Holiday Shopping Forecast Rosy

November 19, 2004
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GRAND RAPIDS — The holiday season is expected to be “strong” for retailers, with a projected sales increase of 6 percent compared with the 5.7 percent increase in sales recorded for the 2003 holiday season.

According to Ernst Young’s retail and consumer products group forecast, happy holidays are in store for most retailers and good values are in store for shoppers this month and next, particularly in toys and consumer electronics.

Lower-income consumers, however, may be more frugal about holiday spending because job creation and personal income growth have stalled at the same time energy and heating prices are rising.

“In the post-election environment, with the reaction of the equity markets and the increase in interest rates, we think the holiday season will be driven by the affluent consumer,” said Dave Hoogendoorn, managing partner for Ernst & Young, West Michigan and northern Indiana. Higher-income consumers, too, are less influenced by gas and oil incremental rate hikes.

That should translate into stronger sales for upscale retailers, but even affluent consumers could hold back somewhat on holiday purchases if the stock market takes a significant plunge, the forecast warns.

Ernst & Young predicts that mid-range department stores — such as Sears, J.C. Penney, and Dillard — will again be squeezed by upscale retailers on the high end and by value retailers on the low end.

Hot retail trends include gift cards and private label merchandise. As Hoogendoorn pointed out, research shows that 64 percent of Americans will receive a gift card over the holiday.

“What generally happens is that consumers spend the gift card after the holidays but they tend to spend more than the amount of the gift card,” he said. “What happens is that the incremental buy above and beyond the gift card occurs generally in January.”

Several holiday categories, including toys, consumer electronics and apparel, should be deflationary. Deflationary prices — prices that are flat or below the prior year’s prices — have occurred in these categories due to increased production in Asia and aggressive pricing by discounters like Best Buy and Circuit City to create demand, Hoogendoorn observed.

“When you have increased capacity through increased production and you have the big box discounters being aggressive on their pricing, it’s an ideal market for the consumer.

There’s deflation in the toy segment because of weak demand, and there are no real “must haves” in the toy lineup. Generally, electronic devices and video games are expected to be more popular than more traditional toys, according to the forecast.

Hoogendoorn anticipates that in the coming weeks the market will create some “must haves” to boost holiday sales. He foresees toy manufacturers developing “exclusive” products for sale in selected retail stores, creating some element of demand because they will only be available at certain stores.

“The toy market,” he explained, “is motivated to create an exclusive arrangement with retailers, particularly given the fact that Wal-Mart dominates so much of the toy market.”

Consumer electronics is a highly competitive area between big box electronic retailers and mass merchandisers. Ernst & Young predicts “hot” items this holiday season will be USB keychain drive — a pocket-sized mini hard drive — personal video recorders and digital music players.

In today’s market, apparel is a promotion-driven business, so the success or failure of that consumer segment will hinge on retailers’ levels of promotion, Hoogendoorn noted. Private label brands of apparel and luxury accessories are expected to go over well with affluent buyers.

In the sporting goods category, hot sellers will be high-priced running shoes, licensed Boston Red Sox sports apparel, as well as football and basketball licensed apparel, golf equipment and — somewhat surprisingly — poker cards and chips.

Hoogendoorn believes the burgeoning demand for poker supplies owes in large part to the game’s exposure on ESPN’s televised 2004 World Series of Poker.

The weather probably won’t dampen sales because not buying during the holiday season is not an option for most consumers, according to Ernst & Young.

“Weather is always a factor that’s very hard to predict. But no matter how bad the weather is, it’s the holiday buying season and you have to go do it,” Hoogendoorn adds.

What the weather could influence is the type of purchases made. If the weather is unseasonably warm, consumers will likely shop for items such as consumer electronics and home furnishings rather than seasonal apparel. If December is especially cold or wet, some might choose to do more shopping online and forgo the trips to the malls.

The Internet will continue to be a popular way to buy across all product categories, according to the forecast. During last year’s holiday season, online sales were up 25 percent, and this year the expectation is it will increase 15 to 20 percent. Hoogendoorn said the slightly smaller increase this year is an indication that the Internet market is maturing.

“The Internet market will mature and stabilize its effect on holiday sales and, for that matter, sales in any quarter. As more people use the Internet routinely, it becomes part of the year-over-year comparison.”

A clog in West Coast shipping operations brought on by labor shortages and a congestion of ships shouldn’t have a significant impact on holiday shipments, Hoogendoorn said. Apparel and consumer electronics sectors would be the most affected by shipping delays, should they occur, but it won’t be anything like the West Coast dock issue of two years ago, he pointed out.

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