STORES Global Powers of Retailing 2009 - (Page 41) 2009 global powers of retailing What does this mean for economic activity— and especially for retailers? Even before the current total credit freeze, things were not looking good for the global economy. The collapse of housing prices in the United States as well as the end of housing bubbles in the United Kingdom, Spain, and several other countries meant that the positive wealth effect of increased housing prices would no longer spur retailing. Thus, the growth of consumer spending was constrained. In addition, the collapse of housing market activity hurt home-related retail spending. Thus, it is no surprise that overall retail sales growth has been weak in the United States and Europe. Now, with the credit freeze having intensified, there is a strong likelihood of a deeper economic downturn in the United States and Europe, which is already having a spillover effect on the rest of the world. The almost complete collapse of the commercial paper market in the United States means that businesses, both large and small, are having trouble with short-term financing. Although government intervention in this market is designed to stimulate lending, it may take a while to kick start activity. In the interim, some weak businesses may fail rather than be acquired given the inability to finance new acquisitions. Employment is likely to suffer substantially. The ultimate impact on the global economy will depend on how quickly governments restore credit market credibility. Yet recent volatility in equity prices indicates that market participants have reevaluated the future profitability of large corporations. They have determined that the current problems will cause a slowdown in economic activity that will suppress profits. The implied drop in wealth will certainly have a negative impact on spending by consumers. As such, the outlook for retailers in developed economies is quite poor. A reasonable forecast is that the U.S. economy ultimately recovers by the end of 2009. Even then, however, consumer spending growth will be limited. The U.S. housing market will take much longer to recover. The destruction of housing wealth will weaken consumer spending growth. Indeed, the structure of the U.S. economy is likely to shift so that more growth will come from exports (something that is already happening) and that retail spending will grow more slowly than the overall economy. As this happens, the U.S. consumer will no longer be the engine of global growth that it represented in the past. Instead, the rest of the world will have to rely on other sources of growth. In East Asia, which has been highly dependent on exports to the United States, more future growth will come from consumer spending. For global retailers and their suppliers, this means that there will be a shift in focus away from North America and more toward East Asia and some other emerging economies. What should retailers do? In the short run, retailers will have to focus on market share. It was relatively easy to do well when the market was growing rapidly. This new environment will determine which retailers have the right strategies. Consumers will be intensely value-oriented, even more so than in the recent past. We are seeing this already with consumers shifting to more price-focused retailers. And for all retailers, this environment will require added attention to keeping costs under control. Top-line growth, however, will require something altogether different. Retailers will gain market share only if they are clearly differentiated from competitors, possess strong brand equity, have the ability to innovate in order to maintain differentiation, and offer a customer experience that excites consumers. These are the factors that will provide retailers with pricing power. Whatever happened to commodity prices? Until the recent credit crisis, many analysts were more focused on concerns about high and rising commodity prices. No longer. Since September, commodity prices have dropped precipitously including energy and food prices. Have the causes of high-priced commodities gone away? No. In the long-run, there are good reasons to expect oil and food prices to be relatively elevated compared to recent history. Yet in the short-run, a decline in prices is warranted as is an increase in volatility. As of this writing, the global economy is on a downward path. The U.S., already in a mild recession, may be entering a deeper and more prolonged downturn. Western Europe is also likely to see a downturn in economic activity. Emerging markets are not immune and are likely to experience at least a slowdown in growth. Thus, global demand for commodities is quickly weakening. Markets are responding by driving down prices. These will remain weak until economic recovery is clearly on the horizon. In the interim, lower commodity prices, especially for oil, will offset some of the negative impact of the credit crunch in oilimporting countries. For commodity exporters, however, the current drop in prices will hurt economic growth. In the longer term, the same forces that drove prices up through most of this decade have not disappeared. As large emerging markets such as China and India continue to grow rapidly, demand for energy will rise accordingly—especially as energy costs are subsidized in these countries, which will discourage efficient usage. At the same time, supply of energy will be constrained by a failure to invest in new capacity in many emerging markets. Discrimination against foreign investment, political instability, and international conflicts over pipelines will be among the factors that limit investment and, therefore, output. www.deloitte.com/consumerbusiness STORES / January 2009 G41 http://www.deloitte.com/consumerbusiness
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