Closed Wallets, Bad News For Retailers

Consumers are showing signs of spending more modestly, which doesn't bode well for businesses heading into holiday season. Steve Inskeep speaks with Howard Davidowitz of Davidowitz and Associates about how retailers are faring.

STEVE INSKEEP, host:

Maybe the end of the strike is good news for retailers who live near Boeing plants. People might be a little more willing to spend this holiday season. To get a sense of how retailers across the country might fare this holiday season, we've been talking with some consumers.

Mr. DAVID GIN(ph): We're staying at home or eating at home a lot more. And even coming to shop, it seems like we're window shopping a lot more lately just to try to keep a few more dollars in the bank.

Ms. GLORIA HASS(ph): Actually, I'm making a lot of Christmas gifts.

Ms. ELIZABETH LOVETON(ph) Probably do a lot of baking this year.

Ms. HASS: I'm making a stocking for my niece, and I've made some jams. I'm making a cross-stitch for my mother-in-law.

INSKEEP: Her mother-in-law might like that, but retailers will not. We found David Gin, Gloria Hass and Elizabeth Loveton at malls along the West Coast. And if they are any indication, stores could have a tough time pulling in those critical holiday shopping dollars. It's not that people are not buying at all. Retail analyst Howard Davidowitz says people are, as he puts it, trading down.

Mr. HOWARD DAVIDOWITZ (Retail Analyst, Davidowitz and Associates): Just look at what's going on. Starbucks closes 600 stores. Bennigan's closes all their stores. Mrs. Field's is in bankruptcy. The department stores are terribly underwater. But Family Dollar is doing great, Dollartree is doing great. Wal-Mart is doing fine. The consumer's in survival mode. You'd better be out there selling for rock bottom prices.

INSKEEP: Because people aren't spending nothing. They're trying to figure out how to spend 15 percent less.

Mr. DAVIDOWITZ: You are exactly right. They are also changing their pattern of spending. They are spending on things they have to have as opposed to what they want to have. Discretionary is terrible.

INSKEEP: What's that mean, discretionary?

Mr. DAVIDOWITZ: Discretionary means apparel. Discretionary means home. You've got 42 sweaters in your closet, do you need 44? That's the question. And consumers are voting no.

INSKEEP: And so a company like Wal-Mart that's going into selling groceries at the same time it's selling other things that might be discretionary is probably in a better position than some others.

Mr. DAVIDOWITZ: They really are. And if you look at Wal-Mart for example compared to their main competitor Target, Target outperformed Wal-Mart for 10 years. Difference is Target sells 40 percent on apparel and home, discretionary. Their sales are in the tank. Wal-Mart is doing extremely well. They do half of their business on consumables and food, rock bottom prices. That's what's working now.

INSKEEP: Let me ask about one other company that seems to be doing pretty well right now, Amazon.com, online retailer. They're depending on credit card sales, people giving their credit card number over the Web. Yet they seem to be doing well.

Mr. DAVIDOWITZ: Online is one of the better sectors. Extreme value is a very good sector. Look, all these store closings - if you're a powerhouse like Bed Bath & Beyond and your big competitor, Linens 'n' Things, is liquidating all their stores, which they are, is that going to help you? Of course it is. So powerful retailers who are solid, have very little debt, have powerful balance sheets, have strong franchises, over the long term they're going to gain. I'm not saying there won't be any winners. I'm saying there's going to be 10 losers for every winner, and the American consumer is getting crushed, and their living standards are never going to be the same. That's what I'm saying.

INSKEEP: One other question about that. We're heading into the Christmas season, of course. It's crucial for all retailers. And it seems obvious that the numbers are going to stink overall compared to what a retailer would like to see. But retailers must have seen this coming for the entire year. And that's raises the question, are retailers positioning themselves in terms of their inventories, in terms of the way they sell things, to take advantage and make sure they survive in the Christmas season?

Mr. DAVIDOWITZ: I think most retailers are. Their inventory is down. Their expenses are down. They've cut capital expenditures. And they are conserving cash like crazy because they're worried about the banks pulling in their loans. So most retailers, when we go to holiday, for example, that's about 700,000 jobs in America, temporary employment for Christmas this year. Well, we think that'll be down 20 percent. So retailers are cutting hiring. They're really watching every nickel. They are doing what they can do. They're controlling the controllables.

INSKEEP: One other thing, Mr. Davidowitz, I'm just wondering if you see the economy in the way I'm about to describe. Is it fair in some way to imagine that perhaps the last five years or so of economic growth were all a mirage, entirely borrowed, entirely unjustified, and we're just going to reset the clock about five years and start over again?

Mr. DAVIDOWITZ: We had a free lunch, and now we're going to buy dinner. I'm hoping for the best. At best, it's going to be terrible.

INSKEEP: Howard Davidowitz of Davidowitz and Associates, good to talk with you again.

Mr. DAVIDOWITZ: Thanks for inviting me.

INSKEEP: At least, when you have to buy that dinner, you might be able to buy it at Bennigan's sometime. Mr. Davidowitz mentioned that one of the companies that over-expanded and went belly-up in recent months was the Irish-style pub chain Bennigan's, but we should clarify it was company-owned stores that were shut down, not the franchises. Some of the restaurants that were closed may reopen. A private equity investor has bought the Bennigan's brand and hopes to give it another shot.

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