Consumers Win as Retailers Cut Holiday Prices

Retail sales for November — excluding automobiles, gasoline and restaurants — were up 0.5 percent over October and 3 percent from a year ago. That’s a welcome increase, but less impressive than what we had expected. While we have been comfortable with our estimate of the direction of sales, the November numbers mean we are going to be watching the next two weeks — including this weekend’s Super Saturday — very closely.

So what’s happening?

A closer look at the numbers reveals that while fewer dollars are coming in than expected, that doesn’t mean consumers are shopping less. In fact, unit volume appears to be up. The issue is that prices are down. And that means the same number of sweaters, toys or electronic gadgets sold brings retailers less revenue.

The Bureau of Economic Analysis’ price index shows that general retail prices were 2.9 percent lower in October than a year earlier. A number of factors are behind the lower prices — inventories are stable but elevated, in part due to the flood of merchandise that came into the country earlier this year after the labor dispute that brought West Coast ports to a crawl ended. Warm weather has reduced demand for seasonal items like coats and sweaters. Much of the extra money freed up by lower gasoline prices has gone to services such as travel and restaurants rather than retail merchandise. In addition, most consumers have seen little in the way of wage increases. Rent, health care costs and even the amount spent on communications like smartphones, tablets and broadband Internet service are all up.

More than anything, perhaps, is that consumers have become conditioned to expect discounts and promotions. As the TV commercial says “nobody pays retail anymore.”

All of this has combined to create a very deflationary atmosphere the past year or more, meaning retailers have needed to be competitive and drop prices to keep products moving off the shelves.

While prices may be down, demand is certainly up. November sales were generally solid, with strength seen in sales of electronics, food and beverage, clothing, sporting goods, general merchandise and on-line and other non-store sales. Weakness in furniture and building materials was seen, but both had been strong in October.

“Lower prices might be bad news for retailers. But they are good news for retailers’ customers, who are getting great values for the prices they pay.”
NRF Chief Economist Jack Kleinhenz

Economist Richard Curtin, who compiles consumer sentiment data for the University of Michigan, stated recently that overall buying attitudes were solid due to the lower prices. He noted that purchases of durable goods were at the highest level since 2006. He says consumers are willing to spend but, as has been the case since the end of the recession, they will continue to dig for discounts and sales.

What’s the bottom line? Lower prices might be bad news for retailers. But they are good news for retailers’ customers, who are getting great values for the prices they pay. And, in the long term, what’s good for consumers is good for retail.

Jack Kleinhenz

December 15, 2015

National Retail Federation