Mauled At The Mall

Retailers are looking at a dismal coming year

Too little, too late--that's how Joel Martin, manager of the Tobacco Lane shop in the Parks at Arlington, a Dallas mall, describes Christmas 2000. Martin, whose tobacco and gift store sells everything from cigars to $300 stone carvings, says this Christmas was unlike any holiday season he has seen in six years managing the store. After a dismally slow start to December, Martin finally saw sales jump in the three days before Christmas. But by then there wasn't time to make up for the weak beginning. Especially disappointing were sales of big-ticket gift items that normally do very well at $300 to $500 a pop. "Everybody's griping," says Martin. "The mall did not seem as full as it had been in past years."

Ho, ho, hum. With consumers becoming more skittish by the day, retailers got scant relief from Santa this year. Now, with the holidays over, many big retailers are confronting two harsh facts: at the very moment economic growth is slowing way down, many chains are continuing to expand their stores at a remarkable pace. The result is a glut of specialty-retail space, up 19% since 1998, even as belts are being tightened across the country. Retailing is now one-third of the U.S. economy, making it a major victim of the slowdown in personal spending. Growth in consumption fell to just 2.5% in the fourth quarter of this year--way off from last year's 5.9% pace.

Heading into the bleak months of winter, retailers won't find much on the horizon to lift their spirits. At Macy's West, a division of Federated Stores, president Robert Mettler is hoping for a Federal Reserve interest rate cut to stimulate the economy. He's focusing on getting good employees and establishing the right product mix. If he can offer improved service levels and frequent updating of the fashions on the floor, he thinks he has a better chance of weathering the downturn.

Weaker players have far gloomier prospects. Bradlees Inc., the $1.5 billion low-end department store chain, threw in the towel and filed for Chapter 11 protection the day after Christmas, its second trip to the bankruptcy courts in five years. It may be worse off than most, but Goldman, Sachs & Co. economist Bill Dudley worries that the recent rise in new jobless claims, together with winter heating bills that are twice as high as last year, will hit the economy with a great big thud. "We can't close our eyes and say the consumer is fine and the slowdown is over," he warns.

In retrospect, economists say, signs of trouble on the retailing horizon have been clear for some time. Energy costs have been rising since late 1998. Household debt, increasing since 1994, now rivals levels not seen since the peak of the mid-1980s. And consumer confidence, though still at historically high levels, started trailing off sharply in October.

Moreover, the declining stock market--which has erased more than $3 trillion in shareholder wealth since March--has taken its toll. Mark Zandi, chief economist at, points out that declines in stock market wealth have had a much more immediate impact on spending than growth ever did. "The worst thing that could have happened for retailers did," says Zandi of the poor market performance late in the year. "Economic losers react more quickly and violently than economic winners."

To counter the holiday blahs, promotions seemed to be everywhere both before and after Christmas Day. KB Toys, which usually doesn't have to advertise discounts in the frantic two weeks before the holiday, ran an 8-page insert in newspapers around the country loaded with specials. Home Depot Inc., which hasn't had such a Christmas sale since 1992, announced 10% off on every item in the store starting Dec. 21. Stewart L. Cohen, a retailing consultant and merchandise liquidator with the Ozer Group in Needham, Mass., says retailers started slashing prices earlier than they have in five years.

So did those discounts help propel sales? Not much. Telecheck International Inc., a check-approval service that monitors spending at 27,000 stores, says retailers open more than one year saw holiday sales growth of just 3.1% this year, half of last year's pace. Online sales--though up 55%, to $5.8 billion, according to e-commerce researcher came in well below early expectations.

Many large retailers have only themselves to blame. An overly optimistic store expansion strategy, for instance, is starting to exact a heavy toll on apparel chains. Merchants like Gap, Pacific Sunwear, TJ Maxx, Talbots, and Ann Taylor, many of which compete for the same customer, have increased their total square footage substantially in the last decade. At Gap alone, retail square footage has grown from 4.6 million square feet in 1989 to 32 million square feet today; over the last year it increased 30%. Lazard Freres & Co. analyst Todd Slater says the store uses a "Zip-Code" philosophy: Any Zip Code without a Gap store should get one, regardless of how that might affect profitability, Slater says. "It seems to me they're willing to trade off margins for market share," he adds.

HEADY EXPECTATIONS. Gap declined to comment on its strategy, but no change is in sight. The chain, which has announced a series of earnings disappointments this year and discounted heavily at Christmas, will again increase store space by 17% to 20% in 2001. And that's just one retailer. Overall, Slater says, speciality retail square footage is up 81% in the last decade. "Retailers all believe they can grow to the sky," says Slater. "But with more or less the same amount of dollars being spent this Christmas as last, the money is now divided among a much larger number of stores."

All those discounts may not have been necessary in the first place if retailers had reined in their overhyped expectations earlier in the year. Merchants stocked up, assuming this season would rival last year's blockbuster showing. That lead to great deals for shoppers like Jennifer A. Napierkowski, a 34-year-old mother of two in Madison, Wis. Napierkowski figures that by shopping the sales, she got a lot more gifts for the same $750 she spent last Christmas. "TJ Maxx had 30% off Christmas items. At Kohl's, there were trucks and blocks for 25% off," she notes. "I bought more gifts for the same amount of money."

So how bad is the damage hinted at by all those sales? That may not become clear until late January, when retailers start to post their profits for the fourth quarter. The numbers will include the week after Christmas, now one of the biggest weeks of the season. Although the fear of yet another round of retail earnings disappointments has the S&P Retail Index off 18% from its high earlier this year, strong sales in the final week before Christmas combined with the prospects for a January interest rate cut have helped retail shares bounce back a bit since Christmas. Will that be sustainable? Only if sellers can figure out how to combat what seems to be shaping up as a long, lonely winter. It could be months before retailers truly thaw out from this holiday chill.

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