Sales rise 6.5%, lending credibility to rebound

DSN Retailing Today, July 5, 2004 by Mike Troy

When in doubt, go shopping appears to be the maxim by which American consumers live. Brushing aside disturbingly steady reports about the loss of life in Iraq, ongoing concerns about domestic terrorism and politicians posturing on the strength of the nation's economy, American consumers spent at record levels last year, according to DSN Retailing Today's Annual Industry Report. This exclusive scorecard of the nation's leading public and privately held retailers indicates sales for the top 150 companies expanded by 6.52% last year to approximately $1.25 billion. In addition, nearly 3,200 net new stores were added.

The strength of the retail market can largely be attributed to a continuation of low interest rates coupled with an overwhelming number of consumers who, even though they are concerned about global unrest and the economy, feel good about their personal situation and are willing to spend.

They have some good reasons to reel that way. Mortgage rates remained at or near historically low levels throughout much of the year, fueling robust demand in the housing market and allowing homeowners to free up cash by refinancing at lower rates. The result was strong demand for home-related goods and services. The spending environment also got help from the overall job market as the employment picture and economy improved over the course of the year. Unemployment crept above 6% and stayed there for much of the year before economic growth heated up later in the year and people went back to work. By the fourth quarter, unemployment had fallen below 6% and so far this year the number of people without jobs has held steady at around 5.6%, of the population. These factors correlate to overall expansion of the economy. The U.S. economy grew by 2% during the first quarter of 2003, but accelerated to 8.2% in the third quarter. Growth dipped to a still respectable 4.1% gain in the fourth quarter and then increased in the first quarter to 4.4%.

To top things off, consumers further benefited from non-existent inflation and in many cases outright deflation that allowed their dollars to go further.

The favorable spending environment that resulted from a generally good economic climate benefited many retailers, but none more so than Wal-Mart. The nation's largest retailer again accounted for the largest chuck of growth by adding nearly $20 billion in additional sales volume at its U.S. stores and warehouse clubs. Many of those additional dollars were spent on food, as Wal-Mart added 213 new supercenters to end the year with nearly 1,500 of the large stores.

As Wal-Mart was gaining momentum in food, including opening its first supercenter in California as well as versatile 99,000-square-foot supercenter in Florida, conventional supermarket competitors were dealt a devastating blow in Southern California when their employees went on strike. Kroger, Safeway and Albertson's saw their sales and profits deteriorate dramatically as store operations were impacted by striking workers demanding higher wages. The labor problems could not have come at worse time for supermarket chains already faced with high cost structures that make it financially impossible to compete effectively with Wal-Mart on price.

Supermarkets also faced competition from several other trade channels that are expanding rapidly and view food its an important traffic-generating category. Drug store operators, such its Walgreens and CVS, and value retailers, such its Dollar General and Family Dollar, added thousands of new stores last year that contained food. Chains such as Target and Costco didn't add as many stores, but they, too, had an impact on the food market.

While food was a segment characterized by aggressive battles for share in a large and slow-growth market, the home area was more a case of a rising title lilting all boats.

Home Depot and Lowe's saw their sales and profits increase substantially and both continued to add large numbers of new stores. It was a similar situation for home goods specialists, such as Bed Bath & Beyond and Linens 'n Things, which continued to open new stores and experience strong results.

Other retailers also benefited from the housing market even though they are not technically considered home goods retailers. Chains such as Best Buy and Circuit City and mass merchants with large exposure to the category, such as Wal-Mart, Sears and Target, experienced strong demand as prices for popular electronics items fell and new technologies came to market.

Also capitalizing on the nation's economic growth were the office superstore chains. Staples, Office Depot and OfficeMax saw their sales pick up as the economy improved and entrepreneurs started new businesses or expanded existing ones. Operators in the channel also took steps toward accelerating new store growth after a period of scaled-back expansion when the economy weakened several years ago.

Even operators in smaller segments of the retail industry, such as sporting goods and pet supplies, experienced positive results. Companies such as PetsMart and Petco continued to be the model of consistency by piling on monthly same-store sales gains. The sporting goods market also proved healthy, with the sector's leading operators reporting improved results and continued profitable expansion.