Selling Growth

Selling Growth

The U.S. economy will gain strength over the course of this year. The United States will get a value-added tax. Home improvement retailers will see a couple of good years. “Value” retailers will be the best performers. Despite an improving retail climate, inventories will be kept tight.

Those were some of the predictions emerging from the opening general session at the National Retail Federation’s annual conference and trade show last week in New York, where beyond the prying eyes of the usual transportation world, the country’s retailers unveiled their outlook for trends and the economic drivers over the coming year. The speakers in the hour-long session were Mark Zandi, chief economist of Moody’s, Allen Questrom, the retired chairman and CEO of J.C. Penney and a current Wal-Mart board member, and Howard Levine, chairman and CEO of Family Dollar.

The perspective of the panel was somewhat skewed because Wal-Mart and Family Dollar are in the “value” category of retailing, but the comments were telling because they represent an industry that drives cargo volumes and accounts for 70 percent of the U.S. economy.

Zandi is optimistic about the economy this year, pointing to expected gains in employment and a continuing deleveraging of household finances that will improve consumer spending. “The economy today is measurably better than it was a year ago, and it will be measurably better a year from now,” Zandi told the conference.

He believes retailers, the nation’s largest employer category, are “right on the cusp” of adding jobs, predicting the economy a year from now will be adding 150,000 to 200,000 net jobs a month. He said sales declined 3 to 4 percent in the 2008 Christmas season but likely grew 1 to 2 percent in the just-finished 2009 season, and 2010 will see a 3 to 4 percent increase. “I think we’re going to be pleasantly surprised by Christmas 2010,” Zandi said.

Family Dollar’s Levine is more cautious, not in the broad-brush numbers but in his view of general economic equilibrium. “The economy is still very fragile. We’re all optimistic and thinking what is best and hoping for that, but there is a concern about all the uncertainty out there,” he said. “I don’t know if we can bank on that (optimistic forecast) or not. We’re seeing a real cautiousness out there in terms of how the customer is spending his money.”

Questrom believes it all hinges on job growth, noting the economy has not created net jobs over the last decade. “We added 30 million to our population, and we have no job growth. If we don’t get the job growth, we’re not going to have the economic growth we’ve become accustomed to,” he said.

One uncertainty Levine pointed to is taxes. Zandi said U.S. debt levels are unsustainably high, and spending will have to be cut or taxes raised. He thinks a VAT, a form of sales tax, will be seen as making the most sense. “Ultimately, at the end of the day, I think we will have a VAT. If it is designed properly, we can cut income tax rates, but it will be a drag on consumer spending almost by definition,” Zandi said.

Questrom doesn’t see it happening in the United States. “A VAT would be very bad for retailing. My problem with a VAT tax is that it is like a sales tax — it’s very easy to raise, and the government doesn’t know how to stop spending,” he said.

Retailers figured out in the downturn how to stop spending, however, by reducing inventory, and they may maintain that cautious approach by keeping a lid on the restocking that many carriers hope will come.

Questrom said retailers’ inventory management improved substantially last year and that a new conservatism may be taking hold. “I think that the inventory was much better planned, much better thought out, relative to the panic of the year before,” he said. “You can always get more value from having less of something than having too much of something.”

That also applies to retail capacity, where proliferation of stores and expansion of store space has mirrored the expansive view transportation carriers have taken toward capacity. “We have to recognize that today we have too much retail space, in terms of number of stores and the size of stores, and we have to deal with that,” Questrom said.

The panelists believe a fundamental change in consumer attitudes is under way, with the beneficiaries being value retailers and luxury goods retailers suffering, especially because of higher taxes on the wealthy. “What we went through was not like the Depression, but there will be a similar impact in some ways,” Levine said. “It will be several months, if not several years, before we see a different perspective.”

Peter Tirschwell is senior vice president for strategy at UBM Global Trade. He can be contacted at