Market turmoil fuels fears about consumer spending

The turmoil in financial markets is further rattling America's jittery shoppers just as the retail industry prepares for a critical holiday season.

By
September 28, 2008 16:24
4 minute read.
Market turmoil fuels fears about consumer spending

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The turmoil in financial markets is further rattling America's jittery shoppers just as the retail industry prepares for a critical holiday season that was already expected to show the weakest growth in almost two decades. Major chains Macy's Inc. and Target Corp. say the upheaval on Wall Street - from the bankruptcy-protection filing of Lehman Brothers to the government bailout of insurer American International Group Inc. - hasn't changed their merchandising plans, since they have already been slashing inventories and cutting expenses. But many may be re-examining their pricing, discounting plans and inventory for the holiday season. And experts say merchants will need to soften their marketing messages to better appeal to increasingly fragile consumers, who are grappling not only with their shrinking company-sponsored retirement accounts and home values but also losing more faith in the financial system. "This is like watching a car crash, but the two vehicles haven't hit yet," said Marian Salzman, chief marketing officer for public relations agency Porter Novelli. "Is this the worst week, or are we waiting for the other shoe to drop?" The turbulence is forcing shoppers such as Philomena Ford, who was already cautious about spending, to retrench even more. "We are cutting to rock bottom," said Ford, 70, a retired nurse, who along with her 84-year-old husband, a retired fish broker, lives on a pension and investment income. "I just hope I am not going to live longer than my money is going to last." Ford noted that she and her husband will be thinking twice about spending $75 per week on cheaper restaurant meals, even after cutting that back from $150 a week in recent months. As for Christmas giving, she says she will get presents only for their two-year-old grandchild. In previous years, the couple also gave money to their two sons. The market turmoil, which is expected to lead to even more layoffs, is occurring as Americans' confidence in the economy is already near historic lows. Two consulting companies recently predicted that the holiday shopping season is expected to show the weakest growth in 17 years. "Consumers are going to be paralyzed through Christmas," Salzman said. Wendy Liebmann, president of the WSL Strategic Retail consulting group, said she could see the impact of the financial upheaval reflected on the faces of people on the streets of Manhattan two weeks ago, a day after Lehman filed for bankruptcy protection. "They seemed shell-shocked," she said. And while the New York City area is feeling the most impact, Liebmann said there was a lot of worry among consumers around the country whose financial security is tied to Wall Street. In particular, she said the latest woes could further derail sales of luxury goods, which have slowed in the last few months as well-heeled customers have pulled back. Michael Dart, a principal at consulting firm Kurt Salmon Associates, said he believes that stores from mall chains to luxury merchants will have to rethink their plans, given an "unprecedented" chain of events that could depress consumer confidence even more. However, he expects dollar stores and discounters will have more opportunity to gain market share this holiday season. Advertising gurus say stores also will need to tweak their message to be more sensitive to uneasy consumers, similar to what many did after the September 11, 2001, terrorist attacks. "We are facing a difficult time, and retailers need to be conscious of that and be very flexible," said Richard Kirshenbaum, a founder of advertising company Kirshenbaum Bond & Partners. Merchants should reconsider any "highly confident and optimistic tone," he said. Instead of trying to sell a dress, clothing stores should sell the attitude, style and confidence consumers get from the product, said Peter Arnell, chairman and chief creative officer of The Arnell Group, a subsidiary of Omnicom. Stores "need to give them trust and encouragement," he said. That may be particularly true if consumers become even more worried. Deloitte Research predicts total holiday sales, which exclude motor vehicles and gasoline, will rise 2.5 percent to 3%, less than last year's 3.4% increase. A rise of 2.5% to 2.8% in the November through January period would be the smallest gain since 1991, Deloitte said. TNS Retail Forward, a global market information group, forecast that retail sales will rise 1.5% in the October through December period, the weakest performance since 1991. The figure excludes sales from gas, supermarkets, restaurants, drug chains and autos. The estimates were made before the past two weeks' events, but Frank Badillio, senior economist at TNS Forward, said his projection reflected the expected fallout from the financial crisis through the first half of next year. Many merchants are hoping that shoppers will focus on feel-good, impulse items, such as lipstick or neckties. Jeff Landis, president of Chicago-based Montopoli Custom Clothiers, which offers suits from $3,000 to $30,000, said he plans to stock up on more impulse items such as cuff links and ties. "People need a little diversion. It's a way to break out of the blues," he said. That was apparent last week at luxury store Bergdorf Goodman, which was entertaining customers who had come to pick up their pre-ordered blue $945 Manolo Blahnik shoes made famous in the Sex and the City movie. The event was occurring just as news was swirling about the unraveling fortunes of Lehman Brothers. Still, customers seemed to be in a good mood as they greeted the famous shoe designer. Bettina Ortiz, 27, received a marriage proposal in the shoe department - and a pair of the blue shoes from her boyfriend. Ortiz, a Manhattan resident, who works in sales and marketing, had just bought a pair of Manolo Blahnik stilettos for herself the week before. "It's definitely a feel-good purchase," she said.

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