1) Introduction to the Retail Industry
Retail, with more than 15 million employees in America alone, is one of the largest industries in the world by number of businesses and number of employees. Retail sales in the U.S. (total retail sales include the categories of gasoline, automobiles, and food service, as well as merchandise) will show a slight decrease in 2008, totaling about $4.400 trillion according to Plunkett Research estimates. Sales were $4.482 trillion in 2007, up from $4.307 in 2006.

Retails sales in 2007-2008 were driven partly by higher gasoline costs as well as by deep price discounting during the holiday seasons by mass merchandisers. Meanwhile, automobile sales saw a disastrous drop off in 2008, with total sales of cars and light trucks for the year at about 13.2 million, down from about 16.5 million in 2007 and 17.5 million at the peak in 2005. Car sales in 2009 could decline further.

Retail sales in 2007-2008 were affected by several factors:

1) Sales of both new and existing homes slowed dramatically. While homes themselves are not counted in retail sales figures, buyers of these homes are a significant force at retail stores where they purchase furniture, appliances, linens, consumer electronics and garden supplies to fill up their new residences. Likewise, builders and remodelers are a strong factor in retail sales, when they purchase supplies, materials, appliances, etc. at retail outlets. The slowdown in building and remodeling led to reduced sales at home centers such as Home Depot.

2) Another factor was home mortgages: From 1998 through part of 2006, Americans were refinancing their existing home mortgages in record-setting numbers. In doing so, they took advantage of very low mortgage interest rates and very easy lending requirements. Many homeowners also increased the balance on their mortgages, taking advantage of rapidly rising home values that increased their borrowing power. Borrowing against home equity lines of credit was also high, and much of that money went to retail purchases. Homeowners were spending this cash windfall freely, driving up retail sales in many categories. However, by late 2006, the slowing real estate market, followed by tougher lending standards, meant that the party was over. This definitely had a negative effect on retail sales.

3) Another major negative impact was the growing number of homes going into foreclosure as their owners were unable or unwilling to meet monthly payments. Many of these foreclosed homes are part of the subprime mortgage fiasco that is rocking financial markets, where borrowers have poor credit or inadequate income. Also, a large portion of foreclosed homes are those subject to rising monthly payments due to adjustable rate mortgages.

4) The sale of gasoline at the pump is included in retail sales figures. Extremely high prices per gallon for gasoline have shown up as growth of total retail sales in America. At the same time, consumers have been forced to allocate a larger portion of their household budgets for gasoline, electricity and heating oil, leaving fewer dollars left over for discretionary retail spending.

Unfortunately, consumers were forced to retrench in 2008, and that trend will accelerate in 2009. Current economic trends will be tough on retail customers. They will have fewer discretionary dollars left in their budgets after they face the challenges of high prices for energy, health care, food, insurance and mortgages. Meanwhile, job security is declining.

Negative factors that will impact the retail sector in 2009:

• Extremely high consumer debt levels
• Higher health care costs for consumers
• Global terrorism, tension and uncertainty
• Consumers burdened with high energy costs for such items as gasoline, home heating fuel, natural gas and electricity
• A continuation of depressed conditions in the housing market
• Rising home mortgage foreclosures (including large numbers of adjustable rate mortgages, “ARMS,” scheduled to reset to higher rates in 2009)
• Layoffs and falling profits in a wide variety of business sectors
• Rising unemployment levels
• Tightened lending standards that will make it more difficult for consumers to obtain credit, including a pull back in lines of credit available on credit cards and home equity loans
• Extremely low consumer confidence
• Consumer tastes and expenditures influenced to a growing extent by LOHAS, a trend toward purchases that support “Lifestyles of Health and Sustainability.” Consumers will be more conservative going forward, saving more while spending less. When they do spend, they will be focusing to a growing extent on high-value items with long life, low impact on the environment and low energy consumption. Items that promote a healthy lifestyle will receive a growing focus.

Meanwhile, competition among retailers has never been tougher. A retailer without a significant competitive advantage doesn’t stand a chance. Superstores are battling each other on every major corner while direct marketers (including catalogs and online sites) are stealing customers from stores. Online selling at deep discounts is even making immense inroads into major consumer purchases such as jewelry. Many retailers have been driven into bankruptcy recently, including Sharper Image, Linens ‘n Things, Bombay Co., and mail order firm Lillian Vernon, and more will follow.

Direct selling through online retailers, catalog companies and home-shopping television channels continues to be popular. However, the 2008 slowdown in consumer spending has put the brakes on online retail sales growth. Analysts at eMarketer project 2008 online sales to be $136.8 billion, up only 7.2% over the previous year (not including travel sales). This is a letdown from the 19.8% growth rate of 2007. They further predict a very low 4.1% growth rate in 2009, to $142.4 billion.

Growth in online shopping has been driven by two factors. First, the number of fast Internet connections in U.S. homes and businesses leapt to about 100 million by early 2008. These connections make buying online faster and more interactive. Next, there’s the savvy marketing of online giants like Amazon.com (with more than $14.8 billion in 2007 revenues, up dramatically from $10.7 billion in the previous year), as well as the e-commerce efforts of traditional retailers such as Home Depot and Wal-Mart. These fast Internet connections are extremely important, even at the office, since a large number of U.S. workers take time out to shop online from their desktops.

The two most closely-watched retail days of the year are the Friday after Thanksgiving (referred to as “Black Friday”) and the Monday after Thanksgiving (known as “Cyber Monday”). This particular Monday is now important since online retail sites show very strong holiday sales on this day, much of it by people shopping from their desks at work. Cyber Monday 2008 enjoyed 84.6 million consumers shopping online from home or the office, according to a Shop.org survey, up from 72.0 million in 2006 and 60.7 million in 2005. Black Friday 2008 was relatively strong compared to 2007, but only because retailers pulled out all the stops, spending vast sums on advertising to lure shoppers into buying at huge price reductions. The strategy worked, but it likely had the effect of leaving consumers with fewer dollars to spend on shopping during December.

All current trends point to a tough time for retailing. Profits at retailers for 2008-2009 are going to be low. Sales in October 2008 dropped a record 2.8% over the previous month. Sales of cars and luxury items are dismal. Many firms will post losses, and an unusually high number will take bankruptcy. Among the rare bright spots are Wal-Mart and Costco, where consumers know they can find everyday low prices on high quality merchandise.