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Frugal shoppers overshadow retailers' holiday
'Can the clothes be washed?' becomes new consumer catchphrase
By Andria Cheng, MarketWatch
Last Update: 6:12 PM ET Nov 14, 2008
NEW YORK (MarketWatch) -- For his birthday this year, Ahmed Dilloo got a $105 Guess watch from his wife. Last year, the couple, whose birthdays both fall in October, celebrated the occasion by throwing a party for about 15 friends and buying new jeans and clothes for each other and their 21-month-old son.
"This year I'm only buying small gifts for her," said the 45-year-old office building superintendent in Queens and a native of Mauritius, adding their spending has tumbled by more than 50%. "We don't want to spend money. Before, we buy what we see is beautiful. Now, we just buy what's necessary."
With the downturn in the economy exacerbated by rising unemployment, the financial sector meltdown and stock market volatility, consumers' confidence has hit rock bottom and their desire to spend is in a freeze mode. And with this happening just on the verge of retailers' critical holiday shopping season, some industry analysts predict this will be the worst season in at least 17 years.
The consumer "has changed," said Bob Shearer, chief financial officer of the top U.S. apparel company VF Corp. VFC, in an interview. "It really didn't matter what income level you were. Consumers just become much more cautious. We are seeing that softening across the board."
Shearer should know. The company's product portfolio, from Wrangler to 7 For All Mankind jeans, is carried at retailers ranging from discounter Wal-Mart Stores Inc. WMT to luxury retailer Saks Inc. SKS.
The withdrawal by consumers has translated to declining store traffic and retailers' difficulty in attracting new customers not familiar with their brand.
Consumers are going out and eating out less, buying at the time of the month they are paid, just browsing, and asking for price first or whether there are deals or coupons to be had. The frugality also is reflected in their asking whether a pair of shoes can be repaired, how long they last for kids, and whether a down jacket can be machine-washed.
"They never asked about it before," said Dina Nehaitou, a store manager at Italian shoe label Geox. "They specifically asked whether they can wash it so they don't have to take it to the dry cleaners."
Middle America to trendy SoHo feeling the pinch
The retrenchment by consumers from middle America to New York's trendy SoHo led to retailers' worst October same-store sales in more than 35 years, according to International Council of Shopping Centers. Retailers that concentrate heavily on apparel and discretionary merchandise, including Gap Inc. GPS, Abercrombie & Fitch Co. ANF and Nordstrom Inc. JWN, were among the most hurt and saw their sales awash in a sea of red.
Discounters and value-oriented retailers led by Wal-Mart were the rare bright spot as consumers focused on basics and look for bargains.
At a recent tour in Queens Center Mall in New York, bags from retailers known for their value or cheap fashion -- Aeropostale Inc. ARO H&M and Forever 21, were the bags from specialty chains most often toted in the hands of consumers. In New York's trendy SoHo district, shop owners said business also is slowing, with fewer foreign tourists shopping there than a year ago, and also spending less with the rebound of the dollar. They said local New Yorkers have all but called it quits and paused in any discretionary spending.
"More customers are just browsing," said Geox's Nehaitou. The new customers "looked at the price and they walked out of the doors. Now we have to explain more about our technology. They said 'I get paid Friday. I'll come back in then. I've never heard that before."
Shoes at Geox, known for its breathable rubber, cost an average of $140.
Retailers hunkering down on expenses, louder on value message
Gail Barnes, the 62-year old manager of Perfumania at Queens Center Mall, said she experienced something she's never seen in her 12 years in business -- the register ringing up only $20 in sales between noon and 2 p.m. one weekday. Her average tally during that period of time on a normal day: $1,000.
"I've never seen anything that bad," she said. "More people are asking for price and saying 'thank you' and leaving. They are comparison shopping."
At Afaze, an accessories and apparel chain, store staff said people are buying more "little things" and smaller-priced items such as jewelry or cheaper bags, and scouring for deals such as three pairs of earrings for $10. "They are asking 'do you have extra coupons or sales?'" said store manager Nicole Rodriguez, 27, adding she has cut back "on a lot of things" herself.
Retailers across the board said they are hunkering down on expenses and inventory, such as cutting back on store discounts for seasonal workers and hiring fewer of them during the holiday season.
Those like Target Corp. TGT, after being hurt by the perception that its goods cost more than at Wal-Mart, said it is intensifying its value message such as touting and grouping products under $5.
Scouring for sales
Retailers also will begin their holiday promotions earlier this year, at a higher level and more consistently throughout the holiday season instead of just concentrating on Black Friday, the day after Thanksgiving and the traditional start of the holiday shopping season.
According to a survey by consulting firm Hay Group, 57% of 20 of the top U.S. retailers it surveyed, which included Best Buy Co. BBY, Costco Wholesale Corp. COST, J.C. Penney Co. JCP and Macy's Inc. M, said earlier this month they plan to run consistent promotions starting this month all the way through New Year's. Two months ago, 45% of them had said they planned to run consistent promotions from mid-December to January.
"It's our way," said Dillo, referring to his and his wife's practice of looking for sales and coupons for themselves and saving purchases mostly for their son. "Our wage is the same and yet all the expenses are going up. You just try to look for sales."
Even upscale retailers said they had to be more creative and reinvent their business model in some cases. At Unpomela, a boutique clothing chain in SoHo, the window hung outfits with prominent sale signs -- $29, $39, $59.
Store owner Jimmy Biricik said those sale prices were the first for him, compared to the company's traditional sale price that would start at $100, at least. The store also unveiled lower price items costing $89 to complement its traditional winter collection that usually starts at $300 and goes up to well over $1,500. That strategy has helped the boutique chain attract a broader range of shoppers who otherwise would have been intimidated by the store's traditional price tag, he said.
"I would be dead this winter if I don't do this," Biricik said. Even his top customer, whom Biricik described as a man from outside the U.S. who visits twice a year with his wife and would spent an average of $20,000, cut back to $9,000 on his recent visit.
"He never, never looked at the price tags before," Biricik said. "Now they start to look at prices. That's a huge difference."
Domino bankruptcy effect
The lack of consumer confidence and spending has meant this holiday season may be a make or break time for private and public retailers alike, in the wake of bankruptcy filings of retailers from Linens 'n Things Inc. to Mervyns, both of which said they are liquidating their stores after failure to find the financing and vendor support to emerge from Chapter 11.
Circuit City Stores Inc. on Nov. 11 also filed for bankruptcy protection after loss of confidence from vendors made it all but impossible for the company to stock merchandise ahead of the holiday season.
"What every consumer is doing right now is need versus want," said Walter Todd, a portfolio manager at Greenwood Capital Associates, which counts Wal-Mart and Lowe's Cos. LOW among its retail holdings. "It's going to be a very tough holiday season. There are going to be a lot of marginal retailers going away."
Anish Anupam, a 31-year old owner of Embroidery Creations, which sells customized embroidered T-shirts, sweatshirts and caps through his mall-based carts, said this Christmas, his fourth year in business, may be the last for him. On top of having to contend with higher rent, which went up in a regular month by 5.7% to $3,700 and is jumping 10% to $11,000 for November and December each, he said he's also struggling with sales declining 25% to 30% over the past five months.
"Customers want to bargain all the time now," said Anupam. "We are working almost seven days a week to save costs. I hope I survive this Christmas. We are definitely feeling the pinch."
Even teens are saying no
One of the most telling signs about the widespread crack in the traditionally resilient consumer confidence can be found in the changing behavior of teens, a usually recession-proof demographic.
They also are going out and eating out less and said they are limiting the number of items they purchase as their part-time hours are cut back and parents are giving them less spending money. Teen retailers such as American Eagle Outfitters Inc. AEO and Abercrombie & Fitch Co. ANF have reported double-digit declines in sales at stores open at least a year.
"They've been cutting back on my hours," said 18-year-old William Restrepo from Jackson Heights, N.Y., referring to his delivery job. "I was out every day in the past. Now two or three times a week. No more. As soon as you are out, you are going to spend money."
The younger tween set, typically those between 8 and 12 who rely on their parents, also are learning their lessons.
"My mom goes straight to the sale racks" at Abercrombie and Hollister, said nine-year-old Tracy Imhof from Astoria, shopping at the Queens mall with her friend and mom.
She also received a new rule: If it's something that her mother thinks is frivolous, the money will have to come out of her pocket money.
"How many Abercrombie sweatshirts can she have?" said Susan McManus, Tracy's mother and a 51-year old nurse from Sunnyside, N.Y. "I tell her 'let's try to buy something that we really need.' I'm starting to worry. In the past, I usually pay for everything if she brings a friend, but not any more."
Cutting back doesn't equal trading down
Still, in spite of the change in shopping behavior and consumers looking for cheaper store-brand cereal or dish detergent, there are certain things that retailers and consumers, especially those in the luxury sector and teen segment, said there's no sign of consumers trading down.
"We don't see any trading down from our full-price to factory stores," Lew Frankfort, Coach Inc.'s COH chief executive, said in an October interview. "Consumers tend to stay with brands they are loyal to and will spend less if they can't afford it. We don't see people trading between channels."
Shearer of VF Corp. said while VF has seen shoppers trading down from midpriced retailers to discounters for items such as jeans, he said there's no trading down by the company's high-end customers either.
For the 18-year-old Restrepo, all the skimping on food and going out has a reason even as he's running low on money -- $350 Nike retro Air Jordan 7.
"If I want something expensive, I'll still get it," he said.
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