What’s ahead for the retail industry

From December 2007

By Susan Reda, Executive Editor

If only predicting the future were as simple as consulting a Magic 8 Ball.

Will mini-skirts make a comeback? Outlook not so good.

Should I open 25 new stores this year? It is decidedly so.

Will consumers buy beverages that promise to make them more beautiful? Don’t count on it.

Fortunately, the editors of STORES don’t quite trust the portable oracle the way they did when they were younger. And, we’re betting that executives don’t put much faith in the plastic fortune-telling orb, either.

Instead, in our annual effort to spot trends that will influence retailing in the coming year, we’ve listened intently, read ferociously and tried to think deep thoughts. Though we’ll be the first to admit that we don’t have all the answers, here are some predictions about issues and events we believe will shape the industry in 2008.

Bucking Recession
Are you afraid to say the “R” word? Plenty of economists are hesitating, too, and with good reason. While it’s difficult to squelch the sentiment that the economy is on shaky ground, financial indicators are volatile – thus making predictions tricky business. Consumer spending has proven resilient enough to pull the nation through some rough patches in the past, and will sustain the economy in the coming year. A healthy dose of tentative optimism will be prudent for retailers during the first half of the year; as the nation gets closer to the 2008 election, a rebound may be in the offing.

Sanguine soothsayers claim that the Federal Reserve’s interest-rate reductions over the past two months are enough to stave off recession and spark a return to a brisker business pace. They point out that the U.S. economy grew 3.9 percent in the third quarter and added 166,000 jobs in October, and reiterate Alan Greenspan’s remarks that he sees “less than 50-50” odds of a U.S. recession.

Still, optimists don’t make good press and bad news is having a bull run. Dispirited consumers, falling home values, and the sub-prime mortgage crisis are catalysts. And a slowdown in consumer spending, rising oil and gasoline prices and a slip in manufacturing activity are also shaking convictions.

For the retail industry, it all comes down to consumer confidence and how those feelings influence spending. Will shoppers continue to spend far more than they save? Will they shift their store preferences to align with a truncated budget?

The answer is probably “both.” If anxious Americans decide to save or pay down debt rather than spend, retailers will take it on the chin. And, shoppers worried about the deepening housing downturn may feel that pulling equity out of their homes is no longer an option. Still, business at high-end and luxury retail stores has proven to be remarkably resilient. Indeed, shoppers behave differently today than they did in the past – making consumer behavior one of the most volatile factors in the economic equation.

There’s truth to the argument that consumers keep on spending no matter what, and retailers can find solace there. The Neiman’s shopper may trade down to a department store, and Kohl’s shoppers may head for Target, but they’ll keep spending. Quick-serve restaurants could be in for a lift; and fast feeders, like the comeback kid McDonald’s, may see a revenue boost, too.

Green v. Green
Retail CEOs will find themselves faced with some hard questions about the green movement sweeping through corporate America. The biggest one: Can they be profit-driven and still be passionate about the planet?

Despite the best of intentions, most will find themselves in agreement with Kermit the Frog: It’s not easy being green.

Converting lighting, providing reusable bags and establishing a recycling program are first steps on the road to becoming an eco-warrior. But building green stores, overhauling sourcing and manufacturing to be more in sync with green objectives and determining the right mix of green products on the shelf are a whole lot harder to do.

Wall Street says it stands ready to reward companies that back the environmental trend, but make no mistake – it’s keeping a wary eye on the cost/benefit equation. And shoppers may say they’re all for eco-friendly wares, but studies have shown that acceptance seems contingent on price. If 2008 brings about corporate and consumer belt-tightening, “green” could get squeezed.

That said, retailers have made impressive strides. Wal-Mart, JCPenney, Staples, Gap, Macy’s, Office Depot, Whole Foods, Home Depot, REI: all have won kudos for their commitment to sustainability. Look for those efforts to continue in ’08 – provided these companies continue to see ROI. The next big efforts will be a push to achieve greater social responsibility in sourcing and to install more environmentally friendly networking and storage equipment on the IT side.

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