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Claes Fornell
  Claes Fornell

Resilience Begins to Fade at Retail

8/18/2008 --

July sales results, downbeat forecast point to second-half slump

ANN ARBOR—Retail sales numbers from July indicate American consumers—hit by lower home values and high prices for food and fuel—are pulling back on spending. Consumers had been somewhat resilient in the first part of the year, despite the pressures of higher food and energy costs. But that may be over and any positive effect from stimulus checks is fading. Claes Fornell, Donald C. Cook Professor of Business Administration at Ross and director of the National Quality Research Center, lends some perspective to emerging trends in the following Q&A.

Is it fair to say the consumer resilience retailers were seeing is over?

Fornell: Well, I think it's difficult to see how consumers can keep on spending when we have so many things that are truly challenging the household economy. We continue to have house price deflation—which trims household wealth in a big way—we have tight credit conditions, a worsening labor market, and we continue to have high fuel and food inflation.

Even if consumers are satisfied with their retail experience, and even if they want to repeat the satisfactory experience, they may not have the means to do so. Our outlook for spending growth is pretty bleak. I don't see how we can even come near the average growth, which is 3.6 percent.

How much of the resilience was fueled by recent stimulus checks?

Fornell: That's hard to say. If you look at the overall consumer spending in the second quarter, it was fairly dismal. I think it was 1.5 percent, which is pretty far from the average of 3.6 percent. So you may say that without the tax rebate it would have been worse. I don't think it helped that much, since difference between 1.5 and 3.6 is pretty substantial. But this is all done and gone. So to the extent it had an effect, that goes away.

Now, American consumers have surprised economists in the past and found the means somehow to spend. Often it was done with credit. Now that credit is tight, however, I don't see how they can.

So as that stimulus check money evaporates, will retail sales also fall off further?

Fornell: Yes. It looks like a pretty bleak forecast. And it's very hard to see how you can come to any other conclusion given all of these factors. There is a very little glimmer of hope. Fuel and food prices might not be quite as disastrous as a few weeks ago, but they will still be very high. The other factor is that the world economy is slowing down. We're not going to get the boost from exports that have sort of saved us so far.

Some of the discount retailers, like Costco Wholesale Corp. logged positive results in July, but the mall-based stores saw big declines. What's behind those trends?

Fornell:What's happening there is the mid-level mall stores will take the first hit. That's because there is a migration to the discount stores in tough economic times. With high-end stores, their customers can usually weather recessions—at least to some degree—if they're not too deep.

But Wal-Mart is not very optimistic about the next quarter and if their fears come to fruition we are in for some difficulty. When the discounters are not growing, even though they take a lot of the business from the mid-range stores, then it is actually quite alarming.

Does this mean the back-to-school season will be a non-event?

Fornell: I don't think we will see much of a bump there. People will spend what they have to spend to some extent. We all have to eat, most of us drive, and we have to buy things for the kids going back to school. These are not discretionary things but most households will try to scale back.

What about the recent decline in gasoline prices? Will it have any positive effect?

Fornell: I don't think it will have much of a positive effect. I think most people probably will think gas prices might come back to $4 a gallon or higher sometime in the future.

Seeing as consumers are paying more for some items, how are customer satisfaction levels?

Fornell: It's been wobbly. It goes down and it goes up. There's no trend right now we can see. It's been almost a year and a half with a little jump upward, then down. There seems to be no direction to it. If there's any good news, it's that customer satisfaction is not in a freefall. It means companies still have enough resources to provide the same level of customer service that they did before. In fact, they're probably trying harder as well.

How important are retail sales to the U.S. economy?

Fornell: Let's take consumer spending. What we spend as households is two-thirds of the economy. So we are highly dependent on what happens to the consumer. Of course, retail is a fairly big chunk of that number. Retail is also—this is more extreme in this country—very, very seasonal. Quarter four with the holiday season is the big time for many retailers. They have to make up what they lost before then. If they donít do that, they often have a losing year.

Is it too early for a read on holiday sales?

Fornell: If we were to make a prediction now, it's early, but I don't think anybody will forecast a strong season. The holiday season starts earlier every year and it's probably going to be earlier than ever this year. When panic sets in and retailers fear they will have a bad fourth quarter, they will start holiday promotions earlier. My prediction is we will see earlier activity than in the past in terms of sales, promotions, and rebates. And that in itself doesnít help all that much, especially if everybody does it.

—Terry Kosdrosky

For more information, contact:
Bernie DeGroat, (734) 936-1015 or 647-1847,