Topic: Miller College of Business

November 5, 2009

Deep price cuts may lure consumers into discount stores this holiday retail season, but sales will still fall 0.93 percent from the same time period last year, resulting in total sales worse than any of the past five years, says a new study by Ball State University.

Even though the economy shows signs of moderating after suffering through one of the worst economic recessions in decades, many consumers are wary of spending, said Michael Hicks, director of Ball State's Center for Business and Economic Research (CBER), the research division of the Miller College of Business.

"The combination of high unemployment and solid growth in various components of the U.S. economy make this one of the most difficult holiday retail forecasts in recent memory," Hicks said. "It is not all gloom and doom out there because we are seeing signs the economy is recovering. However, the unemployment rate continues to be high, and will be for some time, and this is putting a damper on shopping. Some people are afraid to spend as freely as in the past.

"Despite some apprehension, I believe consumers will be out looking for really great bargains. Already, Wal-Mart and Target have announced deep cuts on toys and other merchandise. Consumers want and expect that. For many retailers, it may be difficult to reduce prices further, but they may not have any choice."

Hicks points out that holiday spending typically accounts for more than one out of every six dollars spent on retail items.

For some items such as jewelry and consumer electronics, nearly a quarter of annual spending occurs in November and December, he said, adding that the holiday season is important to retailers while providing important insight into the overall performance of the economy. 

The study may be found at under current studies and publications.

When comparing sales for the upcoming retail holiday season with those from last year, Hicks' analysis forecasts that food sales should see an increase of 3 percent; jewelry sales will be up 0.6 percent; auto sales will be up by 1.5 percent; department stores will see a decrease of 15.7 percent; consumer electronics will be down by 14.3 percent; and furniture sales will be off by 11.5 percent.

Retail implications 

"We believe that some of the increase in manufacturing activity in recent months has reflected inventory declines and a belief that this holiday season will be less severely affected by the economic downturn than the past," Hicks said. "However, we anticipate many retailers, including high-end department stores and specialty stores, to offer significant discounts this year to move inventory through the season."

Jewelry sales are forecast to grow modestly over the holiday; however, the prices incorporate significant year-to-year changes in the cost of precious metals. 

"Interestingly, we expect jewelry sales to accelerate in December, perhaps as jewelry represents a last-minute purchase," Hicks said. "However, this will not necessarily translate into higher profits for retailers." 

Retail sales in 2008

Hicks said when the U.S. slipped into recession during the fourth quarter of 2007 it did so with a whimper, not a bang. That changed in September 2008 as the emerging financial crisis led to a speedy and deep decline in the gross domestic product (GDP) in the fourth quarter of 2008. 

Led by a 24.7 percent decline in auto sales, the 2008 holiday sales period was dismal, declining by 9.4 percent from the previous year.

While some sectors such as discount club stores saw increases, general merchandisers, big box stores, clothing and consumer electronics saw significant holiday season sales declines, he said.

"Simply put, 2008 was horrible for the entire retail industry," Hicks said. "Some individual retailers, most noticeably Wal-Mart, fared much better, but the sector as a whole had its worst performance in more than five years."

The study found that only Wal-Mart, Kohl's and Target saw an increase in sales over the holiday season of 2007, while JC Penney, Gap, Costco, TJ Maxx-related companies and Limited Brands stores all experienced declines in total sales. Of those stores that saw growth in 2008, only Wal-Mart experienced same store sales increases, with the other chains expanding sales through new store placement.