Retailers Face Reality That Many People Can't Trade Back Up
Retailers are coming to terms with a new reality: the consumer who traded down during the recession and never came back.
Buffeted by high unemployment, heavy debt loads, falling home values and high food and gas prices, these shoppers have been whipped into a permanent state of consumer caution. They buy only what they need, avoid premium labels, clip coupons and scour sales.
Wal-Mart Stores Inc. Chief Executive Mike Duke told analysts in a recent conference call that paycheck-cycle shopping is more pronounced than ever, with shoppers stocking up shortly after getting paid, then moving to smaller product sizes toward the end of the month when they run short of money.
"Consumers are fragile, fatigued and fed up," said Chris Christopher, senior economist at IHS. Global Insight, citing wage stagnation, food inflation and high gas prices.
Retailers and manufacturers are figuring out how to appeal to these new "forever frugal" consumers—rather than pin too much hope on economic rebound. Some are waiting longer to pass on higher costs, whether for food or cotton. Coca-Cola Co. and other companies have added new packages at small sizes and lower price tags. Some retailers are holding the line on hiring, even as they head into their busiest season of the year. Many stores are expanding their selection of cheaper private-label products and some are offering credit cards with across-the-board discounts. Layaway has made a comeback.
Heading into the holidays, retailers are in a bind. Many of them placed their orders back in early spring when the stock market was rising and the economy appeared to still be rebounding. But lackluster back-to-school sales signal that the holidays aren't likely to be free-spending for many shoppers. Now retailers are worried they will have too much merchandise.
Eight of the 16 large retail chains that retail analyst Ed Yruma covers for KeyBanc Capital Markets said their inventories had risen faster than sales when they reported second-quarter profit results in August.
It is an ominous sign indicating that chain stores' profit margins will be squeezed if they have to resort to bigger than planned discounts to move merchandise.
Echoing the sentiments of many other retailers, Jonathan Ramsden, chief financial officer of teen retailer Abercrombie & Fitch Co., told Wall Street analysts in a conference call in August that his company is increasingly concerned about "the potential double-dip recession...that has increased in terms of the likelihood over the last few months."
Apparel stores face a double whammy. Many had hoped to raise prices this fall to recoup the cost of cotton, which soared last year and hit historic highs in March before a recent pullback.
Now they worry that strapped consumers will resist price increases. If purchases stall, retailers will have to resort to cutting prices instead.
"The only lever the retailers have is discounting," said Mr. Yruma. "Clothing isn't like fine wine; it doesn't get better with age."
Mr. Yruma expects retailers to offer the sort of promotions that will preserve as much profit margin as possible. For example, instead of slashing prices, he says, stores will try more "buy one, get half-off a second item" promotions.
Wal-Mart is courting shoppers with a return to a Depression-era strategy: layaway.
Discount stores, such as Family Dollar, above, have drawn a lot of new customers over the past several years.
Increasingly strapped Wal-Mart customers, 20% of whom don't even have bank accounts, demanded that Wal-Mart bring back layaway, which it canceled in 2005. The world's biggest retailer—which has seen two years' worth of declines in comparable-store sales—finally acquiesced in time for this Christmas.
Other stores such as Sears Holdings Corp. and Toys "R" Us Inc. brought back the layaway plans during the recession and reported a sales boost.
Target has a different weapon to snare a bigger share of pocketbooks. About a year ago, Target began rolling out a credit and debit card that offers a 5% discount on all purchases. The card effectively makes Target's prices equivalent or less than its competitors, Target Chief Executive Greg Steinhafel said in a recent interview with the Wall Street Journal. Shoppers who use the card increase their spending about 50% each visit, he added. In the spring, Lowe's Corp. began offering a similar 5%-off branded credit card.
Target attracts a more affluent customer than Wal-Mart. Households with income of $75,000 or more have largely resumed their pre-recession shopping patterns at Target. But the families making $50,000 to $75,000 are stressed, Mr. Steinhafel says, as they try to keep up with food and gas prices, health insurance premiums and stagnant wages.
"They are trading down, consolidating shopping trips to save on gas and generally not spending a lot on discretionary purchases," Mr. Steinhafel said.
Target is in a better position to cater to that stressed consumer than it was during the recession. About two years ago, it began adding fresh grocery and expanded dairy and frozen food in its discount stores, making its stores more of a one-stop destination. By the end of the year 1,500 of the chain's 1,800 stores will house the new format.
Dollar stores sales boomed during the recession and moderated only somewhat as the economy appeared to improve. Now, renewed pressure on consumers are lifting their sales again. Dollar General Corp. raised its full-year sales guidance to between 4% and 6% from 3% to 5% when it reported second quarter earnings in late August.
Rick Dreiling, chief executive officer of Dollar General, says the economic climate has bred two new types of dollar-store customers. One group, squeezed by high gas and food prices, is trading down to Dollar General, finding its prices on brand-name goods cheaper than rivals.
With these customers in mind, Dollar General sells smaller package sizes, so the outlay is smaller, a big selling point especially for shoppers who run out of money at the end of the month.
The second group of customers is what Mr. Dreiling calls "the trade-ins," people who can afford to shop elsewhere, but choose to go to the dollar stores. "They are the new consumer, who exercises frugality and smart shopping," Mr. Dreiling said in a conference call with analysts.
Dollar General has slowly passed along higher foods prices to customers and has backed off of some price increases if sales suffered. The company has seen strong response to a new category of private-label health and beauty products it introduced early this year under the brand name Rexall, which was once a pharmacy chain.
Looking forward, Mr. Dreiling said, "We see more of the same—customers who are continuing to struggle."
Write to Ann Zimmerman at ann.zimmerman@wsj.com
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