Saturday, May 10, 2008

Retailers Are Now Feeling the Credit Squeeze

The credit crunch is starting to affect retailers in a big way.

Retail chains fail even in the best of times, so manufacturers have to be careful how much inventory they let stores get. Stores can get all the merchandise they want if they pay for it up front, of course, but very few retail chains are in a position to do that. Traditionally, a retailer that wanted to buy lots of inventory from a manufacturer would get a bank guarantee — basically, the bank promising the manufacturer that it will put the screws to the retailer if they decide they don’t want to pay. But banks let credit standards get much too loose, and with the tighter credit standards they are using this year, even a relatively healthy retail chain can have trouble getting bank guarantees for all the merchandise they would like to display.

This means manufacturers are shipping less to retail. Store displays may look a bit bare, and the specific item, model, or color you want may not be there on the day you go in. This hurts retailers’ revenue, as shoppers go into the stores planning to buy something, but often walk out without buying anything.

It is also going to hurt the economic aggregates, the numbers policy makers use to decide how the economy is doing. If you were counting on consumer spending to bring the economy out of its recession, forget it.

Shoppers are a little smarter than retailers give them credit for. A friend told me one of the clothing discount chains has been going through hard times: “You can tell when the buyers can actually get stuff, and when they’re just getting crap. A lot of what they’re showing now is designer stuff that’s made just to make the designer look good, and it was never really meant for anyone to wear.” A retailer’s buyers are the employees that select the merchandise for the chain. If they don’t have enough money to spend, they generally have to compromise on the quality or style of the merchandise they buy.

You can also tell by the prices. If you see a lot of jeans and shirts at $35–60 in a discount clothing store, they don’t really want to sell them. They’re really just props, priced high to keep them on the racks so the store won’t look empty. Every kind of store, outside of crowded urban centers, has items that serve this purpose. Often, the store paid just a dollar or two to get them. They know items like these won’t sell until they cut the price to $5 or so at the end of the season, but then they hope the appearance of deep discounts will make customers feel better about getting them.

Disappointed, frustrated consumers who can’t buy what they want will, in many cases, just not buy anything, or put off purchases till next year. Already retail sales are declining month by month if you exclude Wal-Mart and gasoline. As retailers get squeezed and store displays get thinner, shoppers are likely to buy even less.