It’s no secret that consumers have entered a new phase of frugality, as they limit their purchases, attempt to pay down debt, and even try to save some money. Today’s retail sales numbers seemed to stun some people, coming in worse than the experts expected, but the data simply underline the fact that beleaguered consumers are still unwilling or unable to spend, creating a huge challenge for retailers.
The past holiday season proved to be retail holiday hell, just as some of us expected. Retailers scrambled to slash prices drastically to coax consumers into shopping. Now, they must adjust to a paradigm shift in the consumer mindset. The recent surge in many lower-quality consumer-facing stocks implies that some investors are playing a dangerous game; the worst isn't over yet, and a lot of adjusting must still be done.
Desperate times, desperate measures
A recent Washington Post article described how retailers are figuring out ways to cut their costs and offer lower-priced merchandise in order to appeal to budget-conscious consumers from the get-go. With this strategy, retailers won’t have to resort to drastic and desperate markdowns later that could devastate profitability. The strategy could also pull shoppers in the door more easily from the start.
Among the companies highlighted were J. Crew (NYSE: JCG ) , Williams-Sonoma (and its Pottery Barn concept), Starbucks (Nasdaq: SBUX ) , and American Eagle Outfitters (NYSE: AEO ) . Each is trying to offer lower-priced merchandise without completely eroding its profitability and brand. For example, American Eagle removed a ribbon from a style of its khakis so that it could offer them at a lower price point.
And shoppers should expect less-risky merchandise, too, since retailers aren’t going to want to make bets on stuff that may be too trendy and expensive, but instead will rely on more tried-and-true styles.
Identity crises in retail
The moves make sense. High prices are clearly turning off consumers in the post-bubble era, as I’ve noted in articles such as my February piece on luxury’s freefall. Things are rough for high-end retailers such as Saks and Nordstrom. And Abercrombie & Fitch’s (NYSE: ANF ) traditional reluctance to mark down its merchandise and risk cheapening its brand -- a philosophy it has had to reverse recently, given the reality of the consumer mindset -- could have contributed to its nauseating 25% plunge in fourth-quarter same-store sales.
Of course, this is a dangerous game for retailers. I’ve often been concerned that if Starbucks offers too many “bargains” or “values,” it will destroy its differentiation as an accessible luxury brand; it doesn’t want to be McDonald’s (NYSE: MCD ) . Likewise, J. Crew doesn’t want to be Gap (NYSE: GPS ) , nor does Williams-Sonoma want to be Target (NYSE: TGT ) .
There’s also the very real risk that once consumers grow accustomed to the lower prices, they won’t respond very well to later price hikes, even if the economy improves quickly. If the current ugly fallout teaches consumers any lessons about the nature of debt and saving, then the reality may be that we face a massive backlash against excessive purchasing and luxury goods for quite some time.
Frugal’s in fashion
For retail companies -- and their shareholders -- the current consumer psychology is absolutely no joke. Meanwhile, I’ve gotten a shiver seeing stocks like Abercrombie and Saks skyrocket for seemingly no good reason; I continue to believe that many retailers will be wiped off the landscape.
If you’re toying with purchasing retail stocks, pick your stocks carefully. Go for leaders with strong brands, little or no debt, and plenty of cash. Resist the temptation to buy a beaten-down retail stock just because its price looks “cheap” on the surface -- be sure to assess its competitive strengths and possible weaknesses. And watch your companies’ strategies very carefully. It’s going to be tricky for higher-end brands to survive in the near term as they try to adjust to the current climate, and even trickier if they need to readjust in the future.
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