Shop till you drop

High unemployment and low consumer confidence
dash chances of spending our way out of a slump.

When the going gets tough, Americans tend to go shopping. Consumer spending has pulled the U.S. economy out of many tight spots. But this time, it might take lot more than that. With unemployment rates rising, retail sales started to slip after kids went back to school. Even Mooresville-based Lowe’s Cos., the state’s largest publicly owned retailer, is bracing for tougher times. In September, it said it would open only 80 hardware stores in 2009, down from 120 last year. Recessions often drive shoppers to discount chains, and Raleigh-based Variety Wholesalers Inc. — owner of Roses, Bargain Town, Value Mart and others — is one of the state’s largest. Art Pope is chairman and CEO.

BNC: Rough year for you?

Pope: It was fair, but we didn’t meet all our goals for expansion and increased sales. We did get a pop in retail sales from the stimulus checks in June and July, but it didn’t hold up after that. Family Dollar and Wal-Mart did fairly well, too, but stores selling high-end discretionary items had it tough. This will be another year of uncertainty.

Why?

Consumer confidence is low, and it won’t turn around overnight. It could be a year of more downward spiral, higher unemployment and of consumers holding onto their savings. That will be good for long-term economic growth, but it reduces retail spending now. Retailers have to be quick on their feet. They have to closely manage inventory and pricing.

Who will and who won’t prosper?

We know from past recessions that discounters tend to benefit from people shopping down. But even if something’s a great value, if you don’t need it — you’re concerned about your job or your expenses — you’re not going to purchase discretionary items. Obviously, you’re not going out and buying new appliances if your washing machine or dryer will last another year. When fewer homes are being built, appliance retailers and stores that sell things to build and furnish them will feel the ripple effect.

Is there too much gloom-and-doom talk?

To an extent, yes. When consumers fear losing their jobs or fear not having enough money for the mortgage, they spend less. In some ways, the economy — God forbid that I’m saying this — is fundamentally sound. Unemployment, while higher than last year, is not terrible, and productivity in American manufacturing and the service industry is still high. A lot of what we’re seeing in retailing is fear.

Is it justified?

One real concern was gasoline prices. They increased retailers’ costs, which put pressure on prices. And there’s a big difference for the average consumer when he has to spend $50 for a tank of gas, not $25. That missing $25 was going to oil companies and overseas, not retail sales. But the subsequent decrease in gas prices has been a boon for us, both in customer spending and lower costs in shipping goods. This year will be better than last year if gasoline prices stay about where they are.

What role does shipping play?

One of the fallacies of the past 30 years has been when people talk about unfair competition overseas because of lower wages and less environmental regulation. It’s really the low cost of container shipping that increased imports — and exports. Last year, with the higher cost of fuel, you were seeing container surcharges and fuel surcharges and, if you landed on the West Coast, surcharges on transporting goods by truck to here. With the decrease in the cost of diesel, the surcharges have gone away, and now there are surpluses of containers, making it easier to negotiate further decreases in shipping.

What about tight credit?

Retailers are as dependent on financing as automobile dealers are. If your manufacturers and vendors can’t get credit and the retailer doesn’t have his revolving credit facility or commercial paper to acquire inventory, that can lead to a downward spiral into bankruptcy. Fortunately, we don’t have that problem, but there are some indications other retailers are experiencing tightening credit, affecting their ability to buy inventory.

What’s ahead this year?

We’re looking for an increase and looking to expand our store locations. We’re hoping landlords will be a little more realistic, that when they’ve got empty buildings they might be more amenable to reasonable lease rates. We’re planning increases in both same-store sales and in opening stores.

What might surprise people?

Last year in April and May, we thought there were going to be large price increases because of increases from vendors. And there were some forced on us by national organizations like Procter & Gamble. However, because the nation — and world — was suffering from recession and because China had excess production capacity, we had lower-cost alternatives to give consumers value. We’ve actually seen deflation on some items, including apparel. So maybe, rather than increases, we’ll see continued downward pressure on prices, which will offset the uncertainty and anticipation of lower income by our customers.