Poll Result: 2011 Economy

Our year-end poll asked readers to look into their crystal balls and forecast the economy: “At this time next year, will we be in the midst of a strong recovery?” The consensus was that there was no consensus:

• 35% Yes
• 48% No
• 17% Too many unknowns

Our readers tend a bit to the bearish side, as summarized by one of our comments: “I want to believe it’s turning around. I really do. But we’ve had this ‘green shoots’ talk a bunch of times already. There are some things that are looking good – we had a very good holiday season. But there are also a lot of ugly obstacles in front of us. Europe makes me very nervous.”

A Year-End Visit to the Corporate Graveyard

A listing of companies that went bankrupt and brands that disappeared in 2010 includes a number of retailers -- Blockbuster and A&P most notable, but also Urban Brands and Jennifer Convertibles. A lot of car brands on the list, as carmakers downsized -- Mercury, Pontiac, Hummer ...

I was also struck by not just the number, but the variety of media listed. There was Affiliated Media, which publishes a bunch of major newspapers (San Jose, Denver, etc), but also Penton Media, a trade press group (Nation's Restaurant News and Farm Press among them), and trashy tabloid publisher American Media (National Enquirer, Star). And then there was mainstream magazine Newsweek, which didn't exactly go bankrupt, but when you're sold for $1, it's pretty much the same thing.

Most of course are just companies that over-expanded or got over-leveraged in buyouts when things were good. That's usually the story in a recession. But the broadness of the media category of failures is a reminder that there's a systemic element to this. We all are conscious of the effect of the internet on local newspapers and broadcast (though there were no big broadcasters on the list), but trade press is equally damaged by the changing dynamics of news delivery. And as for gossip -- who needs to read it in the checkout aisle anymore?

Recessions get a bad rap

Advertising Age had an article last week about the big increases being seen in private label, “Don't Blame Private-Label Gains on the Recession”.

Not only have private label brands been gaining share for the past decade, experts say these gains are the single-biggest problem facing branded packaged goods players. House brands, once a staple of lower-income households, now enjoy roughly equal penetration among demographic segments. Improvements in quality and packaging have helped removed the stigma attached to buying a no-name product.

The recession has accelerated the growth of private label, but it is a long term trend that was happening before the recession and will (presumably) continue, though at perhaps a reduced rate, when the recession is over. The increasing concentration of retail, and the increasing power of the surviving retailers, virtually ensures it.

That’s an interesting thing about recessions – they speed up trends that already exist, especially speeding up the effects of secular decline. Besides private label, we see similar effects from the recession in media and retail. (I did a similar post on this point almost exactly a year ago).

Some of the biggest (or at least most publicized) hits in this recession have been felt by the big media, especially newspapers. But media watchers have been warning about the effects of media fragmentation for the past few years (I did a presentation on its effects on trade promo at a TPMA meeting three or four years ago – and I wasn’t first), and newspapers have been in decline even longer. The recession has merely exacerbated existing problems.

In retail, department stores are hurting, and several chains (including Linens ‘n Things and Circuit City) have liquidated. But the consolidation of channels has been killing off the also-rans in each channel for years now, and department stores’ market share has been dropping for decades. Again, the recession has just sped up processes that were already in action.

It’s convenient to blame recessions for business problems. But often the recession merely exposed the problem, it didn’t create it.

Some brand marketers may want to believe that the recovery will solve their problems with private label, and media people and retailers may have similar dreams, but the recovery will solve nothing if the underlying problems are not addressed.

S&P downgrades Macy's and JCP to junk

Standard & Poor's has lowered the ratings on pretty much the whole retail sector, it appears, with Macy's and J.C. Penney taking the biggest hits.

"The rating actions reflect Standard & Poor's deepening concern about the impact of the U.S. recession on the increasingly troubled department store sector," Standard & Poor's credit analyst Diane Shand writes in her reports, "which has felt the full brunt of the declining U.S. economy and weakening consumer confidence in 2008. We believe lower consumer spending and declining mall traffic will affect the sales and profits of the department store operators this year," Shand writes, "and that recovery will be slow."

I'm not a market analyst (as a glance at my portfolio would quickly prove), but I certainly agree that "recovery will be slow" for the department store sector, since their problems pre-date the recession and will continue after the recession is over.

When retailers suffer, so do mall owners

General Growth Properties (ironic name), the second-biggest owner of shopping malls, declared bankruptcy this week, a victim of the ripple effects from the battering of their retail tenants. The company had $25 billion in debt, much of it coming due next year, and had bought out Rouse Company for $12.6 billion in 2004.

As more stores have closed, mall vacancies are at their highest point in almost a decade, according to Reis, a research company, which said the vacancy rate at the end of 2008 was 7.1 percent, compared with 5.8 percent at the end of 2007.

That has left many of the roughly 1,500 malls in the United States groping for a solution — any solution — to their woes. Some have converted retail space into office space. Others have drastically lowered rents for prized tenants, agreeing to cut deals to keep revenue flowing. Some have simply gone dark.

Shares in General Growth, which closed on Wednesday at $1.05, have fallen 97 percent over the past 12 months.

Down 97% -- sounds like some of my investments.

A few positive indicators

In my never-ending quest to counter what seems to be the never-ending pessimism that I hear around me, I want to point out some of the good things I came across this week.

First, we have this item, confirming previous similar surveys of economists I've read:

A group of financial wizards looked into their crystal ball Tuesday and saw some good news.

The recession will ease by the end of this year and companies will begin adding workers, signaling the end of the worst economic downturn since the Great Depression.

We'd all rather that the recession ends tomorrow, of course, but year-end doesn't seem all that far away.

And then there's this, indicating that consumer confidence, while low, is trending upward.

For the past two weeks, the percentage of respondents in The Gallup Poll who say the economy is getting better has been steadily ticking up. Monday through Wednesday, 29% took the optimistic view — the highest number since July 2007.

And finally, more specific to our business, we see Wall Street rallying on good news from consumer products companies and retailers:

Better-than-expected earnings from big consumer brands Best Buy, ConAgra Foods and Dr Pepper Snapple Group sent the Dow Jones industrial average up more than 174 points Thursday to its highest level in six weeks. It has surged 21 percent since hitting a nearly 12-year low on March 9.

Put it all together and we get ... nothing definite, but perhaps some reason for cautious optimism.

The Trade Promo Stimulus Act of 2009

There was an article in Brandweek last week advocating a stimulus plan for advertising:

The government's stimulus plan won't work as planned if we don't get consumers spending again. But in the nearly $800 billion package, there is one thing missing that would surely help accomplish this: advertising. To get people spending again, and the economy moving, the government needs to provide help for businesses in America to advertise their products and services.

The author says that companies should receive a tax credit for advertising.

I will admit that when I read the article, my first inclination was to make fun of it. After all, it seems everybody is jumping on the bandwagon (perhaps I should say “gravytrain” instead) and asking for some of the taxpayers’ money.

But there is at least some merit in the idea. It is a proven fact that maintaining advertising in a recession has positive effects for a company (I wrote an article almost a year ago for the Journal of Trading Partner Practices, "The Importance of Recession Marketing Remains Constant through Time", summarizing results of studies on recessions from 1921 through 2001).

The problem is that the positive effects of advertising are not always immediate. Though some of the studies indicate that companies that maintain their advertising do better during the recession, most of the effects are seen when recovery comes. The point of a stimulus package is to stimulate now, right? So what form of promotion is it that has an immediate sales effect? Trade promo, of course: co-op/mdf, TPRs, end caps – all are intended to drive immediate incremental sales. So suppliers should receive tax credits to encourage them to spend more on trade promo.

But that isn’t all. We know that not all promotions are successful. There are some great analytics and forecasting tools out there that will help suppliers and retailers choose better which promotions will work. But unfortunately, many suppliers have not yet purchased and implemented such tools and, because of budget cuts, cannot do so now. Since the government wants their stimulus money spent effectively, it makes sense that they should subsidize the purchase and implementation of the best available trade promotion forecasting tools, which will then assist suppliers and retailers in designing promotions that will drive greatly increased sales and therefore save the economy and the country.

That’s OK, you can thank me later. Well, actually, when this bill passes, I expect something a bit more substantive than a “thank you” from Oracle, SAP, DemandTec and the others who would be the principal beneficiaries. I prefer cash – it stimulates my bank account.

Just in case you’re wondering – no, I’m not serious. Though I do think it makes better sense than subsidizing advertising. Come to think of it, it makes more sense than a lot of the stuff I’ve heard.

NRF predicts return to growth in Q4

The National Retail Federation predicts that sales will be down 2.5% in the first half of 2009, down 1.1% in the third quarter, but will rise 3.6% in Q4 (compared, of course, to weak sales in Q4 '08).

They also think that retailers have now reduced inventory enough that price-cutting will abate a bit:

"Because of what's happened, retailers are being more conservative with inventory, and so the need to have that panicked price-cutting is lessened," says Wells. And in addition to better inventory management, adds an NRF spokesperson, stores are "trying to be efficient as possible, to do more with less in their advertising, and sometimes changing their merchandising mix."

Are we there yet?

TNS has published some data suggesting that we may have reached the bottom of the recession. I'm optimistic enough to think they may be right, although their evidence is just a few data points (December was -1.5% in retail sales, a slight improvement over November's -2.5, and consumer shopping intentions improved very slightly).

I'm contrarian enough that my willingness to accept the data may just be my reaction to what sounds to me like wildly overstated cries of doom, but it does seem likely to me that if we are not at the bottom we are likely very near it.

TNS predicts 2% retail growth in 2009

The forecast is not what any of us would ordinarily hope for, but right now anything with a plus sign in front of it is looking pretty good.

For 2009, sales growth for the year (excluding automobiles and gasoline) is forecast to approach 2% growth compared with the 2.3% average growth for 2008 through November, based on data reported by the U.S. Department of Commerce.

TNS Retail Forward anticipates a rebound to occur in 2010 and gain momentum through 2013, when annual increases in sales will again approach the 5% average growth rate of the past 10 years.

I wonder if it's realistic to expect to regain 5% annual growth in retail sales -- GDP growth and income growth were both below 5% over the recent past, so is such a figure sustainable for retail sales over the long haul? I'm not an economist, but it seems like perhaps we should recalibrate our expectations -- both as consumers and as marketers.

Retailers cutting marketing (or maybe not)

Lesson #1000 (or so) on why you shouldn't believe media headlines. Ad Age has an article with this header:

Retailers Shrink Ad Spending During Holiday Sales Period

But the actual story indicates that a survey says that 32% of retailers are cutting their marketing budgets, which would seem to indicate that more than 2/3 are not cutting.

BDO Seidman said that of the 100 chief marketing officers surveyed, 32% report having a smaller holiday advertising budget than last year. Forty-three percent of retailers said their budgets are flat, while only 25% said their budget would increase for the holiday season.

Hmmm ... that reads a little differently from the headline, doesn't it?

How to spin a story as negatively as possible is also demonstrated in this paragraph:

But CMOs are not only pessimistic about the holidays, they are uncertain about the economy's ability to recover. The vast majority, or 65%, of CMOs surveyed said they do not expect to see a meaningful turnaround in the economy until the third quarter of 2009 or later. Twenty-nine percent expect a recovery in the third quarter, while 17% are looking to the fourth quarter of next year for a recovery. Nearly a fifth of CMOs say they don't expect a turnaround until 2010.

Let's do some math: Apparently 35% of CMOs think the economy will recover earlier than Q3 '08, and 29% think the recovery will come in the third quarter, which means instead of reading:

The vast majority, or 65%, of CMOs surveyed said they do not expect to see a meaningful turnaround in the economy until the third quarter ...

It could just as truthfully read:

The vast majority, or 64%, of CMOs surveyed said they expect to see a turnaround by the third quarter ...

But that would be unchicly positive, wouldn't it?

Okay, I'll stop the bashing long enough to point out a rare positive piece of news for the newspaper biz -- 57% of respondents plan to spend a majority of their budgets in print.

Deflation and trade promo: A bit of speculation

Having just written an item about how things aren't really quite as bad as we sometimes worry, now I'm going to offer a bit of speculation on the effect on trade promo if things got considerably worse in one area. What would happen to trade promotion if we entered a period of deflation?

Although it remains very much a long-shot (the WSJ economists' survey referenced below says that we'll have mild inflation next year in the US, about 1.5% or so), the possibility of deflation has gotten a bit of buzz lately, not just in the US, but around the world. A quick round-up:

• India's Economic Times has an article on the (remote) possibility of deflation there.
• This item says that consumer prices in Ireland will decline next year (by a modest 0.5%).
• The UK's Times reports on concern about deflation in that country.

There are lots more, just enter "deflation" into Google News and you'll get your fill. All make the point that deflation is unlikely, and that it has severe consequences only if it continues for a protracted period, which is even more unlikely.

But still: what if?

The reason I ask it in regard to trade promo is that it is often argued that the great increase in trade funding (which was in the low single digits when I got into this business -- a 5% co-op allowance was considered generous) began in the high-inflation seventies, when consumer goods manufacturers began raising prices dramatically as a hedge against the possibility of federal price controls (which were imposed, then withdrawn). The idea was to have a pro forma price increase so that the high price was on the books, but to give most of the increase back to the retailers as allowances.

Would deflation reverse that process? Would an extended decline in what suppliers could charge retailers cause cuts in promotional spending?

Given the large percentage of spending that goes into cutting prices at the shelf, especially in CPG and food, would there be a need for large trade promo budgets in a deflationary environment? What's the point of promoting your price cuts when shoppers have come to assume that prices are going to decrease?

Again, this probably won't happen, but occasionally it's interesting to consider possibilities. It would certainly be different, since none of us have seen deflation in our lifetimes (unless we've lived in Japan), which is what makes guessing the results difficult.

Is this the bottom?

I've become a bit frustrated with news reports about the economy, which have often carried pessimism to extremes. I realize that bad news sells better than good (TV news has long been guided by the mantra "If it bleeds, it leads"), and there certainly is no basis for dancing in the streets; but comparisons to the Great Depression (25%+ unemployment) seem a bit premature (to put it kindly) when inserted into articles reporting that the unemployment rate has risen to 6.5%).

I thought, therefore, that I would pass on an item on some forecasts by people who, unlike journalists, actually know what they're talking about -- the Wall Street Journal's quarterly survey of leading economists. It's certainly not good news, except in comparison with what your local paper is reporting. A few of the consensus findings:

• GDP, which declined 0.3% in the third quarter, will hit a nasty -3.0% this quarter. It will be a little better (but still bad) in the first quarter of 2009: -1.5%. Then it will be flat (+0.3%) in Q2, and the return to modest growth in the second half (Q3: +1.6%, Q4: +2.1%).
• Employment, as we've seen in recent recessions, will be slower to recover -- they predict 7.5% in June 2009, and 7.7% in December.
• Oil is a bright spot, since the consensus is that the price will stay below $65/barrel through 2009. Inflation will be below 2%.
• Housing will stay bad (which means I'm stuck in my house for another year at least),with prices dropping another 3.5%.

Again, this is not at all what any of us would like to see as an economic forecast. But I point it out only because it is nowhere near the "sky is falling" that we often read and hear.

Here's a write-up on the survey by one of the economists who participated in it. He's slightly more pessimistic than the consensus (he forecasts unemployment topping at 8.5%), but the main point of his piece is that the recessions of 74-75 and 81-82 are far more accurate comparisons than the 1930s.

Circuit City files Chapter 11

It has seemed inevitable -- the question gradually becoming when rather than if. We had a post not quite a month ago reporting speculation by an analyst that CC would file for bankruptcy early in 2009. The problem is that once rumors reach that level, they become self-fulfilling. Creditors reading such things begin cutting back, vendors hold off shipments, and ... bankruptcy follows.

So the only surprise was only that they filed before Christmas rather than after:

Circuit City, the biggest electronics retailer in the U.S. until the mid-1990s, filed for bankruptcy before it had a chance to take in cash from the holiday selling season, when it gets more sales than any other time of the year. [...]

"It's very incongruent for retailers to file bankruptcy before Christmas,'' Burt Flickinger, managing director of consultant Strategic Resource Group in New York, said in a Bloomberg Television interview.

However, subsequent the the analyst speculation mentioned above, there was the news that NYSE had warned Circuit City about their stock price dropping too low to meet Big Board standards, and then the announcement last week that CC is closing 155 stores. The combination proved too much for the vendors

A list of creditors is included in the linked report. H-P and Samsung are the biggest, each on the hook for more than $100 million.

Circuit City will continue operations as it attempts to reorganize.

Good news break -- leading indicators up

The Conference Board's index of leading economic indicators, which began dropping in the summer, showed an increase in September, taking a lot of people by surprise.

The New York-based business research group said its index of leading economic indicators rose 0.3% in September. Economists were expecting the index to have declined 0.1%, according to a survey conducted by Briefing.com.

In August, the index fell a revised 0.9% after a 0.7% decline in July.

Economic conditions started deteriorating this summer, and the recent volatility in the stock market and the credit crunch will "no doubt weaken the economy further," Ken Goldstein, a Conference Board economist, said in a statement.

"But latest data suggest that conditions in the non-financial economy are not falling apart," Goldstein said. "Data on hand reflect a contracting economy, but not one in free fall."

So things are bad, but not horrible. Which, compared to much of what we hear, is good.

More liquidations, fewer reorganizations

If it seems that this economic cycle has more bankruptcies resulting in liquidation than in the past, that's because it's true. Changes in bankruptcy law, combined with extra-tight credit, have made it tougher for companies to recover from Chapter 11.

Private-equity firms, once flush with cash and eager to buy retailers for their real estate, aren't in the hunt.

And big chains that had been obvious buyers in the past, such as Nordstrom, Target, J.C. Penney, and Kohl's, are cutting back expansion plans.

"There is less of a population of people to sell these things to and it is creating more difficulty for those retailers to get out of those leases ... "

Retailers have less time for reorganization under the new bankruptcy laws, which might once have allowed a company to stall a bit until things improved enough that bad leases could be shed and credit arranged.

Overall, as the graphic shows, the number of bankruptcies is not unusually high -- this year and next will probably roughly equal the last downturn in 2000-01, but fewer of those companies going into Chapter 11 are likely to come out.

The Economist looks at retailing

The Economist has a worthwhile read on the state of retailing in the US noting, not surprisingly, that the chains that were struggling before the downturn are most vulnerable now. They name some names (not all of which are not the usual suspects): Sears, Target, Whole Foods.

Beyond that point, though, they argue that retailers must respond quickly:

No retailer can afford to delay its response to this downturn in the hope that sales might somehow recover, argues an article by Ashish Kotecha, Josh Leibowitz and Ian McKenzie in the McKinsey Quarterly, published by the consultancy of the same name. This contains a study of the past two downturns in American retailing, in 1990-91 and 2000-01, which found that retail revenues were quick to fall and slow to recover, even once the economy started to pick up. Thus, the authors argue, “retailers should move quickly to minimise performance deterioration”.

That may be easier said than done. Efficiency-enhancing restructuring was already needed in many cases. If retail bosses failed to make necessary changes before, analysts say, it remains to be seen whether they can implement them now.

I was pleased to see, also, that they agree with the point I have made about the importance of getting pricing right in this environment::

Another conundrum is how far to cut prices to shift stock. [...]

Some retailers are finding that deep price cutting may have a perverse effect, according to Mr Silverstein. Rather than see an opportunity to snap up a bargain, today’s value-obsessed American shopper is “just as likely to push the pause button, thinking that if the shop is cutting prices this much now, I might get it even cheaper in a few weeks when the economy gets really bad”. In other words, wait while stocks last.

Not quite such a conundrum if you have the right data and the right tools to analyze the data.

Some folks are still growing

Not every retailer is closing stores, filing Chapter 11, or liquidating. Anna's Linens is still opening stores:

Anna's Linens last month opened a second Santa Ana store that sits less than 3 miles away from its other location in the same city.

The Costa Mesa-based discount home furnishings chain signed the lease for the new 9,200-square-foot store in August.

"It was not on our original 2008 new-store plan," said Scott Gladstone, chief operating officer. "However, we are always looking for opportunistic real estate to add to our portfolio of stores."

This makes 263 stores for this chain, which I guess makes them #2 in their category, now that Linens 'n Things is gone.

Target opened 45 stores last Friday, and Kohl's is opening 47 stores in the last quarter of the year, bringing them up to 1000 stores total.

The news is never all bad or all good.

Icelandic bankruptcy saga has channel implications

Bad joke alert: Be on the watch for headlines with "meltdown" puns. I was just barely able to restrain myself.

But the jokes will probably not go over too well in Reykjavik, where the possibility exists that the whole country may declare Chapter 11, where the currency has lost half its value, and:

"The country's top four banks now hold foreign liabilities in excess of $100 billion, debts that dwarf Iceland's gross domestic product of $14 billion.

I've only commented a few times on the stockmarket and banking situation recently, mostly because I'm utterly ignorant on the subject, but this aspect of it has a direct application for channel marketers, since Icelandic investors have gone in heavily for retail ventures, especially in the UK.

Investment group Baugur, baed in Iceland, owns outright or has stakes in a number of UK high street companies, including Woolworths, Debenhams, frozen food retailer Iceland and Whistles.

Hamley, House of Fraser and other large retailers also have Icelandic ties.

About bankruptcy

The recent bankruptcies of (among others) Steve & Barry's, Mervyn's, and Boscovs has brought to light something of which I was unaware (or at least had given little thought to). The changes in bankruptcy law a few years ago, which at the time were discussed mostly in terms of their effect on consumers, are having an impact on the way retail and other commercial bankruptcies play out. This article in BusinessWeek explains some of the ways in which the law has changed, and how it impacts retailers.

File for bankruptcy, and the pressure now intensifies enormously. Prior to 2005, debtors had 60 days from filing for Chapter 11 to assume or reject a lease. Most of the time, bankruptcy courts would grant repeated extensions that lasted two years or more. Bankruptcy experts argue that gift of time was crucial: They say it takes a minimum of two Christmas cycles before a retailer is ready to put its finances in order and see if its reorganization plan is working.

But mall owners don't like to house bankrupt retailers. An extended, court-run reorganization can hurt the landlord's chance of securing positive financing terms. The real estate industry lobbied successfully for the 210-day cap on how long companies have to assume or reject leases. "Macy's got at least two Christmas seasons, but today if a company files in January, they don't even have until Christmas to decide what they will do," says lawyer Gottlieb.

Other changes require cash deposits to utilities, give priority status to claims from vendors who shipped within twenty days of the filing, and put a limit of 18 months on filing a restructuring plan. These terms will make it more difficult for some of the bankrupt retailers to restructure.

"Stores immediately lose working capital," says Harvey Miller, a partner and bankruptcy specialist at New York law firm Weil Gotschal. He worked with Macy's in the past and has recently worked with several retailers including Goody's Family Clothing, a 355-store chain that operates in 20 states and filed for bankruptcy on June 9. Miller says Macy's reorganization, which took four years, wouldn't have been possible under the new setup.