What lies ahead in 2011? If you're like most retailers you're ready for a rebound in sales after two years fighting the recession dragon. But maybe you're dogged by a common question: How will the unsettled economy affect the success of my merchandising programs?
Here's some good news: You are now operating in an economic environment that is slowly but surely on the mend.
"The recovery will start to ramp up in 2011, then really expand quite strongly in 2012 and 2013," says Sophia Koropeckyj, managing director of industry economics at Moody's Analytics, a research firm based in West Chester, Pa.
Most economists concur with that assessment. Today's economy is like a patient in convalescence: It needs more time to return to full health, but at least it's no longer on life support.
Consider the most common thermometer of economic health: gross domestic product (GDP), or the yearly total of goods and services produced in the United States. In a healthy economy this measurement of general business activity increases at a robust pace.
"We estimate that GDP will grow at 2.7 percent for 2010 when numbers are finalized," says Koropeckyj. That number represents a growth rate which is virtually flat considering that it comes off a GDP decline of 2.6 percent in 2009.
The good news is that GDP is expected to grow by 3.1 percent in 2011, according to Koropeckyj. That's a much healthier number since it's calculated from a decent previous year figure. (To put these numbers in perspective, the annual GDP increase for an economy in average growth mode is 2.5 percent).
Retailers in particular should experience a better 2011. "We are expecting better performance in almost every segment of retailing," says Scott Hoyt, senior director of consumer economics at Moody's. Hoyt expects core retail sales (which exclude volatile auto and gasoline sales) to increase some 3.6 percent when 2010 numbers are finalized.
While that figure looks good on first blush, note that it comes off a dismal decline of 1.9 percent in 2009. But the future looks better: In 2011 retail sales should rise 4.2 percent. (To put all these figures in context, average annual core retail sales growth has been running at 4.6 percent in recent times.)
Some current factors are especially conducive to a rebound. Perhaps the most important is the healthy state of corporate profits. "Medium and large companies have been very profitable over the past 12 months, thanks partly to low interest rates, minimal hiring and no wage pressures," says Koropeckyj. Coming off a pretty flat 2009, corporate profits are expected to increase by some 28 percent in 2010, by 4 percent in 2011, and a healthy 14 percent in 2012.
These enterprises are accumulating lots of extra cash, earning close to zero percent interest. "They are well positioned to expand both hiring and capital investments," says Koropeckyj. That would have a stimulating effect on consumers and retailers.
So far, though, companies large and small are refusing to invest in the future out of a number of concerns. These include the negative effects of the unstable housing market, the European debt crisis, and the unsettled nature of federal laws in many areas such as taxation, health care and the environment.
Perhaps the most important concern, though, is the low level of consumer confidence. The public's faith in the future is critically important for a healthy marketplace, since consumer activity represents 70 percent of the economy.
Here, unfortunately, things are not so good. "Consumers are majorly depressed," says Hoyt. "Consumer confidence has been at levels characteristic of a deep recession for over a year." That's inconsistent with what one might expect, given the fact that the recession officially ended in 2009 and sales at retail stores have been improving.
Why the gloom? The current recovery has not yet been accompanied by an uptick in employment, which has been running at around 9.6 percent, according to Moody's. That figure, up slightly from the 9.3 percent of 2009, is actually expected to increase over the coming months.
"Once job creation kicks into higher gear people on the sidelines will perceive the labor market as more hospitable and will start applying for work," says Koropeckyj. She expects unemployment to average 9.9 percent for 2011, eventually easing down to 9.5 percent late that year. The rate in 2012 is expected to average 8.3 percent.
These anemic employment numbers are enough to keep consumers restrained. "When people hear the unemployment figures they are not going to tell anyone they are happy," says Hoyt. Additionally, consumers have lost massive amounts of wealth in their homes and stock portfolios, and are making very little money on their savings because of low interest rates.
Consumers are also concerned about the continuing glut of homes. "The housing market is still performing quite poorly and is not expected to stabilize until later in 2011," says Koropeckyj. "The big problem is the huge inventory of unsold homes."
Housing starts are expected to total 590,000 when 2010 numbers are finally tallied, up from 550,000 in 2009. They are expected to rebound to 830,000 in 2011. While that figure looks like a huge improvement, Koropeckyj points out that "it's not really a boom historically. Housing starts were averaging 1.6 million before the recession. The 2011 rebound represents some renewed activity in select undersupplied markets."
A related problem, equally serious, is that existing homeowners won't benefit from increased value in their properties for the foreseeable future. The median price for existing home sales is expected to be $162,800 in 2011. That's actually a decline from the $171,400 average for 2010, despite the fact that existing home sales are expected to rise to 5.9 million in 2011 from the previous year's 5.2 million.
Why the disparity? "Many foreclosed homes are still going on the market and being sold at big discounts," explains Koropeckyj. "Sales of foreclosed homes do affect the selling prices of other houses." Stable or dropping home values make consumers feel less flush, and that has a negative effect on spending.
Until consumer confidence rebounds, companies with money to spend are not closing their purses but are shying away from taking on more debt. This reluctance to borrow comes at a time when the recession-based credit freeze has largely thawed.
"Banks are now open to lend and the money is available, but demand from entrepreneurs is down," says Walter Simson, principal of New York City-based Ventor Consulting. "Banks are telling me they are having trouble finding people who want to take business risks."
Shoppers, for their part, have also become shy about borrowing money. "Three years ago people were spending their home equity at retailers," notes James Dion, president of Dionco, a Chicago-based retail consulting firm. "Then all of a sudden that money disappeared. Also, credit card issuers have tightened up credit lines. People who had $2,000 limits before might only have $900 or $1,100 now. As a result, the use of credit cards has dropped dramatically in favor of debit cards and cash."
In the longer term, consumers refinancing their mortgages will end up with more cash to spend as a result of lower debt payments. This trend is being fed by low interest rates and minimal inflation, two conditions that economists expect to remain through 2011.
When will a robust rebound happen? When consumers decide they have reset their balance sheets sufficiently.
"At some point consumers are going to say 'I have started saving, my finances are in better shape, and now I need to replace my car and buy some new things that I have been avoiding,'" says Simson. "Then demand will be back and it will be dramatic."
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Tactics for a Great 2011
The economy is struggling out of recession. Consumers are trickling back to stores. And retailers can pave the way to a successful 2011 by controlling inventory levels and capitalizing on new technologies.
Maybe you've already established a solid foundation by trimming inventory over the past two recessionary years. "Retailers who got burned in 2008 have cut their buying to reduce the number of duplicate products and SKUs (stock keeping units)," says retail consultant Bob Phibbs, Coxsackie, N.Y. Keep up the good work by managing inventory levels to reflect what you expect in the second half of 2011 and the back-to-school seasons.
And technologies? "Mobile is the big thing," says James Dion, president of Dionco, a Chicago-based retail consultant. "You cannot ignore the sheer number of smart phones out there, and the number has increased as a result of the Christmas season. This gives the consumer huge amounts of information, and the retailer huge amount of opportunities."
Example #1: QR codes. These small dotted squares are being printed on everything from advertisements, brochures and Web pages to in-store displays. "Customers who take pictures of QR ["quick response"] codes with their smart phones are taken to Web sites with product information, coupons or special offers," says Dion.
Example #2: Shopkick. Customer targeting reaches the micro level. This technology emits a high frequency signal that identifies the exact location of a customer in your store, then offers relevant coupons and sales information (www.shopkick.com).
Finally, don't forget the basics. "Hard as it is, stay optimistic," says Dion. "When the customer comes through the door make sure your people have smiles on their faces and always say that business is great. Then the customer will feel good about buying. The worst thing you can have is doom and gloom at the store level."
Phillip M. Perry is a New York-based writer and consultant.