Holiday Retail Sales Outlook Upbeat But Not Without Reservations

November 4, 2002
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CHICAGO — Despite the looming threat of a war with Iraq, sales may surprise retailers this holiday season.

Diane Swonk, Bank One’s chief economist, projects total retail sales during November and December will rise 4.3 percent over the same period last year.

She forecasts general merchandise and apparel store sales will rise 5.6 percent from a year ago.

Swonk attributes the projected increase in retail sales to a shift in consumer focus from vehicle and household furnishing purchases to more affordable apparel and knickknack items.

In addition, demand for winter outerwear apparel is expected to increase because fewer people made heavy winter wear purchases during the relatively mild winter of 2001.

Consumers are expected to spend holiday shopping dollars on computers and software, boosting computer and software store sales by 6 percent over last year.

“The ’98 and ’99 vintage machines bought to avoid Y2K-related problems are quickly obsolescing, especially if you want to run the newest games or business applications,” Swonk explained.

Furthermore, she expects computer prices will decline again as Dell executes its previously announced strategy to capture more market share and undercuts competitors’ prices even more than usual.

The fact that computers are now commonplace at discounters such as Wal-Mart and K-Mart will further fuel computer sales, Swonk predicted.

Many retailers are worried that an attack on Iraq before the holidays could prompt consumers to stay home, glued to the TV as the invasion unfolds, much like they did during the Gulf War.

But a war with Iraq would more likely be fought on the ground rather than in the air, which was the Gulf War strategy, she said, and a ground war is much more difficult to televise.

Furthermore, even though Sept. 11 was the worst terrorist act ever perpetrated on the United States, it only slowed consumers for a week or two, Swonk added.

She said many retailers also are concerned that recent West Coast dock strikes and subsequent shipping delays will leave them short in the toy department.

Dockworkers “still appear to be unhappy and seem to be further delaying shipments,” she noted.

“The good news is that it is not Christmas yet, and what is lost will eventually be recouped. We still have ample time to meet the demand of a consumer that continues to push its holiday shopping back further and further,” Swonk said, adding that for some retailers, the week after Christmas is now the “make or break” period for holiday sales.

Many of the larger retailers stockpiled holiday merchandise in advance of the strikes.

“This is at least part of the reason that imports were so strong in August. Retailers were scrambling to get their orders in early.”

Overall, retailers were generally more conservative than they have been in the past in placing orders for the holiday season.

Tight inventories could limit holiday discount offerings or the selection of merchandise and apparel for those who hold off purchases hoping prices will go down, Swonk noted.

“The fact remains, however, that holiday shoppers have been trained almost as well as vehicle buyers: When promotions are prevalent, they buy; when they aren’t, they don’t.”

Retailers aren’t expected to hire seasonal help as aggressively as they have over other holiday seasons.

Swonk said that with profit margins already razor thin, retailers will try to do more with less.

On the upside, sales clerks are likely to be more skilled than the temporary holiday workers hired in recent years because the labor pool is larger and retailers can be more selective in hiring.

The greatest risk to the holiday retail outlook is the uncertainty of war with Iraq.

“The longer businesses hold off on executing their business plans because of oil price uncertainty, the fewer payroll gains we will see before Christmas,” Swonk said.

And if an invasion of Iraq triggers a spike in already higher than normal oil prices before the holidays, consumers would have less purchasing power.

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