The National Retail Federation (NRF) estimates that retail industry sales will grow at a 4% clip from the 2010 levels, on the back of a better-than-expected holiday season, coupled with strong sales growth.
According to NRF, retailers ended fiscal 2010 on a promising note attributable to good holiday season sales, which set the stage for potential improvements in fiscal 2011. However, inflation from rising commodity prices and a still high unemployment level could remain a matter of concern for retailers.
In this scenario, understanding current customer trends and simultaneously aligning the business model to meet customer requirements is the key to retain and attract new customers. Another key to success in the retail arena is keeping volume growth intact. Retail is basically a volume game. Going forward, with competition intensifying and costs scaling up, the players who are able to grow volumes by ensuring footfall, cutting costs and warding off competition will have the final advantage.
Retailers Adapt to Consumer Preferences
In spite of an improved macro outlook, we believe that frugality and conscious shopping would remain the norm for US retailing this year. Hence, price would prompt shopping decisions over merchandise quality.
Across all income levels, all consumers ranked price as the most important reason for store choices by a significant magnitude ahead of other criteria. Hence, retailers will have to be very sharp about offering trend-right and well-designed assortments without compromising on quality in order to improve merchandise margins besides offering the wares at compelling price points.
Cost of Living Index
While the prices of certain essential items have been on the rise, the overall inflation picture is not threatening enough. Rising inflation can puts a brake on sales as consumers are forced to spend disposable income on more expensive food and fuel.
However, the high unemployment rate remains a matter of nagging concern for the U.S. retail community. And the unemployment rate has come down a full percentage point in the last five months, but still remains significantly high at 8.8%, as of the March payroll report.
Easy comparisons from the prior year should also put this year's performance in a better light. The sustainability of the momentum, however, will rest squarely on the continued economic recovery and improvement in the job market. This will ultimately boost consumer confidence and disarm prudent discretionary spending.
According to the Thomson Reuters survey of 25 major retailers, sales in March increased by a better than expected rate of 1.7%. The strong showing came despite the delayed Easter and the recent surge in gasoline prices, which had tempered expectations.
Some retail chains like Nordstrom Inc.(NYSE: JWN), Macy's Inc.(NYSE: M), J.C. Penney Company Inc. (NYSE: JCP), Kohl's Corp.(NYSE: KSS), Target Corp. (NYSE: TGT) and many others reported strong sales numbers.
Improving labor markets, better economic conditions and the fall in payroll tax helped to mitigate the effect of high fuel and food prices. The key reasons for their strong performances appear to be their continuous efforts to offer innovative products and value pricing, rapidly respond to the buying habits of the consumers and strengthen loyalties despite price-motivated fickleness.
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