Retail Slowing Down

Even if we manage to dodge a recession in 2008, the extended housing downturn, the broadened credit crunch and elevated energy prices will work to slow retail sales growth.

The sharp housing downturn will do the most damage to households’ spending for retail items, with sales of home-related goods – such as appliances and building materials – among those most affected. Because home values are steady in Georgia, the effects of less active housing markets do not pose as big a risk to in-state retailers as they do to retailers operating in states where existing home prices are declining sharply.

Nonetheless, retailers in or near neighborhoods with high numbers of “toxic” mortgages and foreclosed properties will suffer so long as substantial numbers of those properties remain on the edge of bankruptcy or vacant. In contrast, retailers operating near concentrations of rental housing may see sales rise as families move into rental units in lieu of purchasing a home, or move from homes they have lost to their creditors.

High prices for gasoline, home heating oil, natural gas and electricity will reduce low- and middle-income households’ retail spending ability. Discretionary goods and aspirational luxury goods will be hit the hardest by the energy shock. The weak dollar will cause the price of imported consumer products to rise.

These negative forces will have virtually no impact on retail spending by high-income or high-net-worth households, however. Retailers who specialize in selling genuine luxuries may enjoy both top- and bottom-line growth in 2008.

Assuming that Georgia’s economy does not tip into recession, overall retail sales should expand by 4 percent to 5 percent in 2008, reflecting support from several economic forces. The state’s unemployment rate is low, and the number of jobs will increase by 1.1 percent.

Georgia’s substantially above-average population growth – double that of the nation – is a big plus for in-state retailers. Finally, more out-of-state and international visitors will benefit retailers located in major business and tourism destinations, such as Atlanta and Savannah. Spending by foreign tourists should be vigorous given the strength of their currencies relative to the dollar.

Although retail sales will expand in 2008, accelerating labor costs, higher financing costs, higher transportation costs, the necessity to invest heavily in new retail technologies, and more competition among retailers will put more intense pressure on retailers’ net profit margins.

One positive countertrend is that shoppers will gravitate toward private label brands developed by retailers, where prices are lower and profit margins typically are higher than those of premium national brands. The private label phenomenon will spread into almost all product categories. Still, the overall outcome of these pressures will be to substantially reduce net margins, causing retailers’ overall profits to either decline or to grow much more slowly than their overall sales.

One obvious implication of slower sales growth is heightened competition, which typically encourages restructuring. But capital will be much less readily available to finance retail projects in 2008. The net effect of these opposing forces will be a moderate decline in expenditures for restructuring.

Three major themes will dominate the restructuring. First, large retailers will gain at the expense of smaller retailers, though a counter-trend favors a few types of smaller stores, such as convenience and luxury stores.

Second, discount and luxury retailers will gain market share at the expense of mid-price retailers.

Third, online retailing will continue to experience rapid growth. Super-centers and e-tailers will gain market share at the expense of grocery stores, traditional department stores, drug stores and mom and pop operations.

From 2002-2006, Georgia saw an unusually large number of new subdivisions – fueled by population growth, historically low mortgage rates and lax lending standards. The result: new desirable retail locations, some of which have yet to be developed.

Although these retail gaps are filling rapidly, those still unfilled will continue to prompt new retail development in areas of the state that experienced substantial population growth. Much of this new development will be on the urban fringe and will be anchored by grocery stores. In already built up areas, most new retail development will come at the expense of established retailers. Still, urban retailers do gain from gentrification and conversion of commercial properties to residential uses.