Economic storm to last into '09

Chain Drug Review, Nov 10, 2008

NEW YORK -- The tight consumer-spending environment that drug chains and other mass retailers are girding for this holiday season is likely to linger well into the new year as clouds continue to gather over the nation's economy.

Through 2009 consumers will grapple with rising unemployment, low income growth, a credit crunch and other financial pressures, which will compel many to clamp down on their spending--especially discretionary dollars, according to Citi Investment Research retail analyst Deborah Weinswig.

"We expect consumer spending to remain weak through 2009, particularly if unemployment rises, personal income growth falls and consumers are unable to get access to credit," Weinswig writes in a 2009 retail industry outlook report released by Citi.

"Personal income growth is the most important predictor of retail sales, and we believe it will be pressured in 2009 as job losses mount in the wake of the current financial crisis," she says.

The job losses are already happening. A cavalcade of companies--including PepsiCo, Merck, Goldman Sachs, Chrysler, General Motors, Coca-Cola, Yahoo, Bank of America, Xerox, Whirlpool and Alcoa--recently announced plans to cut employees.

Though the unemployment rate held steady at 6.1% in September (the most recent figure available at presstime) after rising during much of the year, the Labor Department says the number of mass layoffs--those involving at least 50 workers from one employer--jumped to 2,269 in September, an increase of 497 from the preceding month and the highest level since September 2001. From January to September the total number of mass layoffs reached 14,811, the highest for that time span since 2003 and 2002, according to the department.

"We expect the unemployment rate to continue to rise in 2009," Weinswig says in her report, adding that Citi economist Steven Wieting predicts the unemployment rate to climb to 8.5% by the end of 2009. "Rising unemployment slows personal income growth, which will have a negative impact on consumer spending and retail sales," she comments.

Recent economic data indicate that retail sales have slowed. Overall retail sales fell to $337.2 billion in September, a 1.2% decrease from August's results and a 1.4% drop year over year, according to estimates in the Census Bureau's "Advance Monthly Retail Trade Survey."

September sales for health and personal care stores, including pharmacies and drug stores, were flat month to month but slipped 3.3% year over year, the Census Bureau says. The trend was similar for grocery stores and general merchandise stores, which saw flat month-to-month sales in September and year-over-year decreases of 5.2% and 3.4%, respectively.

Weinswig expects consumer spending in 2009 to stay well below its 25-year historical average of 3.5%--and maybe go negative. She points out that Citi's forecast is for a 0.9% decline in consumer spending next year.

Consumers are approaching the holiday season with caution. In its 2008 holiday shopping poll, the National Retail Federation (NRF) found that Americans plan to spend an average of $832.36 on holiday-related shopping this year, up just 1.9% from last year's $816.69, the smallest increase since the survey began in 2002.

And it appears that family members will be the ones losing out on gifts this year. The NRF notes that, for the first time in the survey's history, respondents plan to spend less on gifts to family, an average of $466.13 in 2008 versus $469.14 in 2007. Non--gift-related areas that stand to see spending gains include decorations and flowers/plants, while outlays for greeting cards, candy and food stand to remain flat compared with 2007 expenditures, the NRF says.

More people plan to buy holiday items in drug stores ( 1.2%), discount stores ( 1.3%) and supermarkets ( 1%) compared with last year, the NRF poll finds. By far, the top reason for shopping in a certain store is price, with nearly 53% of respondents citing sales/discounts or everyday-low prices as the deciding factor.

One big hurdle for many consumers during the holiday season and in 2009 will be less access to credit. Weinswig's report cites a Federal Reserve survey of senior loan officers in which two-thirds of 33 banks polled in the third quarter said they have tightened lending standards on credit cards--which she terms a "substantial headwind" for retail sales.

"We believe that consumers will be forced to significantly cut back on discretionary spending without this source of credit available to them," she writes.

Inflation, too, continues to eat away at consumers' disposable income, although recent declines in gas prices should provide some relief, Weinswig adds. "Food, energy and gas price inflation will likely remain a burden for consumers even if the rates of inflation moderate from current levels," she explains.

The decline in housing prices and volatility in the securities markets, which has shrunk investment portfolios and retirement savings, are producing a "negative wealth effect" that also may curb consumer inclinations to spend, according to Weinswig. In addition, she describes a "next-door neighbor phenomenon" in which those not significantly impacted by the downturns in the stock and housing markets, or the overall economy, might be affected psychologically as they see others around them struggle financially.