Retailers should proceed with caution

Don Hogsett, January 21, 2002

Splashing cold water on hopes for a speedy retail recovery, Stephen Roach, chief economist for Wall Street giant Morgan Stanley, cautioned retailers of challenging times ahead at last week's NRF session entitled, "Market Maker or Market taker, What Drives Shareholder Value?"

"Retailers are going to face an extremely difficult environment coming off this extraordinary consumer buying binge over the holidays, and it could be quite a hangover," Roach said.

Responding to markdowns and bargain-fever, consumers produced a better Christmas season that retailers had expected — but with consumers freshly tapped out, and their credit cards maxed out, it could take until the second half of the year before stores see any fresh spending momentum, he cautioned.

"It could take a lot longer to get over this recession and back to comfortable levels of consumer spending," said Roach. "To think we'll get over this in just two quarters is delusional."

Roach cautioned, "The entire world is in a very rare synchronous recession, with the effects reverberating around the globe."

While the broad economy shows some signs of recovering, Roach said he thinks a "double-dip" recession is likely, where the economy, after perking up, falls to its knees once again. "Capital spending is weak, the consumer is stretched, and exports aren't going anywhere. You can argue that we just aren't ready to restart the economic engine."

Roach said American consumers are now confronting record debt levels, corporate downsizing, rising unemployment and a lower savings rate. "Consumers are going to face some uncomfortable fundamentals. Unemployment will go up through most of this year. The American consumer is living on borrowed time."

Veteran analyst Walter Loeb, of Walter Loeb Associates, agreed. "I don't think we'll see a quick recovery. The consumer is still worried about employment issues and rising debt levels."

Going one step further, Loeb said he sees a "strategic shift" in American retailing in the directions of the discounters "and stores with food, stores with pharmacies, stores that offer value."

As a result, warned Loeb, "I'm looking for some stores to fall by the wayside. They will not be able to recover from this consumer apathy."

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