Merry Christmas?

It's only about 3 months away:

Stores Scale Back for Christmas

Even though tinsel and toys are still months away, the gift zone under the Christmas tree may already be shrinking thanks to a sputtering U.S. economy and high gasoline prices.

An early look at holiday cargo delivered at the nation's top ports shows that this year's volume is running about 4 percent behind 2007 levels.

Because retailers are ordering less, stores are going to be carrying fewer items. It also means shoppers will need to buy hot gifts quickly and should expect to see fewer sales throughout the season.

"Retailers are being tighter from an inventory perspective," said Mirko Martich, who is based in Chicago and is a partner specializing in inventory management for A.T. Kearney, a London-based management consulting firm.

"We're seeing a trend that people are going to be trading down a little more. We're seeing increases in Wal-Mart comparable store sales. It wouldn't surprise me to see lot more holiday spending on basics or core items.

"Instead of buying a pair of red corduroy pants that are purely holiday, maybe people are going to buy two pair of Wrangler basic blue jeans."

The lower cargo volume may not mean much to consumers now. But all that changes in a month or two as retailers, including Cincinnati-based Macy's, work to keep inventory tight to avoid January shelves of unsold merchandise, which almost always leads to markdowns and pinched profits.

The nation's slow economy is to blame for the decline in cargo, according to the monthly Port Tracker report released in August by the National Retail Federation and Global Insight.

Macy's is continuing to take a cautious approach to Christmas spending. The company with 850 department stores projects that same-store sales in the second half of the year will be flat to down 1 percent. Same-store sales are a measure of retail health because they compare shopping patterns from year to year.

Yet Macy's expects the fourth quarter to be stronger than the third, executives told Wall Street analysts last month.

"Our inventory levels are adjusted for planned sales because customers are buying less," Macy's spokesman Jim Sluzewski said. "If you buy more than you sell, there's more merchandize to clear, and that's not good for the bottom line."

According to the company's second-quarter earnings released in August, inventories as of Aug. 2 were down 3.7 percent from the same period in 2007.

The decline in cargo shipments to the United States also means that consumers are not as likely to get early deals during the shopping season, and experts predict markdowns for last-minute shoppers may not be as steep as in years past.

Shoppers go online

Not all retailers are bracing for a down year.

The price sensitivity created by the economic climate "is driving more visits to the Web sites of online retailers, coupons and comparison shopping tools," wrote Heather Dougherty, director of research of Hitwise Intelligence, in a report issued in mid-August as shoppers increasingly research purchases online. Overall, the number of visits to online shopping sites was up 19 percent in July compared with the same month in 2007.

Ty's Tox Box is among those that prospered from higher gasoline prices because they tend to drive shoppers online to avoid driving from store to store. Founded in the basement of Ty Simpson's home in 2003 as an eBay storefront, today the company is one of the nation's largest online toy providers.

"We are opening up new channels and sales," said Simpson, 35. "We are expecting sales to be up significantly. It's the biggest year so far with lots of momentum."

The 65,000-square-foot warehouse is filling up quickly with toys, costumes and other child-oriented items. Operations this year are different, too, because Ty's Toy Box has signed up for joint ventures with manufacturers to "drop-ship" items directly to consumers, thereby skipping shipment to the Ty's Toy Box warehouse and fuel costs, too.

About 20 percent of the orders will be drop-shipped, he said, and many are customized with names of the child who will receive the gift.

The new strategy means cash is not needed for inventory because Ty's Toy Box is not billed until 15 days after the item is sold.

Risk to Ty's Toy Box is moderated because the company does not have to commit cash up front to fill up a warehouse with toys that may or may not be popular when the holiday season finally rolls around.

Clearly, he said, online shopping is growing in popularity.

"Last year we had 12 million unique visitors. This year we project 17 million," Simpson said.

Meanwhile, in brick-and-mortar stores, popular Christmas gifts are going out on the display floor earlier each year, according to Keith Jelinek, director at Alix Partners, a Southfield, Mich.-based logistics consulting company that focuses on operational improvements.

"Retailers are putting popular products out on the floor and not discounting until they absolutely must slash prices to get items sold," he said. "That's telling consumers, gee, we better get it now because it may not be here in 30 days."

Minding the store

Macy's has a complex inventory management system called 20/20. The process identifies the slowest-selling 20 percent of goods and clears them out of department store shelves with aisle displays and reduced prices.

"The philosophy is that if it doesn't sell in a certain number of days or weeks, it's not going to get any better," Sluzewski said.

The approach also frees up cash to purchase and replenish merchandise in the top-selling 20 percent.

Macy's branded products, which deliver about 19 percent of the company's $26.3 billion in annual revenues, are not immune from the 20/20 process.

"That merchandise is treated like any other brand," Sluzewski said.

Moving inventory quickly is vital for most companies but critical for retailers such as department stores that depend on being fashionable, current and appealing.

In a growing economy, those three moving targets are easy to hit. Not so when consumers are struggling with a flat housing market, high gasoline prices and fears of a loved one losing a job.

"There is no question that the economy has taken its toll on what people are buying," said Gareb Shamus, the New York City publisher of Toy Wishes, the leading magazine and event producer in the toy industry.

"The flip side is that retailers are being pretty strong about making sure they don't have over-inventory."

That means consumers can expect fewer markdowns and less discounting this year than they saw in past years.

But toy buyers don't behave the same as, say, apparel buyers.

"There's going to be a tremendous demand for toys this holiday," Shamus predicted. "People may have to sacrifice. But kids will generally get what they want, no matter the state of the economy."

(Source: Cincinnati Enquirer, 9/7/08)

Sphere: Related Content