See the complete list of trends that we analyze.

1) Introduction to the Retail Industry
Retail is the second-largest industry in the U.S. 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) were up about 3.8% in 2007, to $4.49 trillion (Plunkett Research estimate). The 2007 growth was driven partly by higher gasoline costs as well as by deep price discounting during the Christmas season by mass merchandisers and year-long discounting by automobile dealers.

Retail sales in 2007 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 2006-2007 slowdown in building and remodeling led to reduced sales at home centers such as Home Depot.

2) Another factor was interest rates on 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. 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 the second half of 2006, the slowing real estate market, along with higher mortgage rates, 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 that were and are going into foreclosure as their owners are unable 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 will be forced to retrench in 2008. 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 mortgage interest rates.

Negative factors that will impact the retail sector in 2008:

• Extremely high consumer debt levels
• Higher health care costs for consumers
• Global terrorism, tension and uncertainty
• Consumers burdened with much higher energy costs including gasoline, home heating fuel, natural gas rates and electricity rates
• A significant slowdown in the housing market
• Rising home mortgage foreclosures
• Layoffs and falling profits in certain banking and financial services fields
• A slowing employment market
• Tightened lending standards that will make it more difficult for consumers to obtain credit
• Low consumer confidence

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. For example, discount Internet-based diamond seller Blue Nile is enjoying booming sales.

Direct selling through online retailers, catalog companies and home-shopping television channels continues to increase. Sales via the Internet rose dramatically in 2006, up an estimated 20% according to Jupiter Research. Sales in 2007 were projected by Jupiter Research to increase by 16%, to a total of $116 billion. Analysts at eMarketer projected growth of online retail sales at 21% during 2007, to a total of $131 billion. These figures do not include sales of travel online, which is about $85 billion. Growth is being driven by two factors. First, the number of fast Internet connections in the U.S. leapt to about 80 million by the end of 2007. These connections make buying online faster and more interactive. Next, there’s the savvy marketing of online giants like Amazon.com (with more than $10 billion in annual revenues), as well as the e-commerce efforts of traditional retailers such as J.C. Penney and Wal-Mart. Likewise, the sale of merchandise via television home-shopping channels racks up several billion dollars in annual sales. Companies engaged in this activity include the Home Shopping Network and QVC, Inc.