Friday, December 17, 2004

Retail Reveals Economic Achilles' Heel

by Barry Ritholtz
Founder, Big Picture & Maxim Group Chief Economist

If you want to garner insights about the underlying state of the macro-
economy, look no further than the behavior of holiday shoppers. Sales
are varying dramatically, depending upon venue. The dichotomy between
the discounters and luxury goods sellers remains sharp as ever. After
Wal-Mart Stores became more aggressive with their pricing, their
disappointing start to the holiday season improved. Sears used early
bird specials on Saturday in order to lure customers into their
stores, while Macy’s 20% off coupons were in every paper. Both tactics
generated "good customer traffic," and increased sales.On the other
end of the retail spectrum, business at luxury stores continues to be
robust. The Associated Press reported "designer handbags, jewelry and
items like $1,200 massage chairs being snapped up by well-heeled
shoppers." A large mall operator observed "business on Saturday at
luxury chains was up in the high single-digit to double-digit
percentages from a year ago. For the rest of the merchants, sales were
even with last year or rose a modest single-digit percentage from a
year ago. The strongest retail products in November were building
materials, whose sales jumped 1.1%, followed by Gasoline. Electronics
and furnishings continuing their torrid pace, while winter wear
remains somewhat soft, in light of the warmer than usual weather. Auto
sales slid lower. All this comes as no surprise: Retailers
have "trained" consumers to keep their wallets closed until they hear
Pavlov's bell ring. This was evident last year, when the economy was
noticeably slower than today. After playing and losing a game
of "Discount Chicken" in 2003, the retailers ultimately cried "Uncle!"
They dropped prices to avoid getting stuck with inventory post-
holiday. Like a good trader, shoppers quickly learned the virtue of
patience. The annual dance between retailers and consumers has become
an uncomfortably familiar ritual. It is a minuet that holds little
risk for the buyers, but has become very high stakes for sellers.
Their seduction routine is now well established: Consumers act coy.
Retailers that hold off cutting prices get punished. They panic, drop
prices, and run specials to generate additional traffic and sales.
Shoppers reward them by snapping up discounted goods. Wait another
year, and repeat. I suspect this cycle is likely to be repeated until
the economy becomes much more robust. “Time” is a luxury good beyond
the reach of most shoppers. Until they value it more than their
dollars, the hunt for bargains will remain an annual rite. This year's
holiday shopping season makes it apparent that we are not there yet.

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