Shopping Forecast: Not Too Dismal

Some consumers will use rebate checks to pay down debt. Here's what others will be looking to buy.
By Elizabeth Blackwell ,

CHICAGO -- We've all been demoralized by the steady drumbeat of bad economic news: an imploding housing market, airlines sinking under the high cost of fuel, shoppers avoiding the mall and hoarding each penny to pay for ever-more-expensive food.

But the news may not be all that bad. The truth is, Americans are still shopping. That means small retail businesses should be able to weather the tough times ahead, as long as they focus on what consumers want (and what they can afford).

On the surface, the numbers do look grim. This week, the Commerce Department reported that retail sales fell 0.2% in the past month, the second drop in the past three months.

The report seems to fit the current pessimistic business climate: Worried about the economy and strapped by high gas prices, shoppers must be keeping their wallets shut. But look at the numbers a little deeper, and you'll see that the situation isn't quite so awful.

Certainly, things aren't looking good in Detroit, since auto sales dipped 2.8%. (I'm guessing sales of gas-guzzling Hummers and Suburbans dropped even lower.) But if you exclude cars, retail sales actually rose by 0.5%, higher than most analysts' estimates.

"Consumers are certainly spending money relative to expectations," says Jack Ablin, chief investment officer of Harris Private Bank in Chicago. "It's really a remarkable growth rate given the higher costs of food and gas."

Still, shoppers want each dollar they spend to go farther. "My sense is that the quality of what's selling is not as strong," says Ablin. "The sales growth we're seeing is among the discounters and lower-profit items."

That's good news for discount stores like

Dollar Tree

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, which reported last week that sales were up 7% for the first quarter of its fiscal year.

Wal-Mart

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and

Target

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both saw same-store sales rise 3% in April compared to last year. Sales at warehouse club

Costco

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went up 8% in the same month, as families stocked up on lower-cost bulk items.

To survive in this tough market, you have to show that your business -- whether it's a store or a service provider -- offers real value.

Who's Buying What

The more expensive your goods or services, the harder it's going to be to sell them.

"I would draw a line between the products that consumers can buy in cash, and the products that have to be financed -- things like cars, furniture and expensive electronics. I think that category of big-ticket items will suffer for several quarters," says Ablin.

What about those government rebate checks, which are now arriving in mailboxes across the country? Retailers hope that extra money will give people an excuse to go shopping, but a

Reuters

/University of Michigan survey found that only about 30% of consumers plan to spend their rebate; the rest will put it into savings or use it to pay down debt.

The money that is spent -- which still adds up to billions of dollars -- will probably go to lower-end stores. After all, the high-income shoppers that patronize luxury boutiques won't be getting a government check.

Even given the gloomy economic climate, a recent survey by The NPD Group, a market research company, found three categories where shoppers were least likely to cut spending: toys, video games and home improvement. Who wants to be the evil parent who cancels Junior's birthday party or provokes their teenager's wrath by saying no to

Grand Theft Auto IV

? (Like my husband, consumers may justify spending on videogames as a lower cost-per-hour form of entertainment, since those endless nights spent in a gaming haze means money isn't spent on outings to movies, restaurants, etc.)

While the crumbling housing market would seem to drag down spending on home improvement, people who have been unable to sell their homes might now be more willing to invest in repairs and upgrades rather than moving. They may also find that they have to put money into an outdated house in order to sell it in an ever-more-competitive market.

With shoppers feeling cash-strapped and trolling for bargains, this isn't a great time to be in retail. But Americans haven't given up shopping. You just have to give them a good reason to come to you.

Elizabeth Blackwell is a freelance writer based in Chicago. She is the author of Frommer's Chicago guidebook, and writes for the Wall Street Journal, Chicago, and other national magazines.

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