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Commentary
Weekly Standard Online

Retailers Compete for American Shoppers

Stetzler
Stetzler
Senior Fellow Emeritus

Lower gasoline prices continue to stuff consumers’ wallets and purses with an extra $100 billion annually. So better rush to the stores early, clutching your must-have or merely-want shopping lists to beat the crush. Don’t bother. That cash is staying in consumers’ pockets or bank accounts, or being used to pay down debt. The usually exuberant American consumer is not so exuberant: consumer sentiment has plunged to its lowest level since October, taking most analysts by surprise. And since consumers account for some 70 percent of America’s total output of goods and services (GDP), neither is the US economy. Preliminary reports that the economy flattened in the first quarter are being revised downward, to indicate that it actually shrank. The second quarter seems headed in the same downward direction.

This week’s report that retail sales last month failed to grow marked the fourth such report in the past five months. Consumers are holding on to billions of the bonanza generated by still-low although recently rising gasoline and fuel prices, job creation has picked up from a dismal January, low-paid workers are getting a pay boost from McDonald’s, Wal-Mart and other employers, and the housing market is once again on fire. Yet the consumer remains cautious -- to many retailer’s pain. Tiffany, the high-end jeweler, is reporting sales down 4 percent from last year, which it attributes to the strong dollar and the decline in foreign buyers, especially in its New York store. Macy’s, the giant 886-store retailer, which includes the Bloomingdale’s chain, reported that sales for the thirteen weeks ending May 2 fell by 0.7 percent, driving net income down to $193 million from $224 million at this time last year.

Like many observers, the chain’s CEO, Terry Lundgren, a man considered by most to be the nation’s most talented retail manager, blames transient factors. The weather was vile; West Coast port strikes impeded the flow of clearance-sale goods from Asia; the strong dollar cut into visits to his New York flagship store and other retail hubs by free-spending foreigners; low crude oil prices resulted in lay-offs in several states and unleashed a wave of pessimism from Texas to North Dakota.

Lundgren and other optimists are partly right in calling some of these factors transient -- after all, so did the Fed -- although their surprise that winters are cold has some analysts chuckling. The port strikes are over, oil prices are rebounding and the nation’s frackers are talking about re-activating some idle rigs, and the dollar is approaching a three-year low against the euro, which passed the $1.14 mark for the first time in the past few months, while the yen and the pound are also strengthening against the dollar. After all, the euroland economy seems to be showing signs of life, some think it will pick up even more if it rids itself of those troublesome Greeks, and Britain continues on the path to recovery, the recent election having eliminated left-wing threats of spending and tax increases.

Better still, there are signs that consumers are merely treating themselves to what an old Coca-Cola ad once trumpeted as “the pause that refreshes.” They continue to buy cars, although at a slightly slower pace in April. They mostly choose expensive sports utility vehicles, and are loading them with so many extra gadgets that dealers have to hire teenagers to show older buyers how to use them. The average price paid for a General Motors vehicle is now $34,750, up $880 compared with last year. This love of gadget-laden large vehicles, which are less fuel-efficient than the smaller cars beloved of policymakers of all shades of green, has not cooled even though prices at the pump are up 31 percent from their January lows -- just as the summer driving season heats up, and families pile into their big, air-conditioned cars for a trip to granny or a battle through traffic to a nearby beach.

Then there is that favorite subject of cocktail parties from posh New York penthouses -- the current record sales price, $100 million, is topped by the $150 million being asked for a new condominium -- to sun-drenched homes in Phoenix, Arizona, to which so-called snowbirds flee from Canada and snowy states to join permanent residents in a shovel-free winter -- average asking price about $370,000. The National Association of Realtors reports that home prices rose in 148 of the nation’s 174 metropolitan areas in the first quarter, in 51 of those areas by double digits compared with last year, when only about half experienced such increases. In short: home prices are on the rise, the supply of new homes is low, and demand from consumers who are staying away from retail shops is rising across the country.

The housing and auto markets tell part of a story that might, just might, suggest that retailers who see their problems as temporary might be “talking their own book.” That’s the expression used on Wall Street to describe investors who go on television and pose as disinterested while touting the wonders of some stock they hold in an effort to drive up its price. It could be that we are seeing a rather profound, non-temporary shift in how Americans choose to spend their money.

Most people I talk to have been rattled, both by the recession and by the slow recovery, especially in their wage packets. That produces caution, which produces an increase in the propensity to save. Whether or not that parsimony will last when (if) incomes turn up cannot be predicted, but its permanence cannot be dismissed out of hand. There is worse for traditional retailers. If anecdote and observation are to be believed, consumers are deciding that in addition to cars and houses, restaurants such as the new rage, Shake Shack, its shares trebling since its January initial public offering (IPO) as its sales of all-natural Angus beef burgers soar, and iPhones are a higher priority than a new frock. And if money is to be spent on apparel, it will be on cult brands in the athleisure category, now acceptable outside of the gym, giving Nike (shares up 60% in two years), Lululemon (with its branded super-comfortable “anti-ball crushing”, or ABC men’s pants), and Under Armour (shares up 70 percent in the past year) an edge over traditional apparel retailers.

More styles of apparel, more brands to choose from and now the 150 Macy’s stores that Lundgren is moving up-market, and the four discount outlets he plans. As always, the consumer wins when competition heats up.