Capitol Hill’s Ripple Effect on Retailers
By James McCandless and Kenneth Katz, X Team International
The recent government shutdown has analysts scrambling to determine how much damage was done to the national economy. From a retail perspective, understanding the scale and scope of the shutdown requires a more thorough understanding of the issues at play; including a closer look at how retailers responded and a breakdown of how the lingering effects of the partial government closure may impact the holiday sales season.
The ripple effect on retail
In the midst of the government shutdown, many retailers responded with tangible discounts and promotions targeting furloughed employees. In Washington, D.C., many retailers offered anyone with a government ID a discount of up to 20% for their services or products. Boston Market gave one free whole chicken with the purchase of a family meal by a government employee, and online game retailer GOG offered discounted game packages. Starbucks took a different approach by unveiling a promotion aimed at sending a political message about getting along, offering free coffee to guests who bought someone else a drink. To what extent those incentives boosted business remains to be seen, but the fact that they were put into place at all speaks to the ripple affect of today’s politics and how just one small political pebble will greatly impact employment, consumer spending and retail profits.
It is obvious to retailers that all of the events on Capitol Hill — not just the shutdown — have impacted consumer confidence and have exerted some downward pressure on retail sales. The first real hiccup in what had previously been a slow but relatively steady recovery was the sequester and the associated furloughs that started earlier in the year. As a result, many prominent national retailers saw weak or weaker-than-expected second quarter earnings and were already projecting more anemic fall sales figures before the shutdown.
Despite the sequester, generally uninspiring summer sales figures and a relatively disappointing back-to-school season, pre-shutdown holiday sales projections were still relatively optimistic. The National Retail Foundation projected holiday sales would increase 3.9%, the International Council of Shopping Centers (ICSC) forecast a 3.4% increase, ShopperTrak predicted a 2.4% bump, and Deloitte suggested a 4% to 4.5% spike. In the wake of the shutdown, however, more recent polling indicates that as much as 40% of consumers have scaled back spending.
Looking at this topic from a national perspective, however, can paint an incomplete picture. It is important to consider that not everyone will be affected equally. Some retailers will be more susceptible to the effects of the shutdown, while it is likely that others will barely notice a difference. For example, high-end retailers may be affected less in comparison with discount retailers — according to a recent study by ORC International for ICSC and Goldman Sachs, the shutdown has impacted lower-income households more than high-end consumers and left low earners more likely to be trimming spending.
While the shutdown was a national story, the trickle-down impact on retail differs significantly from one market to the next. Washington, D.C. and other regions with a disproportionately high percentage of government workers are obviously more vulnerable to its negative effects. In areas such as Houston, where the pre-shutdown economic indicators were among the best in the nation, and there are a relatively low percentage of federal employees, the retail impact is likely to be less of an issue.
In the immediate aftermath of the shutdown, sales slowed nationally by 0.7% for the week ending Oct. 12 (according to ICSC and Goldman Sachs Weekly Chain Store Sales Index). While that kind of near-term “hangover” is not reason for true alarm, there are some indicators that consumer confidence — and, subsequently, consumer spending — might have taken a significant blow that will last through the holiday season. Additionally, the “resolution” that ended the shutdown only set the stage for another political confrontation in early 2014. Depending on how much attention that story gets could have a significant impact on sales through the end of the year as well.
Leading up to the holiday season, an interesting thought for retailers is that the typical question of how spending dollars will influence the landscape may not be as relevant as how discretionary dollars will be spent. If more people tighten their figurative purse strings by forgoing restaurant trips and eating more home-cooked meals to save money, grocers could actually see a sales bump, while restaurants may need to get especially creative to fill their tables.
Retailers who heavily depend on fall seasonal sales will also be affected by tighter discretionary spending as a result of the shutdown. For instance, retailers in areas like Vermont that rely on visitors for the fall foliage scenery and sell items that by nature are “moment in time” sales, or those who sell seasonal fall items like Halloween decorations, have likely missed their chance to see any significant profits this year. And unlike the delayed purchase of a new coat or boots, the profits on these types of seasonal sales can not be recouped.
Another important issue facing holiday sales is retroactive pay for government employees. The announcement that all 400,000 or so government employees that were furloughed will receive back pay was welcome news to families and retailers alike, but it remains uncertain when they will receive that pay. The majority of these employees expect to be caught up on pay by the end of October, which could result in a much needed spending/sales boost for retailers as a result of these employees receiving large paychecks that feel more like a “bonus.”
An uncertain future
The reality is that since 2008-2009, consumers have been much more conscious of their spending. And so, while the near term worries about the holiday season are obviously important, many retailers are focused more on the macro-level uncertainty that persists. The shutdown was ultimately just one more fork in the shaky economic road.
What will happen next for retailers is highly questionable considering the unpredictability of the government and, as a result, the increasingly weary and conservative consumer. The shutdown may have lasted 16 days, but no matter what happens this holiday season, we will be following the medium- and long-term retail impacts for much longer.
Kenneth S. Katz, Principal at Houston-based Baker Katz and James McCandless, director of retail at Bethesda-based Streetsense, are part of X Team International, an international alliance of retail real estate advisors with expertise in more than 45 major markets throughout the U.S., Canada, and Europe.
OfficeMax accelerates e-commerce innovation
Technology continues to evolve at a rapid-fire pace, empowering consumers and businesses with more options and expectations for shopping seamlessly wherever, whenever and however they want. And retailers need to keep up.
In order to succeed in this crucial time, the Naperville, Ill.-based, 900-plus-store office products chain OfficeMax, Inc. recognized that it needed to expedite decision-making to bring website improvements to market more quickly.
“We wanted to create a highly collaborative culture that enables rapid innovations aligned with changing shopping habits and strong online competition,” said Jim Barr, executive VP and chief digital officer, OfficeMax. “Also, we wanted to create an environment to help us recruit and retain the best and brightest in ecommerce and digital.”
Bringing the Team Together
To reach these goals, OfficeMax has created the OfficeMax Digital Innovation Collaboration Center, an interactive environment designed to foster ideation and real-time collaboration and creativity among members of the OfficeMax digital team.
“The center’s technology provides us with real-time data and visibility to just about every step in the customer’s shopping experience, which we can then use to continuously improve their experience with us,” explained Barr. “For example, we can monitor response times aggregated across our sites, but we can also drill down to key individual components of the customers’ shopping experience, including search and browsing, shopping cart and checkout, all to help make improvements at each step. Most of the solutions used at the Operations Center were developed in-house and are customized to our business KPIs.”
“In the first few weeks since we launched the center, I have already seen a boost in real-time collaboration among the team and a greater collective awareness of our business,” Barr said. “We’re also seeing greater awareness of how our websites are performing through the new Operations Center. This real-time visibility has allowed us to proactively identify and address performance needs in half the time than we previously could; which helps us to create an improved customer experience across our sites.”
Technology OfficeMax uses to run the center includes Oracle Endeca search technologies that provide customers with faster, more accurate and productive search results. The retailer is also investigating analytics solutions. Moving forward, Barr sees more innovation in the future.
“Our team is currently developing new e-commerce features, including search engine upgrades, significant online SKU expansion, mobile advancements and more, which will be released during the holiday season and early 2014,” he stated.
NRF: Despite drop in auto, September sales up in most retail sectors
Retail sales fell in September for the first time in six months, but the decline was credited to a drop-off in auto purchases. Most U.S. retail sectors actually experienced broad sales gains during the month, according to the National Retail Federation, which reported that, excluding automobiles, gas stations and restaurants, retail sales grew a seasonally 0.6% compared to the previous month and 3.8% unadjusted compared to the prior year.
Results of specific sectors include:
- Building material and garden equipment and supplies dealers stores’ sales increased 0.1% seasonally adjusted and 8.0% unadjusted year-over-year.
- Clothing and clothing accessories stores’ sales decreased 0.5% seasonally adjusted month-to-month yet increased 0.7% unadjusted year-over-year.
- Electronics and appliance stores’ sales increased 0.7% seasonally-adjusted month-to-month and 1.8% unadjusted year-over-year.
- Furniture and home furnishing stores’ sales increased 0.2% seasonally-adjusted month-to-month and 4.1% unadjusted year-over-year.
- General merchandise stores’ sales increased 0.4% seasonally adjusted month-to-month yet decreased 0.2% unadjusted year-over-year.
- Health and personal care stores’ sales increased 0.4% seasonally adjusted month-to-month and 4.6% unadjusted year-over-year.
- Non-store retailers’ sales increased 0.4% seasonally adjusted month-to-month and 12.0% unadjusted year-over-year.
- Sporting goods, hobby, book and music stores’ sales increased 0.5% seasonally adjusted month-to-month and 0.9% unadjusted year-over-year.
“Falling gas prices combined with rising housing and stock prices continue to support consumer spending, and the broader economy,” NRF chief economist Jack Kleinhenz said. “While far from robust, consumers are shopping, but they are spending both discriminately and moderately. Volatility still persists in various retail sectors but spending has somewhat stabilized heading into the all-important holiday shopping season.”
September retail sales, released today by the U.S. Census Bureau, showed that total retail and food services sales, which include non-general merchandise categories such as automobiles, gasoline stations, and restaurants, decreased 0.1% seasonally adjusted month-to-month yet increased 3.2% adjusted year-over-year.