A look at holiday retail sales activity and consumer confidence
Written by Patty Silverstein, chief economist for the Metro Denver EDC, this section identifies major issues affecting the economy and answers frequently asked questions.
‘Tis the season to go shopping, or rather, it usually is. Reports of a slow holiday shopping season for 2008 are slipping into news reports and holiday economic forecasts. Does this mean retail stores - whose aisles are normally bustling with holiday consumers in November and December - will echo eerily with the lone footsteps of a few daring shoppers this year? This article discusses current projections regarding holiday retail sales activity and consumer confidence.
Q: Why is retail activity important to the economic base?
Personal consumption of final goods and services accounts for 70 percent of the total value of national output, or gross domestic product. These expenditures, commonly referred to as consumer spending, are a key component of retail activity, or the market for final goods. Even small declines in consumer spending strongly influence overall economic activity and hurt the retail industry. Retailers faced with falling sales may hire fewer employees, decrease investment, and limit wage increases.
Decreased consumer spending has impacts beyond individual retailers and the retail industry. In the case of public companies, negative sales growth and the associated loss in revenues may be borne by company shareholders who lose dividends and wealth. Decreased business investment by the retail industry resulting from reduced consumption could contribute to rising unemployment rates and stagnating wage growth.
In addition, a crippled retail environment has fiscal consequences. In Colorado, both the state and local governments rely on retail sales taxes for a large portion of their revenues. Declining retail sales activity may force sales tax-dependent jurisdictions to cut back on governmental programs and services and revise budgets.
Q: How is the current economic situation affecting consumers?
The Conference Board’s U.S. Consumer Confidence Index fell to an all-time low in October due to the impact of recent financial events. Confidence levels in Colorado also declined in October, but remain at higher levels than the nation. Consumers with less confidence in the economy typically demand fewer goods and services. Consumers recently have been negatively affected by fewer job opportunities, loss of stock market wealth, and declining home values. Consumers across the country are tightening their belts and preparing for tough economic times.
Along with waning consumer demand, tighter consumer credit adversely affects retailers. In an article posted at CNNMoney.com the situation was described bluntly, “No Desire + No Credit = Throwaway Year.”(1) The report notes that an estimated 87 percent of consumers use credit for their holiday purchases. Credit limits and tighter standards will hinder purchases by some consumers who want to spend more. Tighter credit may force some retailers to cancel financing options and promotions that are a usual part of holiday shopping.
Q: What is the outlook for holiday retail activity?
National sales forecasts for the 2008 holiday season predict slower growth compared to previous years, ranging from 0.1 percent to 2.2 percent growth over 2007. The National Retail Federation (NRF), the world’s largest retail trade association, issued a holiday forecast in September calling for a 2.2 percent gain in 2008 holiday sales activity, with activity totaling $470.4 billion.(2) This increase in activity is half of the average annual growth rate of 4.4 percent achieved over the last ten years. The International Council of Shopping Centers, TNS Retail Forward, and ShopperTrak RTC predict sales gains during the holidays of 1.8 percent, 1.5 percent, and 0.1 percent respectively.(3)
Inflationary pressures could erode any real gains made by retailers this November and December. The Consumer Price Index published by the U.S. Bureau of Labor Statistics measures changes in the prices of goods and services across the nation. While inflation slowed significantly in October, inflation is averaging about 4.5 percent nationally in 2008.
Overall, most experts agree this holiday season will be slower than usual. Retailers who opened stores, expanded product lines, or added employees in the past year may face operating challenges this holiday season if their sales do not increase at rates greater than their costs. Since many retailers earn up to 40 percent of their yearly sales in November and December, a declining holiday sales environment is bad news for the retail industry.(4)
Q: How are Colorado retailers faring?
Many Colorado retailers have already had a challenging year. The retail category reporting the largest loss is motor vehicles and auto parts, down 10.7 percent compared to last year.
Total retail trade activity increased 3.2 percent through the first eight months of 2008. After adjusting for inflation, many retailers may have faced real sales losses. Much of the total increase occurred in three key retail trade categories including food and beverage stores (+10.1 percent), gas stations (+21.4 percent), and non-store retailers (+36.4 percent). The high cost of gasoline during the January-August period explains most of the increase. While gas station sales include food, auto service, and other miscellaneous items, the bulk of the activity is the value of gasoline sales. Food prices also increased dramatically during this period due to rising transportation costs. Non-store retailers reflect the growing interest in online shopping.
Q: Will any retailers benefit this holiday season?
Discount retailers are expecting a robust holiday season. According to the NRF survey of holiday shoppers, 40 percent of shoppers this year state the most important factor influencing their purchases will be sales or promotions.(5) This year, nearly 70 percent of consumers plan to make holiday purchases at discount stores. In Colorado, general merchandise stores, which includes discount retailers, has been one of the few sectors posting any sales gains so far this year.(6) This trend is likely to continue through the holidays as consumers spend less by substituting lower priced goods for their normal purchases.
Online retailers also expect real growth this holiday season.(7) As consumers gain confidence in online shopping, online retailers will capture a greater share of the retail industry. Shoppers increasingly choose online retail for convenience, aversion to holiday crowds, easy price comparisons, and to substitute shipping costs for the cost of driving to a store. In a survey of online retailers by the NRF, 56 percent of online retailers expected a fifteen percent or more increase in sales over last year. This is down from nearly 78 percent who expected a fifteen percent or more increase in sales last year, but is still a robust expectation.
The holiday season will see aggressive competition between retailers. Price slashing and competition are the holiday norm each year even during times of robust consumer confidence. The holiday environment this year may be even more spirited. Consumers will shift their spending to businesses offering lower prices, better selections, or a more convenient shopping experience.
1) Kavilanz, Parija B., “Credit Crunch: Not So Happy Holidays,” CNN Money.com, October 3, 2008.
2) National Retail Federation, “NRF Foresees Challenging Holiday Season, Forecasts Meager Sales Gains of 2.2 Percent,” September 23, 2008.
3) International Council of Shopping Centers, “2008 Holiday Retail Sales Projected to be Modest,” October 21, 2008.
TNS Retail Forward, “Weakest Holiday Since ’91, TNS Retail Forward Forecasts,” September 17, 2008.
ShopperTrak RTC, “ShopperTrak Predicts 9.9 Percent Retail Traffic Decrease for 2008 Holiday Season,” November 19, 2008.
4) Davis, Joyzelle, “Retailers Brace for Austere Holidays,” The Rocky Mountain News, October 11, 2008.
5) National Retail Federation, “Holiday Shoppers Planning to Make a Budget and Check it Twice, According to NRF Survey,” October 16, 2008.
6) Colorado Department of Revenue.
7) National Retail Federation, “Online Retailers “Resilient, Not Immune” to Challenging Holiday Season,” November 5, 2008.