Monday, November 2, 2009

CIT: Christmas in Trouble

Yesterday’s bankruptcy filing by CIT Group spells trouble for the Christmas shopping season. In theory, CIT should continue to operate and make loans during its Chapter 11 financial restructuring. Realistically, though, it won’t be possible for a bankrupt CIT to do all the things you would have expected of it just last year, including the inventory loans that put merchandise on store shelves, and there aren’t other lenders waiting in the wings to fill the void.

Store shelves, then, could be relatively bare. This could create a very unfamiliar shopping experience, at least for specific products and places. To show you what this would mean, I want to use a story of something that happened last week.

Last week, I wore out my computer keyboard and went to the local consumer electronics store to buy a replacement. I found the USB keyboard I wanted, and I noticed there was only one in stock. The store sold a wireless keyboard, and there was only one of those in stock too. Looking around the store, I noticed that there was only one box on the shelf for quite a few items that were on display.

This works out for the store — it doesn’t have to borrow money and pay interest to keep a large inventory. As soon as I checked out, an order for a replacement unit automatically went out, and was delivered to the store the next day, so it wasn’t out of stock for long.

At a consumer electronics store, a thin inventory means having only one unit in stock for many of the electronic devices you might want to buy. For a clothing store, it could mean selling only black military jackets. If the stores don’t have as much to sell, then whatever you were thinking of buying won’t be so easy to come by — either because the store is sold out for the day, or because it couldn’t stock that item at all. Wherever retailers and manufacturers can’t get inventory financing, inventories can only be thinner — in some cases, much thinner than you are used to seeing.

But it’s not just the inconvenience and limited selection. Wherever inventories are less than the store can sell, there won’t be any clearance sales. Of course, we couldn’t see a Christmas shopping season without sales, but only the well-financed items will be in plentiful enough supply to make it to the clearance sales with prices cut to levels that are less than you would expect to pay. Paying full retail price, or just 25 percent less, may come as a shock to shoppers who, last year, saw the first after-Christmas sales start the day after Election Day. Yet shoppers who wait for the sales may come back to find some store shelves picked clean.

With few deep discounts, and many items out of stock toward the end of the day or the end of the week, there will be fewer impulse purchases. Most shoppers won’t have time to go from store to store trying to find suitable presents, so they may just buy fewer and simpler gifts. If that happens, people will barely notice the difference on Christmas morning — the holiday, as in the story of How the Grinch Stole Christmas, is not strictly measured by the quantity or quality of gifts — but it could have a profound effect on the national economy. With retail results considerably less than last year, there could be more stores closing in January, new layoffs, and other economic repercussions from the CIT collapse lasting well into next year.