By Garrick Brown, Vice President, Research – West Region
As promised, this week I am sharing our holiday describe the imagesales season forecast. Many of you who have been tracking this year’s set of forecasts have probably noticed that most analysts have been pretty downbeat about their expectations for 2015. I’m a lot more optimistic and there are a lot of reasons that support my argument. But before I get into those, I would like to invite you to check out the Cushman & Wakefield 2015 Holiday Sales Season Preview. It’s a great interactive piece our incredible Creative Department put together for me that showcases my holiday forecast as well as some interesting and amusing bits of data you might not have known.
And, before I get going with that forecast, there is no way I can ignore the blockbuster news that broke yesterday. And, no, I don’t mean the news that REI is going to shutter its stores on Black Friday… though that is definitely an outside the box move. Is it one that will pay off for the retailer in the long run? It just might… the move definitely plays well with millennials—their strongest demographic. Actually, considering that recent polling has found that the majority of American consumers hate Black Friday, this might just be a stroke of genius in terms of PR… even if it may mean that REI is leaving a fair amount of revenue on the table for that one single day. It certainly goes against the grain in a holiday sales season where the trend will be for even more retailers to open on Thanksgiving Day. But I would argue that these trends are not unrelated. Earlier openings, the impact of e-commerce and pre-Thanksgiving sales all mean that Black Friday’s significance is being steadily diminished. Make no mistake, it’s still the biggest day of the year for bricks and mortar retail… but the wealth is definitely being spread around…
But the blockbuster news of the week (if not month) is that Walgreen’s announced yesterday that they will be acquiring Rite Aid in a $17.2 billion deal that will effectively narrow the nation’s drug store field down to two major players. I am crunching the numbers on that one right now and will be sharing my analysis of what that means for commercial real estate next week.. but let’s just say that it probably isn’t going to be good news for a number of landlords out there. Mergers like this almost always require significant consolidation of space and this one certainly won’t be any different. Tune in next week and I will share some numbers including my estimate of what we may see come back to market, where this is likely to happen and with what kind of space…
U.S. Retail Sales to Hold Their Own This Holiday Season at 4.1%
Over the course of the 2014 holiday shopping season, U.S. retail sales increased by 4.1%. These fairly strong gains came after two consecutive years of relatively lackluster growth (2.9% in 2012 and 3.1% in 2013). But while last year’s performance was far above the 2.9% average posted by the marketplace over the past decade, it still fell well below the expectations of many analysts.
Last year, with gas prices falling to post-recession lows, many retail analysts had expected a more significant boost in consumer spending. From June 2014 through the close of last year, American consumers had realized more than $100 billion in savings at the pump. Yet, they only boosted their holiday spending by a bit. The biggest retail gains were instead realized by food related retail, ranging from grocery to restaurants, as Americans chose to use those savings to pay down debt and/or boost savings.
The question for many retailers as we head into the 2015 holiday sales season is whether these same trends would play out to suppress what otherwise should be strong growth numbers? After all, there are plenty of positives out there; though there certainly are a few economic headwinds to contend with as well.
Let’s start with the positives; unemployment now stands at just 5.1%. This is the lowest rate recorded since 2007. That being said, employment growth in September was comparatively disappointing at just 142,000 new jobs created. But this follows an extended period in which the market was averaging close to 300,000 new positions monthly. It would not be uncommon for these numbers to begin to slow as the nation approaches full employment. The challenge is figuring out whether or not we really are nearing full employment. This is because the U.S. labor participation rate remains an issue. The current rate of 62.4% is the lowest it has been since 1977. What is not known is how many of these workers may be returning to the workforce; certainly a good number of these are likely to be discouraged workers. But in a competitive employment environment where skilled workers are at a premium, how many of these are permanently discouraged older unskilled laborers that are unlikely to return to the workforce in an environment that offers them few opportunities? But even with that question mark hanging over the employment picture, the fact remains that the nation’s job market is in the strongest place that it has been since 2007. In fact, just since January 2014, the US has created 4.9 million new jobs.
Meanwhile, there is a strong case supporting continued strong employment growth. There are currently 5.4 million job openings in the United States (as of the August Job Openings and Labor Turnover—the JOLTS Report—from the Bureau of Labor Statistics). That’s down slightly from the post-Great Recession peak of 5.7 million recorded in July, but is still one of the strongest numbers posted in a decade. Stock market volatility likely played a role in subduing corporate hiring in August and September, but it did not have a major impact on lowering job openings. This tells us that those numbers may be rebounding back from the mid-100,000s range very quickly.
Most encouraging for retailers is the fact that the American consumer is certainly in a better place this year than last. The oil savings that began last year have only continued; we now estimate those savings to be nearing $300 billion. Meanwhile, a recent J.P. Morgan Chase Institute study found that consumers are now not just sitting on those savings. Their study, released in early October 2015, found that consumers are spending 78% of those savings with about 18% going to eating out and another 10% going to grocery purchases. The study, which sifted through the spending habits of 25.6 million Chase credit and debit card holders, is the largest and most in depth accounting of this trend so far and it clearly paints a picture of American consumers sitting on a war chest that they have, as of yet, been cautious in spending.
According to the Federal Reserve, total U.S. household debt as of the close of Q2 2015 (the latest statistics available) stood at $11.85 trillion. Though this metric has been slowly inching up in recent quarters, it remains 6.5% below the $12.68 trillion peak of Q3 2008 and indicates that consumers still have a considerable untapped amount of buying power.
After being flat to negative for most of the past eight years, wage growth ramped up to the 2.0% range throughout the first half of 2015. It flattened early in the summer but rebounded to 2.4% in August. Considering the inflation rate is near 0.0%, these are fairly solid numbers. Yet, has it translated into consumer spending gains?
Here is where the challenge comes for forecasters. Retail same store comparables were relatively flat for both August and September 2015. These are critical months for those of us attempting to predict consumer behavior during the holiday sales season. A strong performance for Back to School retail sales usually foreshadows a strong holiday sales performance. Likewise, a weak performance translated into weak holiday sales in three of the five occurrences we found over the past two decades. And here is where the challenge has come for many forecasters in predicting 2015 holiday sales performance. The 2015 Back to School season was relatively weak. It varies depending upon which index one follows, but overall retail same store comparables for both August and September 2015 averaged between -0.5% and -1.0%. Apparel and department store comps (both which depend heavily upon the holiday sales season) were lackluster with most major chains reporting flat or slightly negative growth.
Against the backdrop of stock market instability, these humdrum numbers would help to explain many of the conservative forecasts for holiday sales growth that we have seen so far from the industry. Most have been lower than last year’s actual 4.1% rate of growth and have been in the mid to high 3.0% range. But we are much more optimistic in our outlook.
Here is why; while August and September same store sales comparables were lackluster, we don’t see them as indicative of sinking consumer confidence or spending trends in the longer term. In fact, despite the volatility of the stock market since August, consumer confidence had actually increased in both August (it climbed from July’s reading of 91.0 to 101.3) and in September (it crept up to 103.0). October’s numbers were released by the Conference Board yesterday and this was the first time that we saw these numbers falter. The Index fell to 97.6 in what really appears to be a delayed reaction to all of the stock market volatility we saw in August and September. Now this should not be too alarming; a lag time of four to six weeks between economic turbulence and the impact on consumer confidence numbers is not at all uncommon. And, if you have followed the Newsline over the past few years, you know that I have often focused on the fact that often confidence numbers in any given month are at odds with actual consumer spending behavior.
I expect consumer confidence numbers to bounce back with November’s reading, just as the holiday sales season is taking off. Now that Wall Street appears to be stabilizing, I think CCI gains will accelerate heading into the final months of 2015.
But let’s get back to the issue of those lackluster same store sales for August and September—are they a precursor of what’s to come this holiday shopping season? I don’t think so. Consumer confidence wasn’t the problem. I believe that weather was.
According to the National Oceanic & Atmospheric Administration (NOAA), in August the average temperature in the U.S. was 72.7 degrees…1.3 degrees above normal. California, Nevada, Oregon and Washington closed out their warmest January through August period on record. Above average temperatures also played out in the Southern Plains and Lower Mississippi Valley, while New England and the Northeastern U.S. saw near record level heat. Meanwhile, nine states in the Midwest and Northeast posted near record wet conditions. Weather conditions were even more challenging in September; the average U.S. temperature was 68.5 degrees. This is 3.7 degrees above average and made it the second hottest September ever recorded. The Midwest, Southwest and Northeast experienced record heat in September while the Northeast, Alaska and Hawaii all experienced major precipitation events.
These adverse weather conditions, more than anything else, contributed to weaker than normal same store comparables during the months of August and September 2015. That being said, we may actually be looking at pent-up demand from consumers in many markets—particularly where shoppers postponed purchasing autumn and winter apparel.
Meanwhile, there are other reasons for retailers to be optimistic about the 2015 holiday shopping season. The International Council of Shopping Centers (ICSC) conducts an annual survey of consumers and their holiday shopping plans. The recently released 2015 ICSC Holiday Shopping Survey found that 80% of survey participants planned to spend the same or more than they did last year. Their survey predicts that consumers will spend an average of $702 this season, up from $677 in 2014. ICSC also found that a whopping 95% of those polled plan on shopping at bricks and mortar retail stores this year.
Lastly, there is one other reason to anticipate that this year’s holiday sales season will produce strong gains and that is the fact that this year’s season will simply be longer. There will be 28 days this year between Thanksgiving and Christmas Eve. Last year there were only 26 days.
But this holiday shopping season will be longer for other reasons besides the arbitrary nature of the calendar. It will be longer because more retailers will continue the trend of opening stores on Thanksgiving Day and it will be longer because more consumers are planning on starting their holiday shopping earlier. The ICSC survey also found that 90% of U.S. shoppers are already starting to plan their holiday purchases. Last year that number stood at 82%. This will translate into more shoppers starting their holiday shopping early this year.
Looking ahead, the ongoing stabilization of the stock market will only translate into stronger gains in consumer confidence as we head into the final months of 2015. These factors, we believe, will translate into overall sales gains. This is not to say that the market will be without headwinds, however, we expect gains this year to be on par with what was recorded in 2014. Our forecast is that retail sales during the 2015 holiday shopping season will increase by roughly 4.1%.
Obviously there could be spoilers like bad weather or black swans, but everything else—from the longer actual calendar season to the fact that American consumers are still yet in a better place this year than they were last year (or the year before that) should translate into a solid performance this year.
This post is commentary from the latest weekly edition of our Cushman & Wakefield Retail Newsline, which you can subscribe to for free by e-mailing firstname.lastname@example.org.
Garrick joined Cushman & Wakefield (formerly DTZ / Cassidy Turley) in October 2010. He serves as Vice President of Retail Research for the Americas. He speaks frequently at industry events and has been a keynote speaker at symposiums, conferences and market forecasting events for groups like the Appraisal Institute, Urban Land Institute, CREW, ICSC and PRSM. He is also a member of Lambda Alpha International, an invitation-only land use society for those who are involved in the ownership, management, regulation and conservation of land, but also those who are involved in its development, redevelopment and preservation.