When Will Retail Recover?

September 15th, 2009

The question I get more than any other is, ‘When will the retail market recover?’.

Of course, I don’t know, but, as my wife frequently points out, that has never stopped me in the past. Here goes, for us to see significant improvement, retailers need to put themselves in a position for recovery, the economy needs to see some broader improvement, and consumer confidence needs to rebound.

Let’s talk about retailers first.

An important part of a down cycle is the elimination of fat. Retail fat comes in the form of both poor performers and operating inefficiencies. Poor performers can be retailers who are undercapitalized, have a bad concept or are just poorly run. For the long-term health of the retail sector, these firms need to fail. At the same time, even well-run retailers tend to get fat and happy during an extended period of growth like the United States has seen the past several years.

Inventories get heavy, not as much attention is paid to payroll costs, and perhaps marketing strategies and product offerings are not updated and refined as they should be.

The market has gone a long way toward taking care of the poor performers. Everyone is familiar with the long list of failures and consolidations. And, while we’ll see more this year and in 2010, the correction has been made.

For the survivors, virtually all have spent the last six months getting their acts together: cutting costs, reducing inventory and getting back in touch with their customers. All which bode well for the future.

The economy has to get better. That seems simple enough. People need to have jobs and get raises to spend money. Companies have to be making a profit to hire people.

No matter how cute you want to get, the fundamental economic indicators are what you want to watch. Unemployment. Job growth. GDP growth. Real incomes. When these indicators all start going in the right direction, we will know that recovery is real. Right now, we are seeing way too much volatility.

The stock market is up, but employment continues to suffer. Housing hit bottom (maybe), but incomes are flat. We need to see a broad range of positive news.

Which brings us to the key to the whole retail recovery, consumer confidence. Uncertainty and volatility kill consumer confidence and our economy is filled with it. All the proposals coming out of Washington are just exacerbating this uncertainty…national health care, cap and trade, the stimulus package.

Until these issues get resolved one way or the other, the consumer is standing by the sideline in a state of shock. The best economists in the world can’t agree on the long-term effect of these huge changes on our economy much less the average shopper. The public and the shopper crave certainty, they crave the positive. Both are in short supply.

Here’s how I see this playing out. Nothing good is happening to the retail market until the public has some sense of direction on the current political proposals out there; I expect these to play out by the end of the first quarter 2010. In the meantime, continued bad news for retail.

Then, over the course of 2010, the economy will move in fits and starts characterized by progress here and there followed by setbacks. Lots of people will proclaim victory, but we won’t be there yet. 2011 will be the start of a steady stream of improved economic data and lead to retail recovery in earnest.

I hope I’m right, it would make my wife happy.