US retailers wait for positive signals from consumers

Overall consumer spending rose at a 1.4% annual rate in the first three months of this year.

people eating 88 248 (photo credit: )
people eating 88 248
(photo credit: )
Dayne Morris eats out less and cooks at home more. He hunts for online bargains and shops at discount stores. So when will he start spending freely again? "When I get a promotion," says Morris, 24, a business consultant in Washington, DC, "and the economy turns around." What used to be an afterthought, from ordering wine with dinner to jetting off on a resort vacation, still feels like a splurge. No one knows when American consumers will feel financially secure enough to return to old spending habits. But those whose livelihoods depend on it - shop owners, restaurant managers, hotel staff - will be among the first to see the change. Diners will order big pancake breakfasts again. Business suits will sell briskly. So will name-brand luggage, gym memberships and pricey jeans. Spas will sell more facials and massages. Taken together, these seemingly minor transactions will likely help lift the US out of its longest recession since World War II. Consumer spending makes up about 70 percent of economic activity. But May data, released Friday, shows that a boost in income from the government's stimulus program was dedicated more to saving than to spending. Americans may be spending a bit more than they did at the end of last year, but it's still far less than needed for a strong economic recovery. That's hardly good news for small-business owners like Troy Little, who runs 27 convenience stores in Tucson, Arizona, and is waiting to see more impulse purchases at the register. Tucson has been battered by the housing bust, which wiped out construction jobs with it. "That lunch-bucket guy is my bread and butter," says Little, president of family-owned Quik Mart Stores. "He'll grab a doughnut in the morning, snacks for lunch and smokes at night. That guy is gone. In our marketplace, I think we have a long, rough road ahead of us." When more of his cost-conscious patrons splurge on the Lumberjack Slam - a feast of pancakes, ham, bacon, sausage, eggs and hash browns - Denny's CEO Nelson Marchioli will smile more. "When the economy gets better, people will start buying the Lumberjack breakfast again and more appetizer samplers," he says. Some merchants who cater to higher-end customers say they already see signs of improvement. Helen Kim, director of operations for the upscale National Jean Co., which runs 12 boutiques nationwide, is one of them. "Some are splurging," she says. "They'll buy the third pair of jeans in a different color. They'll get the second outfit now." The average price of jeans in the store: $170. More typical of retailers, though, is Joe Kanawati, owner of The Men's Shop in Arlington, Virginia, whose customers include government workers and business travelers. Sales are still "the worst I've seen in 42 years," he says, adding, "When they are back buying business suits and slacks that will be good." Broader economic signs will help make the case, too. Paul Taylor, chief economist at the National Automobile Dealers Association, looks at sales of new cars and vans, sport-utility vehicles and pickups. Those sales were running at an annualized rate of 9.9 million units through May. Taylor says sales need to rise to an annualized total of 10 million to 11 million units to signal that consumers are spending freely again. The merchants on the front lines will see the smaller telltale signs. Zane Tankel, owner of more than 30 Applebee's franchises in the New York area, says he'll be looking for customers to order complete meals - appetizers, entrees and desserts - as well as drinks like iced tea or soda. For now, he's taking heart that the worst seems over. During what seemed the depth of the recession, Tankel says, "we saw people tended to scan the menu more for the less expensive item." Iced tea and soft drinks with meals "just disappeared," he says. "Appetizers were nonexistent unless you got a group and they shared platters. Desserts disappeared." Now, at least, diners are "ordering more higher-end things like a steak as opposed to a burger and fries and just a salad. Those are early indications. Whether they stick or not, I'm not sure." Denny's Marchioli says he'll be looking for customers to buy traditional dinner items at dinner time, rather than the cheaper breakfast-style food that's sold all day. He'll also be watching for fewer people - especially older customers on fixed incomes - to split a single meal. "That is up significantly," Marchioli says. "It will go down when things get better." Todd Walter, chief executive officer of Red Door Spa Holdings, knows what to look for: customers splurging again on facials and massages, rather than sticking with "maintenance" services such as hair cuts, color and waxing. He'll also be watching for first-time customers, of whom there's been a "fairly significant falloff" during the recession. "As we start to see those numbers - first-time foot traffic - come back, that will certainly be an indicator that the economy is recovering more broadly," Walter said. Another item on his watch list: a rebound in sales at resort spas, which were hurt more than spas at other locations as people cut back on vacation travel. Michael Movahedi, owner of Signature Leather and Travelware in Arlington, Virginia, says he wants to see people once again buying name-brand luggage. "When the economy was good, people would buy to impress," he says. "They'd get a really fancy bag and toss the other one. It will be a good sign when people ask me, 'Can I leave my old luggage here?'" Randall Filer, an economics professor at Hunter College, says he'll be keeping an eye on summer airline travel and resort bookings. "If bookings are up over last summer, that would definitely be a good sign," he says. Economists, meanwhile, are monitoring overall consumer spending, which rose at a 1.4% annual rate in the first three months of this year. That was a sharp reversal from the 4.3% annualized drop in the fourth quarter, which was the steepest in 28 years. Once quarterly spending starts logging at least 2.5% growth for three straight quarters, it would suggest consumers are truly back, analysts say. Mack Payne hopes to be one of them. Until a few months ago, Payne, 35, of Washington, DC, was "spending money like no tomorrow." But after being laid off from his job at a gym, Payne is on a tight budget. And that won't change until he finds a new job, he says. "My mother always said, 'Save for a rainy day,'" he says. "The rainy day is here."