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Consumers' Reduced Spending Habits Affect Retail, Restaurant Industries

Posted on: Sunday, 20 April 2008, 09:00 CDT

Some financially stressed consumers are embracing a newfound frugality, sending ripples through household budgets that are reaching retailers and restaurateurs.

Consider Sally Wilson of Overland Park. A 38-mile, round-trip daily commute to work in downtown Kansas City while burning $3-plus gasoline has Wilson cutting corners every way she can.

"One week I will buy the expensive gas and the next week the midlevel even though I'm supposed to use only the premium," Wilson said. "I signed up online for everyone and everything to get offers and discounts, switched to a cheaper Internet service and got rid of my landline phone. And I ask for generic prescriptions."

Mounting money pressures stemming from a slumping housing market, a softening job market and soaring food and gas prices are reaching critical mass for many households.

Merrill Lynch recently noted that consumers are spending a higher percentage of disposable income on basics such as food, energy and medical care than they have since such records began to be tracked in 1960. As a result, consumers are cutting back on discretionary spending.

Retail sales declined 0.4 percent in February, according to the Commerce Department. And even though retail sales grew 0.2 percent in March, the increase was almost entirely attributable to surging sales at gas stations, where gasoline has reached record highs.

Consumer confidence also fell to the lowest reading in 26 years in early April, according to the University of Michigan's consumer sentiment index.

The spending malaise has been dubbed a "hesitation holiday" by NPD Group, a consumer and retail research firm. And it has some retailers and restaurants retrenching -- closing stores, cutting back on expansion plans, paring inventories and shedding workers.

The International Council of Shopping Centers expects as many as 5,770 store closings nationwide in 2008, the highest in four years. High-profile retailers such as Levitz Furniture and Sharper Image have filed bankruptcy in recent weeks.

Businesses are hoping to get a boost from the $105 billion in tax rebate checks to be sent out beginning in May. But a new survey by the National Retail Federation indicates consumers will use the majority of the funds to pay debt, save and invest. Just $43 billion of the rebates are expected to be spent at the retail level.

"Consumers are really ready to get their financial house in order," said C. Britt Beemer, chief executive officer and founder of America's Research Group in Charleston, S.C. "You will be seeing some incredible offers by retailers, but I think you will see little response."

Still, some retail niches have yet to feel the impact of consumer cutbacks.

Sales of men's and children's clothing are outpacing women's apparel, according to the NPD Group, a trend that has helped upscale, contemporary children's clothing store Lillibelle thrive.

"I keep looking for it, but we haven't seen it yet," said Tiffany Hankel, co-owner of the Country Club Plaza store, of the economic downturn. "We have a real special product, very unique that they can't find at the chains."

National retailers also are trying to become more of a draw by offering exclusive items.

J.C. Penney is rolling out new lines from Kimora Lee Simmons, along with a line by Global Brand Concepts, a division of Ralph Lauren. Limited Brands, American Eagle Outfitters and Abercrombie & Fitch have teens springing for new lingerie lines. And mainstream department stores such as Dillard's and Macy's also are expected to appeal to rebate-wielding shoppers in coming weeks.

Analysts with Citigroup expect Saks to do well, driven by the relative financial health of its more upscale customers, and boosted by a strong tourism market as the weak dollar entices foreign visitors to shop here. Discounters such as Costco and Wal-Mart also outpaced department store competitors in same-store sales results during March.

But the slumping housing market has been hard on some home furnishings retailers.

After more than a decade in Westport, Unique Furniture Options closed when foot traffic dropped and furniture costs increased. Home Gallery in Overland Park planned to close this weekend to concentrate on Web sales.

The moment the "housing mess started, business went down," said Jill Lee, manager of the Home Gallery store.

One consequence of store closings is that landlords will be scrambling to fill vacancies as even the stronger retailers scale back expansion plans.

"We are definitely seeing tenants stepping back," said Dan Lowe, a principal at RED Development. "We are still getting deals done, but they are more thoroughly analyzing the opportunities in the marketplace. Unfortunately for landlords, if they choose your center it's a tenant's market and deals they agreed to 12 months ago they now want to change dramatically in their favor."

But don't blame all the closings on the downturn, retail experts say. After years of economic expansion and a consumer boom fed in part by growing household debt, America is simply overstored.

About 25,000 specialty stores have opened since 2000, and restaurant offerings now exceed demand, according to Technomic, a Chicago-based industry consultant.

Changing consumer trends also have led to closings.

Income earned by women who were joining the workforce drove sales for several decades. But that trend has leveled off, which may be more of a long-term issue for the industry than the current economic situation, said Bonnie Riggs, author of the new NPD report, "Why This Downturn Will Be Different for Restaurants."

To be sure, there are exceptions to the rule.

The recently reopened Stroud's South in Fairway is so overrun by fried chicken fans that it has temporarily suspended takeout orders to focus on in-store customers. Some hot restaurants in the Power & Light District downtown also are reporting big business.

But those examples are fighting a broader trend, industry experts contend.

"Consumers are really squeezed with energy costs and high food inflation -- the highest in 17 years," Riggs said. "The growth in consumers going out to restaurants has slowed, barely a 1 percent lift in traffic in '07, which is keeping up with population growth."

Historically, dinner business has held up well during recessions, but this time the industry has seen a 2 percent drop, or 377 million fewer dinner visits in 2007 than the previous year.

Restaurants are trying to make up the difference, promoting beverages since the profits on those items can be among the highest.

But consumers are savvy to those increased costs, too, and may opt for take-out so they can pour their own drinks at home more cheaply. A survey by Technomic found that more than half of consumers expect to cut back on full-service visits in response to higher prices.

Some Americans also are downsizing from casual dining operations to independent and fast-food venues.

Gregg Johnson, owner of three homegrown restaurant concepts -- Eggtc., Minsky's Pizza Cafe & Bar, and Osteria Il Centro -- has seen more takeout orders in recent weeks, as well as customers cutting back on reserve wines, appetizers and desserts.

"It's hitting everybody," Johnson said. "Our sales are flat or up at some restaurants. We just watch our expenses, tighten up on labor ... let people go home sooner, watch our paper costs, buy in bulk."

Johnson said emerging countries that are developing new eating habits are buying more American flour because of the weak dollar. As a result, he expects flour costs to increase and has stocked up a bit.

"In 35 years of business, I never had to think about the cost of flour," he said.

The Kansas City area franchisee for Popeyes Chicken & Biscuits is looking at other cost-saving measures. It has closed three underperforming locations in Blue Springs, Lee's Summit and Overland Park since mid-August.

The chain also has a new nationwide effort to control costs.

Instead of turning all the lights on during early morning prep times, operators are now turning on lobby and heat lamps just before the restaurants open. They also are watching portion sizes more closely, and making sure that employees are handing over no more than two packets of ketchup with a single serving of Cajun battered fries.

"We are sharpening our pencils and trying to give our customers value without raising prices," said Jim Eddy, president of Heartland Chicken Inc., area franchisee for Popeyes. "There's a shakeout going on with all the different restaurants closing. The ones that survive will have fewer competitors."

Along with the rebate checks, retailers and restaurants can expect sales to increase with warmer weather as consumers spring for supplies for gardening and sports equipment.

Still, despite the recent slowdown, some Americans have yet to curb their spending and aren't planning to.

Amy Hoppenrath, a marketing consultant and owner of AH Marketing in Liberty, said the downtown in the economy is an opportunity for small businesses to grow as corporations look to outsource work instead of hiring.

"It has been great for me, and I continue to see opportunities," Hoppenrath said. "So I don't feel I need to change my spending habits. I refuse to participate in the recession."

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The new frugality --More than two in five consumers, or 43.6 percent, say they've become more practical in purchasing, up from 40.2 percent in February and 38.5 percent a year ago, according to BIGresearch's survey of more than 8,000 consumers in early March. More than half are focused on needs rather than wants.

--After a 16-year decline, more than 2.6 billion coupons were redeemed in both 2006 and 2007, according to Chain Store Age, a trade publication.

Source: The Kansas City Star (Kansas City, Missouri)

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