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The Great Consumer Reset/The Great Retail Reset


By Craig R. Johnson, [email protected]

Consumer Reset

After sharply ratcheting down expenditures in 2008-09, consumers have indeed resumed spending at about the same 5% year-over-year growth rate seen prior to the recession. In short, American consumers have now completed a historic “reset”, fueling the strongest retail rebound seen in decades.

The retail industry completed a parallel “reset” over the same period. Since the mid-2000’s, after decades of often overexpansion, retailers sharply curtailed store development plans, closed rafts of underperforming stores, cut overhead and staff costs, and redirected growth strategies more online. Like consumers, retailers have — with the exception of laggards offering neither newness nor value — been on a major rebound since 2009.

The consumer reset is most evident in the steep deleveraging in household finances over the past four years, which — despite stubbornly high unemployment — has resulted in the healthiest household balance sheets this century:

  • Consumer revolving credit (primarily credit cards) has fallen almost 20% from its peak just before the 2008 Lehman collapse, and for Q4 was flat year-over-year (YOY) at $800 billion;

  • Record low interest rates have spurred a multi-year wave of home refinancings and, combined with mortgage writeoffs, have led to a continuing 7% decline in mortgage debt outstanding from its 2008 peak to only $13.6 trillion; and

  • As a result, the Fed’s Household Debt Service ratio has fallen from its peak 14% four years ago, to barely 11% — its lowest level since 1994.

At the same time, consumer incomes, after taking a dive during the recession, are slowly recovering, with disposable personal income up a solid if not spectacular 2-3% year-over-year for several quarters now. Combined with modestly increasing incomes, households are enjoying a twin engine boost of over $600 billion in free cash flow, or $50 billion/month available to boost monthly retail spending (ex autos/gasoline/restaurants) that now averages some $240 billion.

Consumers have resumed the retail spending growth that characterized the earlier 2000’s—but fueled now by current cash flow rather than tapping home equity lines or plastic. Consumers ratcheted down retail spending sharply in 2008-09, but then bounced off the bottom in 2010 with a 4.5% year-over-year annual increase, and ramped up in 2011 to almost 6% YOY (not including auto and restaurant sales).

Looking forward to 2012, retail growth will continue at our forecast 5.7% year-over year, contrary to pundits convinced that consumers are either tapped out or “spent out” post-Christmas. They are not. Indeed, as the Fed data shows, consumers continue to repair their balance sheets. And, although credit card transaction volumes are growing at double digits, the growth is primarily among “transactors” (holders who use the card for mileage or points but pay off each month) as opposed to “revolvers” who carry a monthly balance.

Retail Reset

Turning from the demand to the supply side of the retail economy, merchants have mirrored the consumer reset: reducing overhead costs, jettisoning real estate, rationalizing product lines and — after the worst two years in memory — are now on a sharp rebound. Approaching the recession, America was overstored and bloated retailers were over-square-footed, with expectations hyperinflated by the housing-induced spending bubble. And just as they were about to hit the recession wall, retailers simultaneously found the ground literally shifting under them, with the internet earthquake. In less than a decade, e-commerce grew from barely 1% of total retail sales to over 10%, rendering store planning assumptions, many superstore concepts—and a number of retailers themselves — “virtually” obsolete.

Since the mid 2000’s a host of retailers, including newly irrelevant superstores, decamped the landscape — largely among the Top 100 — either via Chapter 11 or acquisition:

  • Blockbuster (2006 sales $3.6B)

  • Borders ($3.5B)

  • Circuit City ($11.9B)

  • Comp USA ($3.6B)

  • 84 Lumber ($3.9B)

  • Gateway (Retail) ($2.7B)

  • Goody’s ($1.6B)

  • Gottschalk’s ($0.7B)

  • Linens N Things ($2.5B)

  • Mervyn’s ($2.2Be)

  • Movie Gallery ($2.5B)

  • Sharper Image ($0.4Be)

  • Steve & Barry’s ($1.1B)

  • Sym’s/Filene’s Basement ($0.4B)

Just as importantly, virtually all major retail chains — with a few exceptions such as fast-fashion players Forever 21 and H&M, and small footprint chains such as Aldi, Francesca’s Collection and Vera Bradley — substantially rationalized their store fleets. Among mass merchants, mega-chains such as Walmart and Target cut back new store development during the recession, while reducing by 10-15% the footprint of even planned superstores from the 200,000 SF range — and launching new small format initiatives with Walmart Express and CityTarget.

In the struggling home improvement sector, The Home Depot was first both to halt new store growth and to close marginal stores, while Lowe’s slowed new store growth as housing tanked, but only last year announced its first major “rightsizing.” In the department store sector, Macy’s has closed only a few dozen duplicate mall stores in the wake of its merger with May six years ago and the recession, but — like smart retailers even in good times — has just announced another round of 10 underperforming store closures this month, even while selectively opening new units.

Among specialty merchants, many chains have trimmed store fleets in weak C and some B malls, using the harsh discipline of the recession to make the hard decisions often put off in good times. Facing occupancy costs that spiked from tenant-friendly 10%-14% of sales during the boom to a crushing 20%-25% during the recession — and sometimes leveraging lease co-tenancy or early-out clauses — many apparel and other chains cut bloated store fleets. American Eagle Outfitters, Abercrombie & Fitch, Hot Topic, Chico’s FAS, Charming Shoppes, The Talbots, Gap, Pacific Sunwear, Ann Taylor, all dropped 30 to 100-plus units the last few years. Some, like Gap and Talbots, consolidated multiple formats into a single unit in a mall. Others kept stores open, but transitioned in the mall to smaller space.

Perhaps the most difficult downsizing, however, remains the 30,000-sq.-ft. to 60,000-sq.-ft. specialty superstore, which has been notably disintermediated by the Internet and may be a concept whose time has come — and gone. Circuit City and Linens’ n Things each departed several years ago. But their aging hulks still widely mar the retail landscape as there are few if any takers for that kind of retail space — except for HH Gregg and grocers such as Whole Foods Market whose special requirements usually make it simpler to start greenfield. Retailers still wishing to maintain extensive marketplace points-of-presence but in a smaller footprint are finding it difficult to sublease half their space, with five to 12 years left on their lease, to retailers that want a commensurate share of the frontage and signage.

But merchants that did bite the bullet during the recession, have found that their prudent pruning h

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