Fewer Rings On The Cash Registers

The outlook for retailing in 1991 is, in a word, miserable. In the 1980s, low unemployment and inflation created a sense of prosperity that translated into inflation-adjusted sales increases of about 3% a year for the $1.4 trillion retailing industry. But now, David Kelly, a DRI/McGraw-Hill consumer analyst, figures that inflation-adjusted retail sales actually dropped 1% for all of 1990. And for 1991, he's looking for a further slide of 2.4%. The last time sales were this soft was in the 1982 recession.

This bleak picture results from several gradual but ominous trends. After a decade of shopping more, consumers entered the '90s all spent out. And as 1990 wore on, layoffs, especially of white-collar workers, dramatically slowed growth in disposable income. Now, says Kelly, "consumers don't have a helluva lot of room to increase spending." A drop in housing values is also making many people feel poorer than a year ago.

MORE CHAPTER 11s. As shoppers pull back, retailers will feel more intensely the effects of their overexpansion in the 1980s. "There are too many malls, too many strip shopping centers, and too many stores," says Kenneth A. Macke, chairman of Dayton-Hudson Corp. According to the retail consulting firm Management Horizons, the U. S. now has 18 square feet of retail space per capita, twice as much as in 1974. For the 1990 Christmas season, not even an endless series of price cuts and promotions filled all this space with free-spending shoppers. DRI's Kelly estimates that inflation-adjusted retail sales in 1990's fourth quarter dropped 4%. Expensive apparel and big-ticket appliances fared poorly, while cheaper accessories such as neckties and scarves did better.

Now, retailers have to brace for really tough times. Before any recovery gets under way, they'll see profits diminish as prices suffer, while fixed costs stay high. In 1991, "there will be very low inflation in general merchandise items," says economist Rosalind Wells of the National Retail Federation. Cataloguers, whose nominal sales growth has averaged 12% to 15% for years, will suffer, too, as U. S. Postal Service rates rise as much as 30% and United Parcel Service raises its prices 16%. The only bright side: "The cost of entry into the catalog industry will go up" and perhaps keep new competitors out, says Maxwell Sroge, a catalog consultant in Chicago.

The accumulation of pressures is likely to push weaker players to the limit. Debt-laden Federated-Allied Stores, which filed for Chapter 11 protection early in 1990, is still losing money--nearly $87 million in 1990's third quarter. Discounter Ames Department Stores Inc., also in Chapter 11, has closed more than 200 stores. Despite improvements, its third quarter operating loss was $54 million. Analysts expect that after retailers total up holiday receipts, there will be more Chapter 11s, and perhaps liquidations. "An awful lot of companies that have been hanging on just won't make it," predicts Peter J. Solomon, an investment banker to retailers.

One big company that will bear watching is R. H. Macy & Co. It is suffering from poor sales in the Northeast and a $5 billion debt load, the legacy of a 1986 management buyout and the 1988 purchase of Bullock's/I. Magnin. A recent equity infusion of $119 million with the promise of almost $69 million more squelched rumors of Chapter 11--for now. But fears of Macy's ability to compete, and nervousness over the future of another debt-laden retailer, Carter Hawley Hale Stores Inc., will persist until an upturn materializes.

Another retailer in trouble is Chicago-based Sears Merchandise Group, the $34 billion behemoth. Analysts figure Sears has to chop up to $1 billion in costs to become as efficient as major rivals such as Montgomery Ward Inc. Sears plans to widen margins by streamlining its inventory controls and remodeling stores. But analysts believe Sears' profits for the fourth quarter of 1990 were disappointing. In December, Sears announced a wage freeze for 20,000 employees, cut apparel prices to boost sales, and offered 0% financing on hard-goods purchases.

HOME REPAIR. As it labors to execute its strategy, Sears will remain under intense pressure to match the lower prices of its rivals. "This is the year for discounters and off-price retailers," says Management Horizons economist Carl Steidtmann. Wal-Mart Stores, whose advanced computer systems and unusually high sales per square foot have made it one of the most profitable retailers of common household items, is expected to grow more than 30% this year, to $40 billion in revenues, says David Poneman, an analyst at Sanford C. Bernstein & Co. Analysts expect a 20% sales increase at Home Depot Inc., a chain of discount superstores that sells about 30,000 homebuilding and repair items. "People can't move on to other houses, so they work on the ones they stay in," says Home Depot Chairman Bernard Marcus.

Another successful low-price approach is the warehouse club, which both buys and sells in bulk. "Members" pay an annual fee, typically $25, to shop in a cavernous building for everything from tires to children's clothes. Warehouse club sales may rise 28% in 1991, to $28 billion, and they could reach $50 billion by 1995, foresees Jack D. Seibald, an analyst at Salomon Brothers Inc.

Discount retailers aren't the only ones who view difficult times as opportunity. The Limited Inc., which runs nine different chains of specialty stores, plans to increase its selling space by 23% in 1991 and is expanding two of its newest divisions--Victoria's Secret Bath Shops and Structure, a chain of men's sportswear stores. Seattle-based Nordstrom Inc., the department store chain renowned for personal service, is pursuing a nationwide, 20-store expansion. Weak consumer spending has dampened Nordstrom's earnings, but its executives hope a strong balance sheet will sustain the company as it enters new markets like the Northeast. That will be the retailing story in 1991: survival of the fittest.

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