PRICE WATERHOUSE GLOOMY HOME FURNISHINGS HOLIDAY FORECAST

Furniture World Magazine

Excerpts from a recent report by Price Waterhouse entitled "Underperforming Retail Segments: The 1997 Holiday Outlook," follow. You can contact Carter Pate at Price Waterhouse with any questions or to request the full report. E-Mail Link:carter_pate@pw.notes.com American mass retailing began in the late 1800s with Montgomery Ward marketing its products through general merchandise mail order catalogs, which was a very effective vehicle at that time for reaching a largely rural society. At the end of World War II, the baby boom spawned 64 million births in an 18 year period. Retail space exploded with the new demand for consumer goods. The baby boomers still represent the largest United States generation today, with retailers attempting to market to them throughout their lifetime. The 1940s marked the beginning of several factors which would influence retailers for the next couple of decades. First, the population began its movement to the suburbs as the economy shifted from an agricultural base to an industrialized nation. The first shopping center was opened, which would eventually be a significant factor in the decline of downtown retailing in the 1960s and 70s. JC Penney and Sears began their national mass retailing expansion, and the use of credit cards at major retail chains began. The 1950s witnessed the reaffirmation of the traditional family. The first planned mall and franchised food restaurant opened. As people continued to flock to the suburbs, the downtown areas began to decline. Larger suburban malls were created and anchored by traditional downtown department store merchants with an emphasis toward stay-at-home mothers that had daily free time to shop. Freeways were expanded and the sales of private automobiles grew, giving the consumer a wider accessible area in which to shop. Discounters were born. The 1960s witnessed the growth of enclosed shopping centers, with department store anchors and specialty retail chains. The baby boomers were teenagers at this point, leading to the growth of juniors-oriented stores and vendors. The emergence of the civil rights movement helped create target marketing for minorities merging into the middle class. Women became targets not just as mothers or wives as they entered the workforce, and consumers became more demanding in their expectation of quality and service. In the 1970s, promotional pricing started to pick up at the department stores as off-price retailers emerged. The growth of retail space slowed, as sales increases came at the expense of competition, not of market growth. This competitive market led to the underperformance of several retailers as gross margins experienced downward pressure from increased competition. Retailers in large upscale markets recognized the time shortage created by dual-career families, and began to offer more services to assist in saving time. The 1980s witnessed the growth of off-price retailing as a distinct, enduring retail format. Retailers began to drop lines on which they could not earn acceptable returns due to low margins. Acquisitions and mergers were actively utilized as growth strategies, private brands were redeveloped to enhance uniqueness and margins, and offshore sourcing was developed to compensate for margins. Past Does Not Guarantee Future The only thing certain in retail is change. The United States retail industry has experienced and will continue to experience major shifts in consumer and market demands. History illustrates the point: look at the major players one or two generations ago compared to the struggles or even disappearance of those entities today. For example, Montgomery Ward dominated retailing in the late 1800s and early part of the 1900s only to file Chapter 11 protection in 1997. Some retailers such as Gimbel's, Alexanders, and the W.T. Grant five and dime stores have been replaced by discounters such as Wal-Mart and Target. High-end retailers such as Macy's and Federated nearly collapsed through overleveraged acquisitions. Finally, two American icons, JC Penney and Sears, have gone through and are still transitioning through internal restructurings as they constantly strive to be what their consumers want. Current Challenges Retailers face an environment with exceptional challenges whereby the market and business is changing, and most of all the consumer is changing. This section will explore several factors contributing to the obstacles currently encountered in the fight for market share and survival. The Overstored United States One of the significant challenges facing the retail industry today is the overabundance of stores and selling space. Existing players, as well as new entrants, looking to expand market share, have built stores at a record pace, leading to a glut of selling space in the market place. Between 1986 and 1996 the number of shopping centers and malls increased by approximately 13,000, from 28,496 to 42,130, or 48%. However, sales per square foot have not kept pace, a troubling signal to retailers. There will and should be continued pressure to find better and innovative ways to utilize the space, to consolidate, or to dispose of the space altogether. To further illustrate the "overstoring" of America, there is an estimated 20 square feet of retail space for every man, woman and child in this country, an increase from an estimated 14.7 in 1986. Compare that to the approximately 2 square feet per person in Great Britain. Consumer Debt Of great importance to the larger ticket portion of the retail industry is the general level of consumer debt. While high income households have paid down their debt loads, the aggregate numbers are below all-time highs. The debt of the middle class households with incomes between $25,000 and $75,000 are at record highs. This higher debt load is making it harder for consumers to service their debt and continue to spend, which is particularly alarming given that recent retail growth has been fueled mainly by the rise in consumer debt. Total consumer payments as a percent of disposable income is reaching a record high, and the middle income consumer is already there. Further exacerbating this situation is the tightening of credit issued by banks. Bad credit card debt is on the rise, hitting 4.5% of total debt in the fourth quarter of 1996, and there is an all-time high of 3.72% of all credit card holders late in their payments in the same time period. Bad debts charge-offs increased from $10.5 million in 1995 to $17.4 million in 1996. Banks and card issuers will have no choice but to continue to adhere to stricter standards. Pricing Retailers have experienced general downward pressure on pricing over the past few years due to several factors. First and foremost is the high level of competition in the industry. Obviously, one of the easiest points on which to compete is price, and the advent of discount retailers and superstores have placed increased pressure on pricing. However, we cannot forget that consumers are also more informed, better-educated, and more savvy purchasers than ever before. Frequent sales among department stores, the spread of discount outlet malls, and tough competition among specialty retailers allow consumers to time their purchases better, and have led to the overall feeling that there is always a deal out there on what they want to buy. Such price stabilization, or even deflation, can make business miserable for retailers. Category Killers Category Killer is better defined as a narrowly focused retailer - one that offers numerous items and specialized service in a specific segment of retail. The competition between discount retailers and category killers will perhaps be the most interesting - and vicious - in the retail industry over the next few years. Chains such as Petsmart, Office Depot, and Toys R US will continue to cut into some of the bread and butter of the "Big Box" market retailers of the world. By offering a larger number of items, greater variety in each category, and often better pricing, the category killers offer stiff competition to the discount retailers. Lifestyle Changes As America continues to see numerous single-parent households, and as many, if not most, two parent homes continue to require two incomes to make ends meet, people are finding less time to shop. In 1996, consumers reduced the amount of time spent shopping to 3 hours per month, down from 4.3 hours in 1995. Whereas in the past trips to the grocery store and the mall were frequent, most Americans find they have less and less time to spend on buying food or shopping leisurely at a mall. A study performed by Rodman & Renshaw reported a 25% decrease in average time spent shopping and a 32% drop in the number of mall visits from 1982 to present. In response to this statistic, emerging technologies are redefining the ways people shop and businesses meet shopping expectations. Several higher end malls have developed new ways to attract consumers, such as providing entertainment or atmosphere to revitalize the enjoyment aspect of shopping. Furthermore, the trend focuses on creating ways to minimize the consumers' time spent shopping. In short, clients are redefining value, demanding that shopping experiences be efficient and worthwhile, and at the same time expecting products and services to target individual needs Upcoming Holiday Outlook My outlook for the upcoming holiday season is mixed with a general view that sales will increase 2.5% in the fourth quarter. There are a number of factors that have the potential to influence the holiday season such as: consumer confidence, personal bankruptcies, interest rates, and price promotions. The following provides a brief summary of these factors and their anticipated impact on fourth quarter 1997 results. Personal Bankruptcies This could be the single largest factor contributing to a lackluster Christmas. The middle income consumer is strapped with debt levels that are at record highs. Credit card companies are cutting back on their extension of credit as bad debt reaches record levels. Finally, the government is reviewing the current bankruptcy laws to possibly make filing more stringent and painful for the debtor, thereby encouraging earlier filings to avoid the possible change. Unemployment As shown below, the unemployment level has just dropped below 5%. This could increase during the holidays with the minimum wage increase and the welfare reform act. Price Discounting Competition remains fierce in retail. Bankruptcy filings, store closures, and liquidations all add to price pressure. If consumers limit their spending due to high credit limits, the retailer will be forced once again to promote in order to lure the consumer. With competition continuing to increase coupled with limited spending budgets due to personal debt, retailers will continue promoting to protect market share. Consumer Confidence This index is utilized as a measure of the consumer's confidence in their economic security. As shown, this has reached a peak in 1997 with low inflation and unemployment combined with good economic growth. Furniture And Home Furnishings Stores After a very strong period from 1993 to 1995, the segment experienced a considerable slow down in 1996, and should expect to see more of the same in 1997. Three main factors combine to slow down spending in the furniture and furnishings industry: a slow down in the expansion of the labor force, an overall increase in consumer debt levels, and a correlation between furniture and the housing market, which is expected to slow in the near future. Overall sales are expected to grow in an inflation-adjusted rate of 1.9% over the next five years. This could prove to be very disappointing with potential bankruptcies looming.