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News Service:

Annette Hacker, director,
(515) 294-3720

Office: (515) 294-4777

11-17-08

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Iowa State economist Meghan O'Brien calls the current economic conditions a "perfect storm" for retailers this holiday season, resulting in significant hardship for many Iowa businesses and communities. Photo by Bob Elbert

Contacts:

Meghan O'Brien, Economics (515) 991-1947 (c), (515) 294-4095, mcobrien@iastate.edu

Joydeep Bhattacharya, Economics (515) 294 5886, joydeep@iastate.edu

Mike Ferlazzo, News Service (515) 294-8986, ferlazzo@iastate.edu

Anne Kassel, News Service (515) 294-6881, akassel@iastate.edu

Iowa State experts project a rough holiday retail season

AMES, Iowa -- While the National Retail Federation's recent survey of 8,100 of its members found that the group expects a 2.2 percent increase in holiday shopping from 2007, two Iowa State University economic experts disagree. They project a decline in retail sales this holiday season, with smaller businesses feeling more of the economic pain.

"This holiday season is the 'perfect storm' for retailers," said Meghan O'Brien, an economist with Iowa State's Regional Capacity Analysis Program. "Trade groups have predicted a sales increase of about 2 percent from last year, which is about half of the 10- year average. I think this is ambitious and overly optimistic."

Consumer spending has been declining for more than a year, O'Brien said. She sees the country's financial crisis, increasing inflation and a recessionary economy as reasons for lowered expectations.

"Even if we had the best-case scenario and sales increased by 2 percent, it wouldn't be enough to save many retail businesses," O'Brien said. "Most retail businesses have seen their input costs and overhead increase by 5 percent. For those retailers hoping the holiday season will save their business, there will be considerable disappointment and the dismal holiday season may be the nail in the coffin for many retailers."

ISU Associate Professor of Economics Joydeep Bhattacharya shares O'Brien's holiday retail concern. He says consumers typically save more and spend less during times of economic strife.

"In times of uncertainty, people increase their 'precautionary saving' -- the saving for the rainy day," said Bhattacharya, who has research expertise in monetary theory, credit market imperfections and bank panics. "Businesses will try to cut profit margins and offer deals to shoppers, but they are so constrained -- their pockets aren't as deep as they used to be and the deals will not be as good as they have been in the past."

"There will be deep discounting from retailers so consumers who have cash and are not worried about losing their jobs will get some great deals," said O'Brien. "Each season will have one big item that sells out and has excess demand, like the Nintendo Wii -- and this year will be no different. But consumers will definitely cut back on the number of people they buy for and the amount they spend per gift."

O'Brien said specialty and high-end retailers will really struggle, likely producing more store closings and bankruptcies in those areas next spring.

"Discount retailers will do well comparatively," she said. "However, with everyone having less disposable income, they won't make up for the losses in other areas of retail."

"I predict a lot more of the holiday shopping will be done at places like Sam's Club and the big online retailers," said Bhattacharya. "Historically, entertainment has been somewhat recession-proof. Upmarket stores, such as Macy's, are likely to take a hit, as are upmarket retail items such as designer outfits, shoes, etc."

In her report, "Retail Economics 101: Lessons and Strategies of a Recession," O'Brien wrote that it is not only possible, but probable that the retail sector will not meet the National Retail Federation's holiday retail forecast, which is its weakest projection in six years.

"This will mean significant hardship for many Iowa businesses and communities," O'Brien said.

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Joydeep Bhattacharya

Quick look

Both Meghan O'Brien, an economist with ISU's Regional Capacity Analysis Program; and Joydeep Bhattacharya, an associate professor of economics, project a decline in retail sales this holiday season, with smaller businesses feeling more of the economic pain.

Quote

"This holiday season is the 'perfect storm' for retailers. Trade groups have predicted a sales increase of about 2 percent from last year, which is about half of the 10- year average. I think this is ambitious and overly optimistic."

Meghan O'Brien