, he said.
TNS Retail Forward, a consulting and market research firm, predicted upscale retailers such as Neiman Marcus, Nordstrom Inc. and Saks Inc. will be the leaders among conventional department stores.
Weitz agreed the luxury market is still relatively strong. "Our survey shows that people with lower incomes plan to spend less, but those with higher incomes expect to spend more, which makes the overall effect positive," Weitz said.
"It's not that they're buying more things; it's that the things they want to buy are more expensive."
Weitz's survey shows 81% of those in higher income households plan to spend the same or more this holiday season compared to last season, but only 67% of residents from lower income households intend to spend the same or more.
And those in the lowest earning group (with household incomes of less than $30,000) plan to spend the least.
According to Weitz, these income differences were not apparent in last year's survey. "We do know there has been this general widening of the income gap between the haves and the have-nots," he said.
According to Weitz, the ice storm spells trouble for retailers like Family Dollar Stores of Michigan Inc., Dollar General Corp. and Wal-Mart Stores Inc.
Liuzzo agreed based on sales progress thus far. "Early signs for 2007 indicate that discounters will not do well," he said. Retail Forward projected -0.5% in sales for discount department stores.
Merchants in those markets are already showing signs of nervousness. Wal-Mart, which faltered during last year's holiday season, has already deeply slashed toy prices and has announced plans to do so weekly until Christmas.
Additionally, on Oct. 31, 2007, Wal-Mart announced that "shoppers need not wait until after Thanksgiving for great deals." The store offered Black Friday prices starting Nov. 2 - three weeks early. The retailer also unveiled secret in-store specials on five electronics. Toys "R" Us, part of Geoffrey Inc., followed suit by also slashing prices.
Oddly, sales aren't expected to drop at the wholesale club stores such as Costco Wholesale Corp. and Sam's West Inc. which, according to Retail Forward, experienced an 8.8% growth last year and are anticipated to have an 8% growth this year.
According to Badillo, home improvement chains face the most risk for low results because of the downturn in the housing market earlier this year.
Retail Forward also forecasted a mere 1.5% growth in sales at consumer electronics and appliance stores in the fourth quarter, compared with 3.3% growth expected for retail overall.
Badillo said recent pricing trends at consumer electronics stores suggest that price-cutting by the fourth quarter holiday will be even steeper than a year ago. "Combine that with softer demand, and the result will be much weaker growth at consumer electronics stores," he said.
Additionally, there are fewer new products to excite consumers. Although experts predict consumers will continue to buy items such as flat screen TVs and MP3 players -particularly if, Badillo said, this season brings sharp discounting - this season lacks a hot new item that will send consumers rushing to the nearest mall.
Marshal Cohen, Analyst for the NPD Group, a retail market research firm, warned this shortage of must-have products in 2007 is one of the factors dampening forecasts.
Toy industry expert Jim Silver released his annual "hot dozen" list of the most popular toys for fourth quarter holiday shopping. These items include the Barbie MP3 player and Guitar Hero III: Legends of Rock, which is made for several game consoles.
Wal-Mart's "top 12 toys of 2007" list includes TMX Elmo eXtra Special Edition doll that Mattel revealed in early November, striking a pattern.
In 2006, the most hyped toy was TMX Elmo, released on the tenth anniversary of the original Tickle Me Elmo, a sold-out, nondiscounted hit. Tickle Me Elmo laughed when tickled. Elmo TMX, fell over laughing, hitting his hand on the ground.
This year's version specializes in "hidden" moves, where a sequence of tickling and posing needs to be done. If done correctly, Elmo will laugh hard enough to get a case of the hiccups.
Internet holiday sales continue to increase. Forrester Research, a technology and market research firm, projected online retail sales will reach $33 billion during the 2007 holiday season - a 21% increase over last year.
But there is still some thin ice ahead. Fewer customers are willing to pay for extras like expedited delivery or gift wrapping. As in prior years, free shipping is the strongest shopping incentive.
Patti Freeman Evans, Senior Analyst at JupiterResearch LLC, projected a slightly higher overall online sales number for November and December - $39 billion.
"Online is still a pretty new market," she said. "It is still showing an aggressive growth, particularly when compared to the relatively weak offline sales projections."
Freeman Evans said in addition to the growth expected in a new market, the fact that online consumers tend to be more affluent - in the $75,000-plus income category - helps make online sales slightly more immune to the factors that dampen consumers' holiday purchases.
"An increase in gas prices, for example, affects everyone, but a few more dollars at the pump doesn't hurt the affluent as much as lower income individuals," Freeman Evans said.
"In spite of the continued growth, we expect to see a much more competitive retail market online, particularly in the area of consumer electronics," she said. "We expect to see a much more aggressive use of free shipping offers, fewer restrictions on free shipping and earlier promotions."
Internet sales will continue to flourish, Freeman Evans noted. "Online sales' robust pace will not reflect the overall macroeconomic climate in the U.S.," she said. "In a few years, the market will mature, and growth will slow. But we're still seeing new adopters and a shifting of buyers' wallets toward online."
Gift cards are still big - and growing. "Gift cards this year will be even more popular than in 2006," Liuzzo said. "I am expecting gift card sales to be greater than ever."
Forrester's research shows 18% of online consumers plan to spend more on gift cards this year, compared to 2006.
According to Freeman Evans, one in five online consumers will buy gift cards this year. "That's a significant penetration," she said. "We didn't see an increase in the number of people who say they will be buying gift cards this year, but gift cards tend to be a last minute purchase, and we are seeing retailers promote gift cards much more heavily."
And, as seen in 2006, cards are complicating the holiday sales figures.
Historically, holiday sales were based on November and December sales figures, and represented 25% to 30% of total yearly retail sales. But gift cards purchased are not accounted for until they are redeemed.
So, although gift cards are usually given in December, the retailer doesn't tally the sale until a month or more after the holiday, making comparisons to previous years something of an apple and orange venture.
Cohen said the shuffling of revenues to other months is not the only drawback to increased gift card sales. These cards are often redeemed purchasing merchandise that is deeply discounted after the holiday shopping season.
"Gift cards and online shopping are contributing to the decline of impulse purchasing," he said. "Fifty percent of Americans say they now think it's acceptable to give a gift card. It's a great gift, but it doesn't promote an impulse purchase on the part of the gift buyer."
Cohen noted that in the past, impulse gift sales have accounted for 26% of holiday sales. "In 2006, that figure dropped to 19%, this year we'll be lucky to hit 17%," he said.
On the upside, gift cards give retailers the use of their customers' cash until the cards are redeemed, bring revenue into the bleak retail months of January and February, and offer merchant level salespeople and ISOs a great sales opportunity.
Most experts say gift cards are here to stay, and successful retailers will be the ones who embrace the shifting sales patterns, promote their gift cards well - don't forget clever packaging - and consider their gift card redemption period as an extended holiday merchandising season.
The projected bright spots in this season's sales - gift cards, the luxury market and Internet sales - may be enough to keep balanced portfolios from looking like dried out holiday wreaths. But, if the experts are correct, many retailers may say bah humbug instead of ho ho ho this season.
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