October: Retailers Unwrap a New Approach to Holiday
Download PDF Version
Economic recovery is a question mark for retailers and consumers alike. While the issues vary by retail segment, retailers across the board face important questions about increasing risk in costs, margins, inventory, and the consumer. Heading into Holiday 2011, retailers need to think seriously about two central issues:
THE BIG PICTURE Last month, we talked about sinking consumer confidence. The picture, as we said, was not pretty; as more people were reporting a stagnant or worsening personal economic situation, we were concerned that September's performance and the close-out of back-to-school (BTS) seemed overly hopeful. September beat, but October disappointed, netting at best a mediocre BTS season.
Despite the disappointing headline consumer confidence numbers, we do see a few glimmers of hope. According to a recently published joint study by AlixPartners and Citigroup Global Markets, real Gross Domestic Product has been, and continues to be, positive since Q3 2009. The U.S. Census Bureau's Totals for Retail Sales have remained positive for the last 15 months and show 7.1% improvement over 2010; and the U.S. Bureau of Labor Statistics has shown positive net job gains over the past year. However, this is not to say the economy will rebound, as unemployment still hovers around 9%, the housing sector remains challenged, and consumers continue to pay down big debts.
Other signs also point to positive, or at least not deteriorating, conditions in the macroeconomic environment that may favor the consumer (figure 1). Personal income, personal savings, and nonfarm payrolls have all increased year over year. Additionally, the change rate of growth (2nd derivative) in these areas has increased, meaning that they are improving more quickly now than the prior period. Despite the worsening consumer confidence reflected in surveys, these measurable economic signals show the economy does not appear to be continuing to rapidly deteriorate. On a similar note, the Citi Economic Surprise Index (a comparison of economic releases against their consensus expectations) turned positive on October 14, 2011 after holding negative since May. We believe that this increased financial stabilization should yield a modest growth of 4% to 5% this holiday season.
Are consumers getting the message? Perhaps not. The AlixPartners Holiday Spending Outlook1 found that attitudes towards holiday shopping continue to show signs of caution. In May 2007, 27% expected an improvement in personal situation; now just 20% expect improvements, while 52% see no change forthcoming (figure 2).
How will this change in expectations affect holiday spending for this season?
Consumers say they plan to manage their holiday spending by carefully watching prices and waiting for sales or promotions before choosing to make a purchase. Overall, 88% of consumers plan to spend the same or less this holiday season; 41% say they plan to spend less. The major drivers cited for these changes were concern over future personal economic situations at 57%, and rising household expenses at 52% (likely driven by inflation in food, gas, and apparel prices).
Fortunately, we did see slight reductions in those quoting "lower household income" and "managing/reducing credit card expense" from the same period last year.
THE RETAIL REALITY Retailers catered to cautious consumers for the past two to three years and made many changes to their holiday approaches. So, how have retailers prepared for the upcoming season of business?
First, inventory levels have been leaned down to a point where it seems retailers are waiting for customers before investing in large amounts of inventory. Broadlines and drug stores show this the most with inventories below forecasted growth for the fourth quarter, while specialty apparel remains bloated – with the potential to create pricing pressure and margin loss later in the season.
Second, we expect retailers to fight against these pressures with improved planning through the use of new pricing programs, price and markdown optimization tools, and workforce management systems. According to our study, more than 43% of retailers are actively working to enhance their supply chain models and rapid reorder capabilities.
Third, we expect retailers to leverage their online presence and focus during the holiday season. We have already seen many retailers announce free shipping on all purchases, and this may further include increases in promotions and social media presence to drive traffic to both brick-and-mortar and online stores, making up for a lack of "must have" items this season.
A focus on mobile users would also be wise. Handheld smartphones continue to revolutionize retail. Popular comparison applications, such as Red Laser, have seen downloads increase tenfold over the past two years. As users leverage comparison apps, search engines, and coupons to become more informed, they are changing their shopping behaviors, according to the recent AlixPartners Mobile Shopping Applications survey (figure 3).
Click to see larger image.
The survey found that:
-
Mobile shopping applications impacted shopping decisions for more than 70% of users aged 18 to 44, and almost half of those 45-65+
-
In-store price comparison apps, such as Red Laser, proved to be the most influential in driving 40% of decisions to purchase a cheaper alternative online, or from a nearby store with a lower price
-
Mobile coupon offers pushed through location-based services or regularly delivered promotions programs are used twice as often as other forms of mobile couponing
- Consumers largely do not feel overwhelmed by the volume of mobile alerts received to date, and there is significant demand for more alerts in certain segments
IMPLICATIONS FOR HOLIDAY 2011 AND BEYOND In the short term, we can expect a "game of chicken" between retailers who want to keep inventory low and margins high, and consumers who are willing to hold out for pricing promotions and sales. Just as consumers are becoming better informed and savvier shoppers through improved access to technology, retailers are also continuing to invest in their backend systems to literally give them a fight for their money.
The economic situation is uncharted and uncertain. Emerging customer expectations include: real-time reporting and continuous consumer connectivity; transparency and access to pricing detail and options; engagement and interactivity, even if not perceived as high value-add can translate into instant gratification; and delivery of coupons and alerts as a continuous source of information, value, and discounts. Retailers will need to keep pace with these changes and consumer expectations to stay relevant; competing in the future will look very different.
Please look for more on that in our upcoming perspective on predictions for Retail in 2012. And, as always, our complete data pack of retailer and macroeconomic data is attached. Follow this link to download the AlixPartners Comp Sales Report for October 2011.
1The AlixPartners Holiday Spending Outlook surveyed 1,000 adults nationwide, a demographically representative sample of the U.S. population, about their sentiment and expectations about the U.S. economy and personal holiday spending behavior.