Do you find yourself doing things a little differently these days? Are you shopping at the same stores that you were 12 months ago? Are you spending as much as you used to? Have your purchasing decisions changed?
This economic downturn has been so sharp that it has affected the way that virtually everyone shops. Some people are buying cheaper meat at the grocery store while others are driving less to save a little money. Almost everybody is looking to lower costs while minimizing impact to quality of life. Inherently, this rapid and significant shift is creating strife for some and tremendous opportunity for others.
In economics we learned about the concept of substitute goods – a good or service which can be used in place of another item to serve the same or similar purpose. And in our lives, we live it. The classic example of perfect substitute goods is soft drinks - Coke and Pepsi. Despite consumers’ taste preferences, they may choose one over the other if it’s on sale. A consumer is willing to consider this because the product can be used interchangeably and serves the exact same purpose. So, these days, brands charging a premium are losing customers fleeing for a better deal on a comparable product. At the same time, consumers are simply buying less. Labeled the income effect in economics, this theory states that, as income decreases, a consumer will demand less.
This mix of substitution and decreased consumer spending has been a lethal mix and has caused businesses across all segments to scrap previous business plans and completely rethink their models in an effort to weather the storm. Companies with premium brands have been particularly vulnerable as they suffer greatest from substitution and the income effect. However, well-managed, premium brands can actually create more loyal customers during an economic downturn. When the economy recovers, brands that succeeded in building and maintaining loyalty will emerge even stronger. Harley-Davidson is a great example of this – 105 years after it was founded. While the company is undoubtedly feeling the pinch, it continues to stay positive and offer opportunities for customers to continue developing the long-term relationship they have with the product and the brand.
So let’s take a closer look at what’s actually been happening. Results have indicated that for the 2008 calendar year, retail sales only rose 1%, according to the chief economist at the International Council of Shopping Centers. Although the recently released November and December retail sales results confirm that the overall picture was bleak, there were some success stories. The chart below illustrates sales trend results for December 2008 versus December 2007, for 60 of the top retailers, based on same store sales results reported by these retail companies. Same store sales are defined as sales for stores which have been open for more than 12 consecutive months. Analyzing same store sales allows for performance comparison without results being skewed by store openings and closings.
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The results of this analysis clearly indicate the potential areas for growth (i.e. discount) within the retail sector for 2009, as well as the major areas of concern (i.e. department stores, clothing, specialty retailers).
In general, 2009 will prove to be very challenging for retailers. While there will be some opportunities for big box and discount stores, companies providing lower cost substitute goods and those focused on building long-term brand loyalty, these will be few and far between compared with the number of store closings, bankruptcies and liquidations that are yet to come. Review the 2009 Retail Watch List on the right to gain an understanding of the health of these firms.
Lenders with retail assets in their portfolios should examine whether an update value is in order to ensure they are not overextended. Contact AccuVal for further guidance on whether a reappraisal is warranted. Retailers should continue examining every avenue to cut costs hitting the bottom line. This should include an inventory management study that identifies opportunities to reduce slow-moving inventory, keeping stock fresh and cash resources productive. AccuVal’s Inventory Advisory team can help. Read more about our experience in the retail industry.