Consumers Trade Down – US-FOREX.US
Cash-strapped consumers are looking to get the most bang for their buck, forcing retailers to adapt to new spending habits, says Claire Gruppo, co-founder and managing director of investment bank and M&A firm Gruppo, Levey.”People aren’t comfortable paying for brands or an experience if they don’t feel it’s worth it,” Gruppo said, “and the trend we’re seeing across most brands is consumers seem to be trading down for ticket prices.” Americans have become more careful with their money, but the key to their behavior isn’t price, but value. For example, instead of buying a 20 t-shirt at Ann Taylor
, consumers will purchase it for 5 at Wal-Mart
or Kohl’s
. They’re still buying a t-shirt, but not at 20.The environment is very difficult. Instead of rising 0.7% as expected, on Thursday, the U.S. Commerce Department reported retail sales fell by 0.1% in July, and would have dropped by 0.6% if it were not the government’s “clash for clunker” program. Department store stales sunk 1.6%, while broader general merchandise stores, which includes mega-retailers like Target
, saw sales decrease 0.8%. The data reinforces the thesis held by many on Wall Street that business, rather than consumers, will lead the economic recovery.To navigate this trend, some retailers have become more careful in managing their inventory, by reducing product lines and offering fewer items within a line. The strategy is simple: offer the consumers what they’ll actually purchase. This way businesses are better able to streamline inventory and not tie upa lot of capital in items that aren’t going to move. The trick is to reduce inventories without shoppers thinking that they have fewer choices.”Good retailers are thinking not so much about discounting as much as adding items of lines of merchandise at different price points that they’re not going to have to sell at 50% off retail,” Gruppo said. “They’re starting different offerings at lower price points.”Gruppo highlighted Macy’s
recent performance as an example of this approach. “They beat expectations and raised their forecast for the year,” Gruppo said. “The brand has always been known for good value at department stores, and it’s the first piece of good news from something other than a big-box discounter.”
Gruppo expects retailers to operate in this fashion until consumer spending begins to turn around. “Until unemployment and lack of credit ease more than what we’ve seen this will be what the retail landscape will look like,” Gruppo said. The businesses that will have an edge through the end of the year will be the ones that offer lower prices but with strong value, Gruppo added.