Retail Rollercoaster
Does the tumultuous economy have you on the edge of your seat? You are in good company with other retailers of all shapes and sizes. A review of the overall retail results in 2002--and an eye to the rest of 2003--may help you better understand the situation
By Erinn Morgan

Still, some of the most respected economists agree that the economy will gain momentum in this, the second half of 2003. In fact, according to the Conference Board's Consumer Confidence Index in June, expectations for the next six months show continued improvement. Those consumers anticipating an improvement in business conditions rose to 23.9 percent from 22.8 percent. Consumers anticipating conditions to worsen fell to 9.3 percent from 9.6 percent.

Additionally, a new survey of corporate chief financial officers conducted by Duke University's Fuqua School of Business recently showed that nearly seven out of 10 CFOs are more optimistic this quarter, versus 25 percent last quarter.

While the actual Consumer Confidence Index edged back slightly in June to 83.5 from 83.6 in May, this information still drove Wall Street to bid share prices higher as analysts had expected it to drop to 82.

The report's measure of consumer expectations for the rest of the year actually rose to 95.9, up from 94.5 in May, offsetting the declines in optimism about the current economy. The expectations index is at its highest level since last September, having risen 56 percent since the recent low of 61.4 in March when the war in Iraq began.

From the retail front, the predicted numbers paint an improved picture. After a year of constant economic ups and downs, the National Retail Federation (NRF) forecasts an increase in real consumer spending of 2.5 percent this year (from 2 to 2.5 in the first six months to 3 to 3.5 percent in the second half). Last year, consumer spending averaged a gain of 3.1 percent.

The NRF is also predicting that 2003 GAFS sales (general merchandise stores, apparel stores, furniture and home furnishings stores, electronics and appliances stores, and sporting goods, hobby, book, and music stores) will increase 3.8 percent from last year.

"It appears that consumers have begun to bounce back from the Iraq-induced doldrums," said NRF chief economist Rosalind Wells. "Consumer confidence has risen, low interest rates continue to boost housing, and Americans are looking forward to more disposable income as a result of the tax cut. [The recent] retail sales results could signal the beginning of a solid economic recovery."

THE DOWNSIDE

While confidence may be building that the U.S. economy will rebound in the remainder of 2003, there are still some serious issues with the value of the dollar that could hold things back. At press time, the dollar is currently down by close to 30 percent against the euro, the common currency of 12 European countries. This four-year low means higher prices for Americans for German cars, French wines, and even Italian eyewear. The dollar has also declined by 15 percent against a trade-weighted market base of currencies, which means that products imported from China, Mexico, and Japan, will also be more costly.

Analysts agree that the slide against the euro, and to a lesser extent against other foreign currencies, is likely to continue. This trend is affecting the American economy on many levels.

European manufacturers, in particular, are being hit hard here, and sales of their products are compromised in the U.S. as retailers are forced to raise prices. Consumers are reassessing their need for the now-more-expensive European handbag or fashion sunglasses.

While a falling dollar means higher prices on imported goods and domestic goods competing with imports, the decline of the dollar abroad has been welcome news to American manufacturers. This domestic segment has suffered 33 straight months of employment declines, with 2.2 million manufacturing jobs wiped out.

The rise of the dollar from 1997 through the middle of 2002 created the country's trade deficit, manufacturers note, because it priced U.S. products out of foreign markets while making imports cheaper for American consumers.

While the current situation may be a boon to domestic manufacturers, it will still create angst for those American retailers that rely heavily on imported products--such as the optical market. With much of the product being imported from Italy, China, and Japan, retailers are forced to raise prices to remain competitive in this dollar-devalued world.

Will consumers be willing to dish out the extra money for imported frames? In a world where more eyeglass wearers are putting new lenses in old frames to save money, retailers are realizing what the answer will be. [For more information on the optical market, see sidebar above]

Perhaps it could be called "The Year of the Markdown." 2002 held major challenges for most retailers--many of whom scrambled to make ends meet. The savvy retailers valiantly tried to merchandise with compelling products and create inviting environments to maintain their customer base in a crowded playing field.

In the end, the results were mixed. According to information provided at NRF's Big Show held in New York City, department stores experienced a zero to one percent growth in 2002, specialty stores a two to three percent gain, and discount stores were up three to four percent.

Overall, total retail sales moved ahead 3.2 percent for the year through November. This compares with a 3.7 percent gain for the previous year.

Virtually no one emerged unscathed from the down economy in 2002. Average growth rate for the top 100 retailers dropped to four percent, according to the NRF, down from 9.4 percent for the period from 1996 to 2001.

"The economic recovery we expected in the second half of 2002 never materialized," said Phil Kowalczyk, vice president and managing director, North America, Kurt Salomon Associates, speaking at a seminar held during the NRF's Big Show.

The poor health of an economy weeds out the bad retailers from the good, he notes. "Retailers who are poor performers will go out of business anyway, no matter the economy," he says. "A good economy, however, can hide a moderately performing retailer. In a bad economy, only the strongest survive."

LOOKING UP IN 2003

While 2002 challenged retailers, those still standing can take solace in the positive predictions ahead. "We anticipate a slow recovery," says Kurt Salomon's Kowalczyk. The major industrial machinery sectors will see the benefits of this first.

Still, NRF representatives say that many of the same obstacles retailers faced last year are continuous throughout 2003.

Store trends during 2002 give us a clue to what we can expect. For instance, the largest sales increases, in the magnitude of 15 to 20 percent, were achieved by warehouse clubs and superstores.

For the rest of 2003, retail experts say consumers will still feel compelled to seek out the best deal for their money.

"Customers are going to buy. The question is, will they buy from you?" asks Kowalczyk.

SURVIVAL STRATEGIES

To ensure you stay on the playing field, retail experts suggest following some progressive and competitive strategies.

Merchandise. Merchandising is one of the top priorities. Today, retailers have to provide consumers with a solution, not just an item. They have to offer something unique and interesting. The challenge going forward will be for retailers to find those must-have items that consumers will not be able to resist. "Consumers will buy, but they need a lot more incentive to spend," says Kurt Salomon's Kowalczyk.

Store design. Effective store layout and design is another area of importance for retailers. "Make the store an easy and inviting place for consumers," says Kowalczyk. "Something that appeals and entices them to buy more than just what they came in for. The questions also is: How do we make the store easy to shop?"

New strategies. This retail expert also recommends a formula of value, innovation, and convenience for success. All these efforts are aimed at making the shopping experience better. "Pay close attention to what your consumer is telling you about your business," he says.

In addition, the NRF report Retail Horizons focused on three strategies that study findings concluded were currently critical to retailers' success. First, the study found that retailers want to become more customer-driven in their strategies and operations, yet most of them have not determined how to accomplish this. The report noted: "Many retailers are exploring new strategies, processes, and technologies that will enable them to differentiate their value through customer-centric service, personalization, and loyalty programs, emphasizing the importance of customer retention and marketing in the upcoming year."

The study also evaluated the success of the data evaluation. Though many retailers collect massive amounts of data, the study suggests that they are not using this information to make better, faster decisions about product assortments, store location and design, pricing, and promotions. Retail Horizons predicts those retailers that use data most efficiently will be better positioned to differentiate themselves from their competitors.

Finally, Retail Horizons explored the importance of "retailers that are in touch with consumers, collaborative with suppliers, and agile in a changing environment." Intra- and inter-company integration are a necessity and, if done well, a competitive advantage.

Speaking on the future, Tracy Mullin, president of the National Retail Federation Foundation, notes: "The winning retailers of the 21st century will reflect the currents of change in every aspect of their business by being customer-centric, by moving along the data-knowledge-action continuum, and by forging a boundary-less organization."