NRF: Brave New World

Christmas at JC Penney chairman and chief executive Mike Ullman’s house was different in 2008. Instead of the normal gifts, he offered to clear the credit card debts of his children. The catch was that they had to get rid of the cards too.

This anecdote perfectly illustrates the mood at the NRF convention, the US retail industry’s big get-together, which was held in New York last week. American retailers largely accept their economy over expanded off the back of personal debt and there seemed to be a moral consensus that it is wrong to expect consumers to keep purchasing items they cannot afford.

Ullman told the conference that the next generation has to learn how to manage their lives buying what they can afford. And Urban Outfitters chief information officer Calvin Hollinger went so far as to say that the retailer won’t launch a branded store card to encourage customer loyalty because it does not want to associate itself with debt among its 18- to 32-year-old target customer segment.

This was echoed by outgoing Wal-Mart chairman and chief executive Lee Scott in his last public speech. He said he is seeing younger adults’ views on consumption changing. “A lot of young people have learnt what it is like living on the edge… I think that there is an appetite for living differently,” he said. “It is tough for retailers, but I am not sure that it is bad for society.”

US retailers have taken a good hard look at themselves and their customers and concluded that things must change. The bitter pill the industry is now swallowing will almost certainly include a contraction of retail.

Ullman continued: “There is way too much space and inventory in our industry – that is why productivity has gone down.”

Moodys.com chief economist Mark Zandi said that the percentage of the overall US economy wrapped up in consumer spending had risen to an unsustainable level of more than 70 per cent in the past few years. He added that the next few years will be dominated by returning that level back down to between 63 to 65 per cent.

Investment banker Peter Solomon was clear in his belief that US retail has seen the end of an era and the future will be very different. In particular, he viewed the private equity pile in to the industry as a mistake. “Retail is the area that least lends itself to leverage,” he said.

While there was widespread support for the fiscal stimulus measures that have been announced by the US government and tax cuts to try to get the economy growing again, there is a desire not to create another inflationary boom. “There will be massive inflation in three to five years’ time because the government is printing money,” said Solomon. He added that he has no confidence in politicians to soak up excess liquidity at the right moment.

Ullman believes that the only reason why the US$350bn (£239.78bn) provided to the banking industry in the States so far has not been inflationary is because it is sitting on their balance sheets.

He agreed that the new Obama-led administration is going to have to have the courage to put interest rates back up once the economy begins to turn the corner.
The rise of alternative consumer powerhouses is not lost on US retailers either. Already they are worried about the future inflationary effects of increasing spending power in the emerging economies, and realise that they must participate in these economies or they will lose out.

Zandi points out that the Chinese save between 40 and 50 per cent of their GDP each year at present. If that saving rate were to fall back to 25 per cent in the next 10 years, which would still be high, Chinese consumer spending will skyrocket.

Backing Us retail

Ullman also urged retailers to work harder at demonstrating their importance to the economy. “There are 25 million retail jobs in the US. We lost 579,000 jobs in our industrylast year – more than work in the auto industry. I think we need to do a better job of articulating that to our elected officials,” he said.

He conceded that there is a dichotomy between what retail balance sheets need right now – less staff – and what the macro economy needs, which is more jobs. Ullman admitted that 45 per cent of the jobs lost in the US in the past quarter were in retail.

Solomon said that retailers should worry only about generating cash during 2009. “Don’t worry about investment… you have got to survive.”

All this talk probably didn’t please the many technology suppliers on the showfloor hoping to get retailers to part with some of their hard-earned cash. But even the exhibition space demonstrated changes in the industry’s psyche, with far fewer double-height monolithic exhibition stands and even a green retailing section, something that was not on the radar even a year or two back.

One UK retailer who visited the show also mentioned how impressed he was with the line that technology vendors were taking when he visited stands – asking what his major challenges are right now, rather than just trying to push products.

And when it came to technology projects that retailers were willing to talk about, the focus was squarely on quick returns on investment and especially projects where a small investment could help generate cash.

Hollinger said the projects he will fight to get budget for at Urban Outfitters include e-commerce, and assortment and supply chain optimisation: projects that can have an impact on the retailer’s customers.

Urban Outfitters is also calling on its suppliers to demonstrate commitment to their partnerships with the retailer. Hollinger has negotiated 20 per cent reductions on the cost of professional services this year, having committed to a certain spend. He is trying to thrash out similar deals for his maintenance contracts, but says this is proving harder.

540-store grocery chain Wawa is in the process of a major roll-out of SAP systems that began in mid-2006. Its senior director for business transformation John Baldino admitted that the retailer wants to do more, such as introduce price optimisation, but that it will wait until at least 2010 before making this investment.

Meanwhile, Fresh & Easy chief information officer Doug Rutledge said that replenishment and space planning are top priorities, because Tesco’s US stores have no stockrooms and the grocer needs to align stock with space and sales. Fresh & Easy will also participate in the roll-out of labour scheduling software that Tesco has planned.

However, US$1bn multichannel apparel retailer Coldwater Creek is ploughing on with a business transformation project that will involve going live with SAP financials, merchandising and PoS data management technology later this year. The retailer’s divisional vice-president for business transformation David Edwards says the company intends to take huge steps forward with its core merchandising this year. However, he added that Coldwater Creek has resisted investing in its legacy applications, even if it is possible to optimise them.

Best Buy has invested in a simple web-based marketing tool to help its store managers create on-brand marketing material to take advantage of local conditions and special events. Best Buy programme director for customer relationship management Jamey Wojciechowski said that the project had been designed as part of the retailer’s strategy to create more loyal and profitable customers.

This once again demonstrates how US retailers are trying to create an image of being on the same side as consumers right now. For instance, the portal had allowed a store manager near a US military base to create marketing around a special event for soldiers who were about to be deployed to Iraq and their families.

The Retail Marketing Tool, as Best Buy calls it, allows store staff to create localised print communications, point-of-sale material and run of paper advertising, as well as update local store pages on the retailer’s website.

A return on investment calculator means Best Buy gets value for money from this marketing spend and store managers can view the results of each other’s marketing initiatives to encourage best practice. Wojciechowski says it has reduced Best Buy’s marketing costs and delivered millions in top-line revenue.

Ullman believes that as the first country to suffer economic distress, the US will also be the first to benefit from a recovery. If the UK economy continues to follow the same path as the American one, UK retailers will soon find that they are asking the same fundamental questions as their US counterparts.

Watching US retailers’ response to the shift in spending and attitudes the industry is facing should be on every UK retailer’s to-do list this year.