Top Stories » Expert Columns » Profiles & Trends

Why, for fifty-three years I’ve put up with it now. I must stop Christmas from coming . . . but how?
— Grinch

Housing prices are falling, financial markets are in disarray, consumer confidence is slipping, credit is tightening, savings are low and personal bankruptcy is rising. It all seems a perfect storm that only the Grinch could love. As retailers and their suppliers look toward the holiday season, there are a lot of sound economic reasons for concern. While this will be a challenging season for consumer-dependent businesses, not all is lost. Consumer finances are not totally hopeless, and retailers are currently managing their businesses with little expectation of growth.

Cost Discipline
Retailers are showing great cost discipline as they enter the fourth quarter of 2007. Inventories have been kept tightly under control while labor costs are also very lean. Inventory-to-sales ratios for most categories, including food, are at or near record lows. Years of work and billions of dollars in technology investment have paid off in giving retailers supply chains that are efficient and extremely adaptable to changing consumer demand.

Source: U.S. Bureau of Census

With inventories at or near record lows, retailers will not need to be nearly as promotional to move their merchandise this holiday season. Less promotional activity should translate into a better-than-expected profit performance.

Retailers have also done an excellent job of keeping their labor costs under tight control. Retail employment peaked during the last expansion in December 2000 at 15.39 million. After dropping steadily for the next three years, it was not until March 2007 that retail employment exceeded the December 2000 peak, and since then, retail employment has slipped back slightly.

Consumer Spending Headwinds
On the demand side, consumers face a number of financial hurdles that will keep spending growth modest. Over the last three months of 2007, roughly $150 billion of adjustable rate mortgages will reset with another $500 billion coming next year. Higher mortgage payments coupled with a steady decline in mortgage refinance money will cut into holiday spending.

Energy prices fell during the summer, giving a boost to consumer spending in August and September. That decline in energy prices has reversed and what the oil markets give, they will now take away. With spot oil prices pushing $80 a barrel, the energy dividend will be a distant memory by December.

While energy and housing will be a drag on spending, income growth remains relatively healthy. Through mid-year, real disposable income is up a solid 3.8 percent. While weakness in the labor market due to housing and credit market problems will slow income growth, it will still be strong enough to offset some of the energy and mortgage problems.

Implications for Retailers
Retailers should expect modest sales growth this holiday season. At Deloitte, we are forecasting a gain of just 4.5 percent for the November through January time frame. Home-related retailers will have the hardest time, while high-end retailers will fare the best. Merchandising problems with toys may give a boost to apparel and consumer electronics.

Successful retailers will focus on driving customer traffic through promotions that don’t give away the store. Carefully managing the flow of inventory to maintain fresh selections throughout the season will give consumers a reason to come back more than once. Finally, we expect consumers to focus more on the country of origin of the products they buy this holiday season and into next year as well.

Retailers can also look to past holiday seasons for direction. A survey we did in January 2007 found the not-surprising result that retailers lost sales due to poor customer service, store navigation and inventory issues. Out-of-stock items, long lines at registers, unavailable or unhelpful sales help, and confusing store layouts caused many customers to leave stores without making purchases. It may be obvious that creating a positive customer experience needs to be more of a focus but few retailers seem to be able to execute on this issue with any degree of consistency.

If you would like to comment or send us your feedback, please send e-mail to csteidtmann@deloitte.com.