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Retail Sales: How to Get Consumers Spending Again

Consumers need more money in their pockets and confidence that the paychecks will keep coming. That might not be so easy, say economists

What will it take to get retail sales moving again? After two months of slender gains, advance estimates released by the Commerce Dept. on Aug. 13 showed that July retail and food service sales decreased by 0.1% from the month before??own 8.3% from a year ago. Excluding auto sales, which were up 2.4%, juiced by cash-for-clunkers rebates, retail sales declined 0.6%. The report disappointed economists, who had been expecting a 0.6% gain in July.

Consumers have been cutting back sharply for more than a year now. Their ability to spend has been reduced as record numbers of people face joblessness and underemployment, and increased uncertainty and stress levels have reduced consumer motivation. Discretionary spending has plummeted. For retailers, that means revenues have dropped as their customers switch to discount items. In turn, merchants are cutting back on inventories and product diversity.

Getting consumer spending, which is behind more than two-thirds of the U.S. economy, moving again is considered key to a strong economic recovery. But, says Paul Dales, U.S. economist for Capital Economics, "Households aren't in the mood to spend."

Delivering "Shoppability"

As frugality becomes the new norm for shoppers, retailers are casting about for ways to get customers to open their wallets. "The knee-jerk reaction for retailers is to cut prices to stimulate purchases," says Raymond Burke, professor of marketing at the Indiana University Kelley School of Business. "But the concern is that consumers will adjust expectations and become accustomed to the new prices, hurting the profitability of these firms in the future."

Researching consumer behavior, Burke has identified several factors that can deliver "shoppability"??he ability to translate consumer needs and desires into purchases. The most important things for retailers are "relevance??aking sure products consumers want are in stock and at fair prices. And they need to understand who their customers are and have inventories tailored to meet their unique demands."

Burke points to the success of supermarket giant Kroger (KR) as an example. In a joint venture with dunnhumby, a British research firm, the Cincinnati-based company pulls together customer information through its frequent shopping card to track consumer preferences. It then targets its clientele through direct mail and direct sale offers. Aided by the success of its private-label products, Kroger reported in June that its first-quarter profits reached $435.1 million, up nearly 13%.

Economists, meanwhile, say shoppers won't return to free-spending ways until they have more confidence in the future??nd cash in their paychecks. The Deloitte consulting firm, which compiles a Consumer Spending Index to track cash flow, looks to reduced tax burdens, falling unemployment claims, improved real wages, and firming home prices to increase consumer purchasing power. Improvements in those factors and increased consumer confidence "could release some pent-up demand in the months to come," wrote Stacy Janiak, Deloitte's vice-chairman and U.S. retail leader, in an Aug. 12 report.

Capital Economics' Dales says: "Employment needs to stop falling, wage growth needs to stop slowing, and confidence needs to pick back up. Unfortunately, it doesn't seem to me that any of those will start to happen any time soon." By the beginning of next year, Dales expects, the economy will get slightly better.

Meanwhile, the current shift in consumer mentality might force retailers to become accustomed to more modest growth in sales. He says the massive expansion in retail over the past decade was fueled by easy credit. "Banks may be better than they were six months or a year ago, but they're not going to be willing to lend in the same way as the last 5 to 10 years," says Dales.

Deprez is a reporter for BusinessWeek.

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