Retail woes: Customers will benefit from bargains as stores fight slumping economy

By: BRADLEY J. FIKES - Staff Writer | Sunday, November 18, 2007 9:48 AM PST ∞

NORTH COUNTY ---- The slumping real estate market and lack of consumer confidence foreshadow a lackluster holiday sales season for area retailers, two local economists say.

But Carlsbad retail consultant George Whalin partially counters their gloomy outlook, saying he anticipates a slight increase in sales nationwide, with San Diego County sales in line with nationwide trends.

Whichever way the forecasts go, shoppers seem guaranteed to benefit from the edginess among retailers who kicked off holiday sales campaigns ahead of Friday's traditional start to the shopping season.

Locally and nationwide, falling home prices and rising mortgage rates are making people more hesitant about buying such big-ticket items as vehicles, local economists Kelly Cunningham and Alan Gin said. Rising gas prices also have consumers feeling harder-pressed, they said.

California retail sales have been "pretty weak" this year, said Cunningham of the San Diego Institute for Policy Research, a free-market-oriented think tank.

"I'm sure it has a lot to do with the real estate industry," Cunningham said. Previously, rising home values had given homeowners a sense of prosperity, which they indulged by taking out second mortgages and buying consumer goods.

"But I think that wave has passed, and consequently, we're seeing a big slowdown in spending," said Cunningham, the former chief economist and research director for the San Diego Regional Chamber of Commerce.

Cautious hiring

Overall, he said, holiday sales are likely to be flat compared with last year, and when inflation is taken into account, sales will actually decline.

Judging by their staffing, local retailers appear to agree, Cunningham said.

"Retail employment is actually down over the year, and that's another indication," Cunningham said before the state issued its most recent report on Friday. "Usually, retailers add quite a few employees for temporary help. But going into the holiday season, the employment level is less than what it was a year ago."

San Diego County retail employment dipped 0.1 percent from September 2006 to September 2007, according to the California Employment Development Department. However, October's report, released Friday, showed retail employment up 1.3 percent since October of last year.

Clothing and clothing accessory store employment was up 9 percent over October 2006. However, employment at general merchandise stores, including department stores, was down by 2 percent. And employment at motor vehicle and parts dealer stores fell by 2.6 percent.

Alan Gin, who compiles the San Diego Index of Leading Economic Indicators, likewise said that the real estate slump would drag down the holiday shopping season's numbers.

"I don't think it'll be strong at all," said Gin, an associate professor of economics at the University of San Diego.

'Reverse wealth' in play

"You might call it a reverse wealth effect," Gin said. He was referring to the behavior of homeowners during the years of big housing price increases, a major sustainer of the American consumer-dominated economy.

"People don't feel as wealthy and they don't go out and spend, even though they might be making the same amount of income," Gin said.

The reverse wealth effect is not just psychological ---- it's real, Gin said. When a homeowner's home equity declines, that person is poorer. His net worth has declined, so there is less collateral for credit.

"Adjustable-rate mortgages ratcheting upwards means people have to pay more in terms of mortgages," Gin said. "That takes money away from them they could have been spending on Christmas."

Whalin was less gloomy.

"We think it's going to be OK," said Whalin, president of Carlsbad-based Retail Management Consultants. The firm helps retailers and consumer products-makers improve sales and better manage their businesses.

"We don't think it's going to be gangbusters, but we don't think it's going to be a disaster."

Hard to follow '06

Sales would likely be down from last year, which was exceptionally good, Whalin said.

Home improvement and hardware stores are hurting from the real estate sector's woes, Whalin said. Furniture sales "are hurt a little bit," he said. "I think that both of them will benefit from rebuilding of homes after the fires, but I don't think we're going to see much of that yet."

The fire rebuilding stimulus will kick in next year, Whalin said, too late to affect this year's holiday season sales.

Local retailers might do a bit better than the national average, Whalin said, because the area still has a relatively low unemployment rate, indicating a basically sound economy. However, he said he didn't have hard numbers for the local retail picture and was relying on anecdotal evidence.

Bobby Hansen, manager of the Best Buy store on Vista Way in Oceanside, is being optimistic. He said he anticipates that customers will be eager for consumer electronics products, which Best Buy is known for.

"It looks like it's going to be a real positive holiday season," Hansen said, declining to be more specific because the information is proprietary.

"You'll see a lot of people looking for a Nintendo Wii; you're going to have a hard time getting a hold of that during the holidays," Hansen said. "Other hot gift items will be digital photo frames, GPS (Global Positioning Systems), the new iPods."

Digital music players, cameras and other items will be available in many more colors than last year, when the standard black and silver was more dominant, Hansen said.

"It's catching the eye for customers, getting stuff that's red or pink or green or whatever," Hansen said.

One optimistic shop owner

Gift store owner Eileen Burke also said she is hoping for a good season, but concedes there's some weakness in sales to corporate clients. Burke owns Queen Eileen's locations in Encinitas and Solana Beach.

Burke's business not only includes retail sales at the whimsical shops, but sales of gift baskets for corporate clients. Those corporate sales are down, she said, although store sales are strong.

Many of the corporate customers are in real estate or related areas, she said, and they're feeling the pinch of a down market. But business could pick up, Burke said. The gift basket business has many last-minute clients, so forecasting is difficult.

Burke was interviewed last week while preparing these quick-order gift baskets with employees. A table in the Encinitas store's back room was stacked with baskets and gift items.

"There's always a million different projects going on here," Burke said. "We're doing a basket order for a hotel for tomorrow. A bunch of baskets are going down to Mission Valley in a few hours."

Quick service is important to keeping customers happy, Burke said, pointing to another load of baskets for a really last-minute customer.

For large deliveries, Queen Eileen's uses a van. But for small orders, the company recently bought a gas-stingy Prius, Burke said. Gas simply costs too much to use the van for just a few items, Burke said, but the Prius can be used for a week and the gas tank only dips marginally.

"Because we have such a great fun store with lower price points, we're doing really well," she said. "While everybody else in retail is crying the blues, we're actually having increases every month."

In some months this year, sales have been up 20 percent over the previous year, Burke said.

Customers will be winners

"Retailers might be complaining about 2007, but in the long run, consumers are really going to benefit from a lot of sales this year right up until Christmas," Eva Yusa, marketing manager for ShopLocal, a comparison-shopping Web site, told the Atlanta Journal-Constitution.

Yusa said consumers can expect major price cuts on electronics and toys. When it comes to apparel, retailers will actually be offering discounts on clothing that you can wear right now, instead of the previous season's gear.

"J.C. Penney, Nordstrom and Macy's had really slow years. They expected a big back-to-school push that never happened. The great thing about slower sales for those kind of retailers means they are really going to push (preview) sales."

As for where to find the deals, Yusa said shoppers would be wise to keep an eye on outlet stores, discount stores and warehouse clubs.

"What will be great," she said, "is to see the crazy gimmicks retailers will get into to get people out."

Midnight Madness, the practice of opening for business at 12 after Thanksgiving, is now standard. But Wal-Mart even pushed that forward, offering Black Friday deals on Nov. 2, including a $350 laptop and a $1,000 50-inch plasma TV.

A sampling of area stores shows that they're following traditions of early openings on Friday and adding a few treats to draw buyers.

Sam's Club, a Wal-Mart division, announced that any shoppers waiting in line for its opening at 5 a.m. Friday would be served a continental breakfast.

Carlsbad Premium Outlets will open at midnight Thursday for Black Friday.

The Oceanside Best Buy will open at 5 a.m. Friday, and the Wal-Mart next door will open at 6 a.m.

At Westfield North County in Escondido, J.C. Penney will open at 4 a.m., Macy's at 6 a.m. and Nordstrom at 8 a.m.

Wire services contributed to this report. Contact staff writer Bradley J. Fikes at (760) 739-6641 or bfikes@nctimes.com.

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