Bargains await consumers, not retailers this year

An 'extraordinary' 1998 isn't likely to be repeated

Retail

January 24, 1999|By Lorraine Mirabella | Lorraine Mirabella,Sun Staff

Consumers will go shopping with an eye toward bargains in 1999 and spend less than in the past year, bringing retailers modest sales gains and possibly their weakest year since the early 1990s.

Buoyed by a strong job market, a booming stock market and lower interest rates, consumers kept the registers ringing in stores in Maryland and across the nation for much of the year, boosting sales by 5.1 percent over 1997, according to Commerce Department figures.

"1998 has been an extraordinary year for consumers," said Mark Zandi, chief economist for Regional Financial Associates, an economic consulting firm in West Chester, Pa. "Although retailers have had to be aggressive in their pricing, for the most part profit growth has been good and overall conditions have been strong."

But economists expect somewhat weaker conditions for the coming year, with slower job growth and a less meteoric rise on Walll Street.

"[This] year will be a much more difficult year for retailers, primarily because consumers will be less aggressive in their buying as job and income growth slows and consumers no longer benefit from further declines in interest rates and energy prices," Zandi said.

For much of the year, retailers have pulled consumers in with promotions.

Walter Loeb, president of Loeb Associates, a New York-based retail consulting firm, and other analysts and economists are forecasting sales gains in 1999 of just 3 percent, amid higher unemployment, more consumer uncertainty and more employment cutbacks.

"Employment has a significant impact on consumer confidence and therefore retail spending," said Bruce Van Kleeck, vice president of member services for the National Retail Federation. "We're still seeing low unemployment, but there's still signs out there indicating some problems, and that can cause overall consumer confidence to stumble a bit."

Rising personal debt won't help, Zandi said, adding that "lenders will be even more reluctant to allow consumers to borrow enough to support spending growth consistent with what consumers enjoyed for the year."

A 3 percent gain would be the slowest rate of retail growth since the early 1990s. Sales rose 4.3 percent in 1997, 5.2 percent in 1996 and 4.9 percent in 1995.

The National Retail Federation forecasts a somewhat brighter picture, calling for sales growth of 4.5 percent next year.

Even if sales rise no more than 3 percent, the outlook for retail next year is not as dim as some believe, especially without any dramatic changes in the economy, said David H. Nevins of Nevins and Associates, a Baltimore marketing and retail consultant.

"Retail is in for another pretty strong year," Nevins said. "There's a lot of hidden wealth that's been built up in this country. While the economists are somewhat concerned about the lack of savings, that savings rate does not include the money that people have in the stock market.

"As long as that is so, there is a significant level of consumer confidence that allows them to spend virtually all that they earn," he said. "Combine that with the fact that unemployment is low and people are less concerned about corporate layoffs -- though they are still somewhat regular announcements -- because it's easier to get a new job."

Analysts expect fewer retail bankruptcies in 1999, in large part because many retailers have spent the past year or so reorganizing or taking other steps to regain their footing, such as shedding unprofitable stores and laying off workers.

For instance, Montgomery Ward, which had filed for bankruptcy protection in 1997, announced the closing of 65 stores, including locations in Lanham and Gaithersburg. Toys 'R Us shut stores and distribution centers and fired thousands of workers as it headed into the holiday season. Caldor Corp., which went into Chapter 11 bankruptcy protection in September 1995, closed 12 underperforming stores, including two in the Baltimore area. Recently it announced it had stopped paying vendors.

Mergers and consolidations are likely to continue, especially in "big box" retailing. Mass discounters such as Wal-Mart, Kmart and Target will likely continue their reign.

"Consumers are valuing price and service," Van Kleeck said. "The discount chains are doing reasonably well, forcing department stores to cut prices earlier than planned. For next year, you will see heavy price competition."

Department stores have not seen the last of their troubles and will likely see only modest sales increases next year, analysts said. In the coming year, department stores could close or merge, while chains will likely focus more heavily on apparel and accessories, analysts said.

Specialty retailers, especially those with unusual approaches, cutting-edge merchandise or a successful marketing image such as The Gap and Abercrombie & Fitch, should continue to have strong sales. "They have connected with consumers, and have been the shining stars in the industry," Van Kleeck said.

One of the biggest growth spurts in retail in 1998 came in the virtual store, and Internet retail sales skyrocketed. Holiday spending alone jumped from $1.1 billion in 1997 to an estimated $2.3 billion in 1998, according to new-media analyst Jupiter Communications.

"The 21st century is going to bring about another type of competition that the real estate-based retailers haven't faced before," Nevins said. "Internet retailing is going to change the face of retailing once again, all of which is good for the sector as a whole. It's clearly a matter of survival of the fittest."

Pub Date: 01/24/99

Baltimore Sun Articles
|
|
|
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.