First Annual Retail Sales Preview

This is the first of what will become an annual feature of the “what my intuition tells me now” blog: a qualitative preview of retail sales figures.

The reason this preview comes in January, rather than December, is that most retailers report their annual sales numbers for the year prior at the end of January.  By doing this they capture in their totals all of the holiday sales, plus the post-holiday sales.

Retail sales are among the most important economic numbers because around 70% of gross domestic product (GDP) is made up of consumer purchases.  So if you understand and can anticipate retail sales you have a pretty good idea of how the economy is going to perform.

To be clear, I am not going to forecast the year just passed, 2010, but what I expect for the upcoming year, 2011.  Here I am talking about January 2011 to January 2012.

Here’s is the overview of how we are going to look at this…

• grocery stores
• restaurants
• cars
• consumer electronics
• clothing

Officially there are more categories reported by most prognosticators, however, I consider these to be the core places where people spend their hard-earned money.  So getting these five categories right will give a powerful indication as to how the economy is going to do as a whole.

Let’s take the above categories, in turn.

Grocery Stores

It doesn’t take a rocket scientist to know that the cost of food is up.  All of the big categories from meat, to milk, to dairy, to produce, are all up in price.  However, food prices are also up for grocery stores themselves.  However, most stores have been able to expand their gross profit margin on food stuffs.  Furthermore, wages at grocery stores, like almost all wages in the economy, are flat.  So the two biggest expenses for grocery stores, food costs and wages, are flat to down.

The recession has led to many more people cooking at home rather than eating out in order to save money.  In other words, grocery store sales have been rising.  The combination of rising sales and flat to slightly lower expenses means that grocery stores are doing very well, profit-wise.  This combination led to a robust 2010 total.

However, as consumers begin to feel more confident in 2011 about the economy, their job security, and their personal finance situation, they will begin to curtail their grocery store runs and cooking at home.  Thus, I anticipate a 2011 that sees flat to slightly down sales.

Restaurants

Restaurants have gone out of their way to keep customers over the last three years, 2008 through 2010.  They have offered value meals, reduced-calorie count menus, increased-calorie count sexed-up fatty menus, and so on.  The pressure on restaurants to keep customers is likely to begin easing.

As people feel better about their financial situations they like to eat out – it keeps the energy of relief and celebration going.  In the restaurant business it’s all about volume.  Effectively diners rent the table for the time that they are at the restaurant.  The more tables that are full, the more rent.  My impression is that consumers have felt that they were scrimping over the last three years.  One easy way to relieve yourself of that feeling is to eat out.  So volumes will be up.

Prices at restaurants will probably begin to rise slowly in the latter half of 2011 as restaurants realize that volumes are real and stable.

This combination of factors means that 2011 is likely to be a good year for the restaurant industry.

Cars

One of the surprising figures during the Great Recession was the strength of car sales.  Largely this was driven by government incentives, like the “Cash for Clunkers” program which was among the most brilliant uses of tax payer money ever invented.  It single-handedly saved the car industry, kept all of those blue collar jobs around, reduced the pressure on the financing businesses of car manufacturers, and got a number of polluting vehicles off of the road.

Car sales have remained strong.  I expect them to get slightly stronger.  Why?

Many people have continued to drive and then repair their old, already paid off cars rather than add a new monthly payment for a new car to their budget.  This will end as the unemployment numbers start to improve.  Folks have been prioritizing paying off their high-interest credit cards.  Room in the budget is now available for a new car payment.  Plus, psychologically, one of the great ways of engaging in retail therapy is to buy a new car.

So I expect 2011 to be a good year for the car industry.  I expect sales to be slightly up from 2010 levels.  If the jobs situation capitulates and improves rapidly then there will be surprising strength to the upside in terms of car sales.

Consumer Electronics

Wow!  That is the word that describes this continuously miraculous retail category.  We all love our gadgets, from killer 4G cell phones, to flat panel televisions, to surround sound stereos, to lap top computers, to pad computers, to BluRay DVD players, to…?  And that’s just it, what else is there to buy in this category?

Unlike most prognosticators I would not at all be surprised to see a disappointing year in the consumer electronics space.  I am not predicting a down year here for this category.  But if there were a surprise here, it will not be a positively up surprise, it will be a surprise in terms of downside disappointment.  The reason is that most of the cool gadgets have already made their way into our lives.  It’s not that there isn’t cool stuff on the horizon, it’s just that in terms of incremental coolness factor, they are refinements to cool, not revolutions in cool.

Nonetheless, my own feeling is that this category will see slightly up sales from 2010.  But the possibility for disappointment looms.

Clothing

My wife Dawn works in the fashion photography business and they have been devastated over the past three years.  That is not what I expect in 2011.  One of the easiest ways for people to improve their budgetary situation is to cut back on clothing purchases.  Many people have been wearing the same stuff for many years now, adding new articles of clothing when something was truly outstanding, and on sale.

Conversely, one of the easiest ways for people to feel better about their psychological situation is to adorn themselves with new clothing.  Emerging out of the Great Recession will be many, many people who have been anticipating “going shopping.”  So I expect that clothing sales are going to be very strong in 2011.  Not only that, but I fully expect that many of the killer bargains that have existed for the last three years will begin disappearing.

In conclusion, 2011 is going to be the first year since 2007 that feels like a “normal” year as a consumer.  Couple that sense of normality with the understandable relief that will be felt by many and you have the makings of a great retail 2011.

Gross domestic product typically grows 3-5% in a positive growth year.  I am expecting that retail sales will be up on the high end of that range: 4% plus.

Jason