A New Playing Field

No one ever said that retail was an easy game, and the current economic meltdown just accentuates the challenges you’ll face in 2009. As I write this in mid-November, all indications are that the problems retailers face will only become more challenging as we head into the 2009 selling season. Some might say that if we keep talking about the challenges, we’ll be creating a self-fulfilling prophecy. To the contrary, these problems are very real, and if you don’t factor them into your decision making and planning, you put yourself and your business in even greater peril.

Grasping the Impact

Not to overstate the obvious, but we need to understand the depth and severity of the problems and their impact on our consumers.

Housing. New-home construction and remodeling have been the backbone of lawn and garden sales for independent garden center retailers and landscapers for many years. Now, this market is falling apart. It was just announced that new housing starts are at the lowest annualized levels in 51 years, and some pundits say we won’t see housing starts back to “normal” (whatever that means in today’s vernacular) levels until 2012. And the remodel marketplace is also at a standstill, as no homeowner wants to invest money in their homes when their housing values continue to shrink — they fear that they’ll not see a resale return on their investments.

Consumer confidence. If consumers are concerned about their economic futures, they don’t spend, especially on deferrable purchases. Consumer confidence has fallen to the lowest levels in 41 years, which doesn’t portend open wallets and high spending trends. And as much as we may think otherwise, the consumer views our products as discretionary, not necessary. As an industry, we haven’t done much to dissuade this perception as we continue to focus mainly on price, without promoting the benefits our products add to consumers’ lives.

One of the greatest fears impacting consumer confidence today is job security. Like you, most companies are cutting payroll to the bare minimums to try to control expenses in a tight economy, with payroll being the largest variable expense on your financial statement. Hearing numbers like 52,000 job cuts at Citibank and the potential of hundreds of thousands, perhaps even millions, of job reductions in the auto industry are enough to make the hair on the back of my neck stand up. But what many of us fail to consider is the ripple effect these job layoffs and reductions have on the overall economy, especially small businesses. As an example, every production-line job in a car manufacturing plant supports two or three jobs of automotive parts suppliers. And these jobs support five jobs in the secondary job market, jobs in the local communities such as butchers, bakers, dry cleaners and garden center retailers. The primary job cuts are bad enough, but the trickle-down economic effect of these spending reductions are farther reaching than the published unemployment numbers.

Credit market. We’ve experienced the housing bubble bursting, the sub-prime mortgage collapse, the financial institution meltdown…is it over yet? Some say not, that the credit card market is the next impending disaster on the horizon. We’ve been on a spending spree for years, with consumers — even those not qualified to earn credit, just like the root of the sub-prime debacle — resulting in maxed-out credit lines. This problem was recently exacerbated as consumers dealt with high energy costs and relied on their credit cards to bridge the gap between personal income and higher expenses. The net result: credit card companies that are writing off billions of dollars of bad, uncollectable debt and reduced lines of credit at higher interest rates with increased fees for consumers.

Add to this the fact that many homeowners now have negative equity in their homes and can’t tap the home-equity loans that have previously funded many of the remodel and landscape projects that we’ve benefited from in the past.

Changed consumer behavior. As consumer spending collapses, even high-end luxury manufacturers and retailers are more focused on reduced price promotions in an attempt to get a share of the shrinking consumer spending dollar, and mainstream retailers are aggressively promoting price value as their point of differentiation. The latest consumer price index (CPI) release showed the largest one-month drop in consumer prices in 61 years! Retailers who historically generate 40 percent of their sales and more than 60 percent of their profits from Christmas holiday sales started promoting holiday sale prices in October, especially with holiday sales forecasts being reduced on a weekly basis, with some prognosticators calling for a 5 to 15 percent drop in sales versus 2007. And, unfortunately, as we move into the heat (albeit temperate) of the selling season, these cuts aren’t surgical, single key-item “doorbuster” reductions; they’re total-category and whole-store price cuts.

A Shift in Behavior

I’m not suggesting that retailers aren’t or shouldn’t be concerned about moving out their pre-season inventories in light of a predicted slower holiday spending period. But I am concerned with the longer term impact of these pricing decisions on the purchasing behavior and psychology of our consumer. My fear is that we’re changing the consumer psyche to a higher expectation of price value, and conditioning them to purchase something only when it’s on sale. I’m not convinced this new way of thinking will be temporary, lasting only until we come out of our current economic and spending doldrums. Our actions today could cause a fundamental shift in consumer buying behavior and an increased focus and expectation on price-point selling — one that will not benefit small and mid-size retailers in the long run.

The changing competitive marketplace and consumer purchasing drivers will force retailers to challenge their existing business models. Use this as the impetus to rethink, and possibly reinvent, your business model to survive the current challenges and position yourself and your business to thrive in the good times ahead, after we pass through these crises. There are a lot of things working against you today. But you are resilient: You’ve survived challenges and change before, and you are blessed to be in an industry that provides products that consumers need and can positively relate to. Most of us resist change, but this time around, change is being forced on you. Seize this as an opportunity and get creative…