Eye on the Recession: A Test of Wills

So who will blink first? As the holiday season was drawing near there appeared to be a test of wills of who will blink first, retailers or customers. A week before the calendar deadline, some 20% of Americans said that they had not as yet commenced with their shopping. An additional percentage admitted to only having completed the task “minimally.” So what were they waiting for?

Sure, we are all aware of “last minute people,” in almost every aspect of life and they certainly exist when it comes to shopping, but was there an underlying reason and how does it relate to the ongoing recession? The answer seems to lie in the fact that customers believe that retailers are more desperate than ever and as a result will be forced to do some deep discounting. They read all of the earning reports and pronouncements by company executives and are convinced that the retailers will come around. If they wait it out, the prevailing feeling is, they will be able to afford items that they might not be willing to pay for today.

Retailers, however, sense that despite the continuing recession and relatively high unemployment, customers in general are feeling better about the future. They really are prepared to spend more, is the reasoning here, so why loose money on someone who will pay the full price. They are always watching the cash registers and know exactly when to press the panic button.

For better or worse, the customer ultimately wins. A leading retailer played the game a bit by offering deep discounts on some items but keeping the lid on high prices for luxury items. The prevailing thought was that they could probably buy the less expensive items at a discount house, so why not compete with those discounters on the cheaper goods. The discount stores on the other hand were also fully cognizant of this idea but they were perhaps even a step ahead by still offering the discounts on the non-luxury items and even slashing prices for the more expensive items.

The success of stores like Target was precisely because the conventional retailers were hedging their bets and coaxing consumers into paying regular holiday prices. Target probably concluded that even losses from discounts on more expensive items could be made up through volume. The popularity of the discount stores is largely due to their mode of operation, which is buying in bulk at extremely low prices, relying on volume, and making do with smaller margins due to volume.

For the small retailer caught in the middle of all this, it poses enormous challenges. For one, they do not have an option of drastic reductions lest they jeopardize their own profits. Their selling points are what small retailers always bring to the table: personal service and a focused design and layout of the store. In a recession, it becomes more difficult to hold onto the customer but by carrying unique and different items, a certain class of consumers will come forward.

Business is trying to figure out just where consumers stand on the recession. The frame of mind of the customer is critical to business. As Detroit marches on towards recovery, the psyche of the consumer is paramount. Is the customer ready to buy a new car? Do they feel that the recession has bottomed out and are they more confident about the future? In Detroit’s case, getting a good buy on a car may not be nearly enough. Customers are concerned about the stability of the manufacturer and whether they will be able to get service and parts.

It is interesting that we may be in a period when it may difficult to answer some of those questions. There is a sense that things have improved somewhat, but then you read about how shaky Citicorp is. You hear that people are more confident about the future; yet the unemployment figures are still high at about 10%. You know that housing is picking up somewhat; yet many people cannot get a mortgage. The banks still seem to keep a tight grip on lending.

One Manhattan department store opted to stay away from heavy discounting, but did offer favorable credit terms for those with the store’s credit card. They invited cardholders to make purchases now while not being obligated to pay until February 15^th without any interest penalties. At least one bank voluntarily postponed foreclosure procedures for a month. The object there was to demonstrate compassion and social responsibility in the face of the continuing recession.

My own observation is that the worst of the recession is over but that the recovery will be a lot slower than the optimists think. I believe that retailers did not discount earlier because they noticed an appreciable increase in consumer spending and because they always have time to lower the prices. The customer will still win because when the discounts do come, they will be deeper than anticipated. The reason: the retailers are trying to goad that 20% to spend their money.