Mind Reading
May 10, 2010 11:34 AM, Elaine Misonzhnik
Consumers are thinking about returning to malls. But they face obstacles to spending. What it means for retail real estate.
On the morning of Apr. 3, when Apple’s new iPad tablet officially went on sale, the lines in front of Apple’s four New York City stores snaked around street corners. At the company’s shops from coast to coast, people turned out in droves to take the new gadget for a spin and many ended up shelling out $500 to $700 for units of their own.
By the end of the day, Apple had sold 300,000 iPads.
By the end of the week, the number had jumped to 500,000.
And by mid-April, Apple was forced to delay the international release of the product by about a month because of the overwhelming domestic demand.
Things got so crazy that in late April one shopper in Denver lost a part of his pinky finger when an overzealous thief violently ripped the plastic bag he was carrying the device in out of his hands.
Before the iPad hit the market, the company expected to sell 1.2 million units in the second quarter of 2010. After the release, analysts upped the projection by 50 percent to 1.8 million because of its smashing sales.
It would be hard to classify the iPad as a necessity. The device fills the gap between smart phones and laptops and one of its main purposes is to compete with Amazon’s Kindle in the burgeoning e-reader market. (In that first day of sales, iPad owners downloaded 250,000 iBook titles.)
Yet a healthy number of beleaguered U.S. consumers were willing to fork over hundreds of dollars for what is essentially a luxury gadget, even as they continue to deal with limited credit availability, stagnant housing prices and the worst job market in decades. The iPad is not the kind of item that should be a hit, given the levels of frugality that have gripped U.S. consumers during the past 18 months. Could its success be a sign that the U.S. is en route to the same levels of consumer spending the country saw before the recession hit?
Not quite, experts say. While consumers are recovering some of their buying prowess, buoyed by positive news about the economy, spending power is nowhere near what it was in 2006 and 2007. Back then, the housing bubble and a booming stock market helped fuel Americans’ shopping trips in the absence of real income growth. With those crutches gone, going forward U.S. consumers will likely return to their pre-boom shopping habits. That means there will be less room in the sector for all the mid-price chain retailers and less demand for retail space. One real estate professional describes the situation this way: while the worst of the retail industry reshuffling may be over, the game of musical chairs will go on for some time.
Misleading picture
In March, same-store sales for U.S. chain stores rose 9.0 percent year over year according to ICSC—the sixth month out of the last seven with positive results. It was the biggest year over year gain in 10 years. More interestingly, sales gains were strongest at luxury chains, which posted a 14.2 percent increase. Discount stores saw sales increase 10.7 percent.
Similarly, the U.S. Commerce Department recorded a 1.6 percent gain in consumer spending, marking seven straight months of increases. The Deloitte Consumer Spending Index, which looks at consumer cash flow as an indicator of future spending, rose to 4.47 percent from 4.21 percent in February.
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Yet most economists caution that the March retail numbers come with a lot of caveats. The comparisons are with March 2009, one of the worst months for retail on record, notes Mary Delk, director in the retail practice of Deloitte Consulting LLP. In addition, the shift in the date of Easter skewed sales related to the holiday much earlier than they were last year. As a result, April numbers will be much more modest and a more accurate picture will emerge when sales can be viewed in their totality compared with 2009’s figures.
“We are up against very easy comparisons against last year and the other thing is that whenever there is a recession, we get this puritanical behavior from consumers and then people pull out their wallets and they spend again,” Delk says. “Sometimes it’s because of [pent-up] needs, other times it’s because of the emotional factor. But I believe there will be a period of time when that will start to taper off again.”
In fact, while Americans have begun feeling more hopeful about the future and are gradually coming back to malls, the economic indicators that determine a sustainable level of consumer spending have not been strong.
As of March, the unemployment rate remained at 9.7 percent in official estimates, the same level as in January and February. and not far from October’s 10.2 percent peak. In addition, when discouraged job seekers and part-time workers looking for a full-time job are added in, the rate jumps to 16.9 percent.
That rate continues to be a source of concern not only to those Americans looking for a job, but also to those in the workforce, as they worry about their job security and potential salary cuts, notes Robert Bach, senior vice president and chief economist with real estate services firm Grubb & Ellis. And when people worry about losing their jobs, they remain conservative spenders.
Moreover, the average length of unemployment stands at more than 26 weeks—the highest number on record. There were more than 8 million jobs lost during the recession—dwarfing what the economy experienced in any other recent downturn. While firms have begun hiring again, the pace of job creation remains anemic. And the number of job openings per applicant remains at depressed levels. All of this paints a gruesome employment picture for some time to come.
There has also been a slow decline in real disposable incomes in recent years and consumer credit remains tight, as banks have adjusted their lending criteria to fit a more risk-averse model. But perhaps the biggest obstacle to strong growth in consumer spending is the housing market.
While the housing sector seems to be on the mend in many parts of the country, with a rising number of sales, foreclosures keep trending upward and prices are either flat or going down. Moody’s Investors Service predicts it might take a decade for the U.S. housing market to fully recover the 30 percent to 40 percent in value it lost during the crisis.
It was the unsustainable rise in home values that drove unprecedented levels of consumer spending in the mid-2000s, more so than steady employment or credit cards, notes Jay McIntosh, president of Consumer Foresight LLC, a Chicago-based consulting firm. In those years, Americans came to rely on their home equity to finance their shopping sprees. In 2005, for example, U.S. consumers extracted $750 billion of equity from their homes through home equity lines of credit. In 2009, the figure fell to a negative $214 billion.
“One of the fallacies that I think exists in many people’s mind is this focus on the negative savings rate we had for many years,” McIntosh says. “But [during that time], the home values were going up and many consumers were focused on their homes as a source of their net worth. At a time when housing prices are flat or falling, consumers are going to scale back spending because they need to replace that wealth creation with savings.”
As of fourth quarter 2009, the U.S. personal savings rate as a percentage of disposable income stood at 3.9 percent, according to the Commerce Department. The figure represents a 240 basis point increase from a savings rate of 1.5 percent in fourth quarter of 2007, but is off its recent peak of 5.4 percent, which occurred in the second quarter of 2009. Since home values are not likely to recover any time soon, Americans, especially baby boomers who are now approaching retirement, will continue to put at least a portion of their income into savings, McIntosh notes.
What that means for the retail industry...Continue reading on the next page.
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