Best Bye-Bye?

This has been a sobering week for the nation’s retailers and only three trading days have passed! It started with a double-shot of grim news: Starbucks reported that its net income dropped 97% from a year ago and the Circuit City filed for Chapter 11 bankruptcy protection. Then yesterday, Best Buy’s Chief Executive Brad Anderson said
"Since mid-September, rapid, seismic changes in consumer behavior have created the most difficult climate we've ever seen." Ouch!

As everyone gears up for the 2008 holiday season—it is crazy to see the decorations appearing in the windows this early—the question is whether beleaguered consumers will dramatically reduce their spending as they face a serious economic downturn. The answer is likely to be a resounding yes and evidence is clear wherever you look—in the auto industry, where sales of new vehicles have dropped 32% in the third quarter or in surveys that indicate that consumer spending is likely to fall in 2009 for the first year since 1980. In fact, last week, retailers reported the worst monthly sales decline in over thirty years, prompting them to kick off the season earlier than usual and with more dramatic discounts than previously expected.

America’s Research Group (ARG)/UBS Christmas Survey asked consumers what they intend to do for the holidays and the results were rough: 40.1% of consumers interviewed said they will spend less this year than last and 35.3% said they will buy fewer gifts. ARG Chief Executive C. Britt Beemer predicts that retail sales will be negative compared to last year for the first time in 23 years of conducting these surveys.

Downbeat forward-looking data is prompting retailers like Best Buy to batten down the hatches and quickly. The nation’s largest consumer electronics chain warned that its revenues would suffer and lowered its future profits as it retools operations to adjust to the new consumer reality of tighter purses. Best Buy’s President and Chief Operating Officer Brian Dunn said, "In 42 years of retailing, we've never seen such difficult times for the consumer. People are making dramatic changes in how much they spend, and we're not immune from those forces."

There is some good news buried in the bad stuff. The first is that consumers will benefit from lower prices this season. If you are lucky enough to have a steady job and the money available to purchase a flat screen TV, the best bet is to shop around, compare prices and wait for the drastic mark-downs, because they are sure to come. The price pressure is likely to be intense, especially among electronic retailers because failures like those at Circuit City and Tweeter will create large inventory levels throughout the sector. The other interesting benefit of these bankruptcies is that the survivors like Best Buy and even Wal-Mart, should benefit from shoppers who want to purchase merchandise and gift cards from stores that they believe will survive the current downturn. For now, I am hopeful that Best Buy will not morph into Best Bye-Bye.