September 13, 2009 in Business

Recession forces retailers to think small

Anne D’Innocenzio Associated Press
Associated Press photo

A customer looks at no-frills laptops at in Chicago.
(Full-size photo)

High closure rate

About 143,000 stores closed last year, the highest number since 2001, according to an analysis of government figures by Michael Niemira, chief economist at International Council of Shopping Centers.

NEW YORK – The Great Recession and Americans’ retreat into thriftiness are teaching retailers a new lesson: how to survive when consumers are focused on “needs” rather than “wants.”

For years, shoppers splurged on everything from $5 lattes to $200 jeans, and retailers responded by opening more stores and offering more choices. Now, beset by high unemployment and limited access to credit, shoppers are limiting most of their purchases only to essentials or the best deals.

Retailers’ first response to the sudden and sharp pullback in spending last fall was to offer deep discounts and more coupons to keep merchandise moving. But to survive over the long haul, the watchword for stores and product makers is “small.”

They’re stocking shelves with slimmed-down milk jugs and half-sized pies. They’re charging less for stripped-down products such as blouses with less-frilly designs and detergents with less powerful cleaning action. Brands are disappearing, too, including Kraft’s Handi-Snacks pudding. Some stores are being reduced in size, if they’re not shut down entirely.

The changes are likely to last for years. Even when the economy improves, it will take years before the debts that piled up during the decade-long shopping spree are paid off. Americans are also getting used to their newly adopted frugal habits of saving more and spending less.

“I don’t think we are going to go back to business as usual,” said Steve Sadove, chairman and CEO of Saks Inc., operator of Saks Fifth Avenue.

As companies woo buyers, shoppers are finding they’re in control. And they’re driving hard bargains.

Renee Bello, a real estate broker in Sandwich, Mass., is enjoying the bombardment of store coupons, more lower-priced products and better quality in store-label merchandise, particularly at grocery chains.

“I definitely feel I have power,” says Bello, 54, who has been able to grab coveted brands and high-quality groceries even though she’s cut her spending in half because of economic uncertainty.

For retailers, the changes need not be devastating. In fact, those that survive will be leaner and more efficient.

“There’s nothing like a good old-fashioned recession to make you run a better business,” J. Crew Group Chairman and CEO Millard Drexler said recently.

Less is more

To stay in business, stores find they can’t take big chances with what they put on the shelves, and how much they stock of each item.

Merchants now keep less stock on hand and deliver goods into the store more frequently to keep stores looking fresh, instead of having items sit on the shelves for months. Retail executives hope that strategy will help cut down on aggressive discounting.

The long-term goal is for merchants to carry about six weeks’ worth of inventory, compared with 3 ½ months in the past, says retail consultant Burt Flickinger III.

Apparel companies are focusing on the most popular colors instead of oddball hues. For example, Nicole Miller eliminated olive green in its prom dress collection. And plain styles were prevalent at last week’s apparel industry trade show in Las Vegas, says David Wolfe, creative director of The Doneger Group, which advises stores on apparel buying.

Shoppers won’t buy tops or dresses with seasonal designs because they want to wear the clothes year round, he says.

The power of lower prices

Manufacturers and retailers that held firm on pricing a year ago to try to protect their brands have felt the sting.

Consumer products giant Procter & Gamble Co., whose revenue fell 11 percent in the latest quarter as it remained steadfast on pricing for its powerhouse brands, is experimenting with price cuts. In a departure from the company’s carefully cultivated premium image, P&G is even testing a lower-cost version of its signature Tide laundry detergent.

Abercrombie & Fitch, long known as the go-to store for pricey teen fashion, was hammered by revenue declines of nearly 30 percent when it refused to budge on prices. It relented this summer.

And Saks has had to shift toward the lowest and mid-tier price points at its stores. More men’s dress shirts range from $95 to $200 and fewer are priced at $300 or more.

Price cuts are painful, so manufacturers and retailers maneuver to avoid them by identifying goods with strong demand. If they must cut prices, they cut costs, too, to maintain profit margins.

Retailers are also throwing out their devotion to premium brands. From Best Buy’s private-label televisions to Kroger’s pizzas to house-brand men’s shirts and sports coats at Saks Fifth Avenue, stores are putting more stock in store-label products, which cost less for consumers and tend to be more profitable.

This year, 37.5 percent of business is expected to be from store brands, according to a survey by the National Retail Federation. Two years ago, that figure was 26 percent.

Marketing value

Consumers’ focus on value and saving money has shaped how products are marketed as well. Sellers are becoming more sympathetic to consumers’ woes in their ad campaigns, a big shift from past recessions in which they focused on price-cutting.

In the past, “retailers had a hard time acknowledging (in ads) when things were bad,” says Ellen Davis, a spokesman at NRF. They feared it would make their business worse.

These days, higher-priced products like Hefty’s odor-blocking trash bags are advertised as money savers because the garbage won’t get so smelly that it has to be taken out before the bag is full. Commercials for Toyota’s Lexus luxury brand tout practical attributes like fuel efficiency, instead of emphasizing prestige.

Marketers are vying to be remembered as “the companies that helped see us through” the hard times, says Julie Winskie, president and chief client officer at public-relations agency Porter Novelli.

Stores closing

Chains have cut stores and shut down unprofitable offshoots that sought to slice the consumer pie into thinner pieces. Since last year, Starbucks Corp. has worked to close about 900 stores. Office supply chain Office Depot announced in July that it was closing 9 percent of its North American stores.

About 143,000 stores closed last year, the highest number since 2001, according to an analysis of government figures by Michael Niemira, chief economist at International Council of Shopping Centers. He predicts 140,000 more will close this year and 135,000 in 2010. That will worsen the already gaping holes in malls across the country.

© Copyright 2009 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

Thoughts and opinions on this story? Click here to comment >>

Get stories like this in a free daily email