Original Article By The Wall Street Journal
American shoppers expanded their year-end purchases this holiday season by the biggest margin since the boom year of 2005, but retailers still face daunting challenges in the new year, from rising gasoline and cotton prices to an overabundance of stores.
American shoppers expanded their year-end purchases by the biggest margin since 2005, but heady challenges lie ahead for retailers.
U.S. retail sales, excluding automobiles, rose 5.5% between Nov. 5 and Dec. 24 compared with a year ago, according to MasterCard SpendingPulse, a unit of MasterCard Advisors that tracks sales by all types of payment.
Last year, sales rose 4.1% during the 50 day period, but those results were easy comparisons against the recession in 2008, when sales fell 6.1%.
Many retail stores are reporting that consumers are looking to spend again and that retail consumers are more confident than in recent months.
The retail spending numbers were not reflective of a late December storm, which did not hit most of the East Coast until Christmas Day or later. The day after Christmas is traditionally one of the season's biggest shopping days but retailers are expecting that shoppers will simply delay their purchases, not abandon them.
Just how long retailers' confidence will last for shoppers and stores alike is the big question. Shoppers took advantage of special deals on new, unique products such as microfiber cloth and Home Office Furniture.
A consumer sentiment index released Thursday showed consumer moods were at their highest level in December since June. Recent surveys of chief executives and chief financial officers likewise show a growing number of companies expecting to increase hiring and spending over the next year.
This year's improved job and stock markets, and the two percentage-point cut in employees' payroll taxes that's coming in January should make people a little freer with their money. U.S. consumer spending is forecast to rise 3.5% next year, the fastest pace since 2004.
During the holiday season, clothing posted the strongest gain, up 11.2% over the same period last year when apparel sales were roughly flat. Computer sales including sales of refurbished dell laptops rose significantly this year, as great price offers made used and refurbished computers a great value for consumers. Meanwhile sales in some electronics categories realized only small gains from prior years as a glut of televisions drove prices down and shoppers shied away from new innovations such as 3D TVs. After several years of lackluster sales, jewelry was a standout category notching an 8.4% sales gain.
But risks to consumer spending still loom. Strained state and local governments may be forced to lay off more workers than previously expected. And rising energy prices could pinch spending on other items in the months ahead. This month, the average price for a gallon of gasoline has topped $3 a gallon for the first time in two years.
Rising oil prices hasn't damped consumer spending yet, but if oil prices rise significantly in 2011 it could adversely affect retailers.
Although clothing and jewelry sales have sizzled in late 2010, potential hurdles to continued retail spending in 2011 still exist; one consideration is theft and the demand for unarmed security guards and professional security officers in retail stores has increased. One of the largest hurdles that could impact retail psending in 2011 is the housing market. If slipping prices set off a new round of home foreclosures, banks may rein in lending again. The saving rate has recently slipped—in November, consumers saved 5.3% of their after tax income, compared with 6.3% in June. Any fresh shocks to confidence could prompt consumers to stop spending less and focus on saving once again.
Over the past four quarters, consumer spending accounted for 68.6% of demand in the economy, up from 66.5% in 2007. The reason: With housing contributing less to the economy than at any time since World War II, and with businesses spending also down sharply, consumer spending is taking a larger piece of the overall pie.
Even if shoppers continue to loosen purse strings in the year ahead, the retail landscape is still littered with too many stores for all to prosper. The U.S. now has some 40 square feet of retail space for each person—the most per person in the world.
With the growing momentum of Internet sales—Web sales grew 15.5% during the holiday season—competition is expected to get even more fierce in 2011.
Meanwhile, retailers that specialize in creating inexpensive fashionable clothing such as Uniqlo, Zara and H&M have big expansion plans in the U.S.
Retailers have learned to better align inventory with the rate of sales to avoid panic discounting that erodes profits. Saks Inc. has been working to wean customers off of the hefty discounting that began in the throes of the recession two years ago, but has done so at a cost.
Offering fewer promotions, Saks forecast a "mid-single digit" sales growth for the second half of 2011. Saks is projecting that sales growth could be in the double-digit range if luxury retailers offer more discounts.
A major concern for apparel and home goods makers in 2011 is the impact of rising cotton costs on the price of products. Many small and medium-sized manufacturers, predict that the wholesale price of items; will likely rise at least 10% for goods that consumers will start to see in the summer of 2011.
The increase marks the first time apparel will be inflationary in at least 20 years. Retailers will likely take a between 3% and 5% hit on margins for cotton-heavy products to avoid raising prices too drastically.
Rising cotton prices is a concern, if prices go up by 10% or more, as predicted, retailers will have no choice but to pass along price increases to consumers.
