Retail Forecast: Economic Downturn Requires Damage Control Measures, Consultant Advises

Furniture World Magazine

With the U.S. economy already slowing down and prospects dimming for a successful holiday season, the horrific events of September 11 have exacerbated weaknesses in the economy and contributed to a lessening of consumer confidence. For retailers, these events will likely lead to a flat fourth quarter at best and a continuation of the trend towards bankruptcies and downsizings well into 2002, according to consumer product industry consultant David Ellis of Buxbaum Group. In fact, it could take upwards of a year for the retail market to hit bottom. "No one wants to understate the enormous number of human tragedies resulting from the September attacks, but on an economic level, they were a catalyst that accelerated trends already there: a downturn in consumer spending, a decline in several markets, and concern among consumers about their wealth and their jobs," said Ellis, Chief Operating Officer of the Encino, Ca.-based firm. "Without the attacks, these trends might not have become so evident until the first quarter of 2002. "With everything that’s happened, the best possible scenario for this year’s holidays is a season of flat fourth quarter sales," he continued. "But even more important than sales volume is profit margins. The question becomes: Are retailers going to have to buy their sales volume through discounts and promotions? I don’t think we’re going to see a lot of people making money in this critical fourth quarter." Ellis advised that retailers could reduce the negative impact of these events by minimizing inventories and downsizing their expense structure. "It’s better to hold shorter inventories and order more frequently—even at the risk of out-of-stocks— than be overstocked," he noted. "The smart retailers have always operated lean and held inventories close. This year, their challenge is to deal with the hand they were holding on September 11. There are orders that can’t be cancelled and large inventories that can’t be reduced immediately." Big-ticket items and some specialty fashion and luxury items are expected to be impacted the most during the 2001 holiday season. "Everyone is going to shop for Christmas," Ellis remarked, "but the question is, what will they pay for their purchases?" Looking ahead to the first quarter of 2002, he observed that the economic downturn in the second half of this year was part of a "settling out" process in which retailers had to contend with a downward spiral in sales, which was also deeply felt by manufacturers. "There is a longer-term phase to that settling out that will definitely carry over into the first and second quarter of next year," he noted. "I believe we have another year before we see bottom, then stabilize, and then start working back up." As part of that settling out phase in the new year, Ellis sees a continuation of the trend toward bankruptcies and downsizing that began earlier this year, when more stores closed during the first half of 2001 than in all of 2000 and 1999. For many of these struggling companies, the single biggest challenge is knowing when to reach out to outside professionals, who can help retailers downsize under-performing locations, exit weak markets altogether, and sell under-performing categories and stock. "We operate a business that helps retailers before they reach the point of liquidation, but many companies are opposed to talking to a turnaround firm or a liquidator until it’s too late," Ellis said. "They’re good at running an ongoing business, but that’s different from exiting stores and markets. They should be focusing on ongoing business issues and allow others to help them survive the transition." Buxbaum Group provides inventory evaluations, turnaround and crisis management and other consulting assignments for banks and other financial institutions with retail, wholesale/distribution and consumer product-manufacturing clients. In addition, the firm provides liquidation services on consumer product inventories, and machinery and equipment, and buys and sells consumer product inventories.