JUDY WOODRUFF: And to the troubles facing the retail industry in this country on this Black Friday, the official start of the holiday shopping season. Jeffrey Brown has the story.
EMPLOYEE: You guys had a good Thanksgiving?
SHOPPER: Yes, absolutely.
JEFFREY BROWN: The prices were lower, lines were shorter, and initial reports were of customers spending less, all signs of a disappointing start to the holiday shopping season, amid a spreading financial and economic crisis.
SHOPPER: People are getting scared because of the economy. People are getting scared with the amount of money they’re allowed to spend on themselves and on others around them.
JAKE CIRKSENA: I’m used to lines being a little bit longer, things being a little bit more hectic.
JEFFREY BROWN: June to September saw the biggest quarterly drop in consumer spending in 25 years. And the trend continued in October.
So this year’s holiday season, when retailers traditionally earn as much as 40 percent of annual sales may be more important than ever.
Customers who were shopping at a Target in Alexandria, Va., just outside of Washington, D.C., told us they worked extra hours to foot the bill.
A few miles away, Tyson’s Corner Center mall opened at 6 a.m., two hours earlier than last year, but…
JACQUELINE SMITH: There’s nobody here compared to last year, and you can look at it. It’s a lot of lookers. And there’s just a level of uncertainty.
JEFFREY BROWN: Already several chains, including Tweeter and Linens ‘n Things, have announced they’re going out of business. Circuit City has filed for bankruptcy.
Still, some large discount stores, like Wal-Mart and Costco, have continued to do well.
And if there’s good news for consumers, it’s the huge bargains available; many retailers, in fact, began slashing prices weeks early this year. And that had some brave souls lined up early in the cold.
SHOPPER: It’s freezing out here. And my whole family is mad because I’m not at Thanksgiving dinner tonight, but got to do what you got to do to save a dollar.
JEFFREY BROWN: Among the big sellers this year: flat-screen TVs and iPods.
Impact of spending cuts
JEFFREY BROWN: And we get more now from Nancy Koehn, professor and retail historian at Harvard Business School, and Joanne Lipman, founding editor-in-chief of Conde Nast Portfolio magazine.
Well, Nancy Koehn, obviously there's a lot of fear out there. What do you look for to know how much people are cutting back and what kind of impact it's having?
NANCY KOEHN, Harvard Business School: Well, we'll be interested, Jeffrey, in the numbers that come forth as early as Sunday on preliminary sales, both on Black Friday and tomorrow.
Cyber Monday, the new, you know, newly titled day for Internet shopping that marks that onset and that holiday spending will be another interesting barometer.
I think a third barometer will be how retailers react. I mean, this is a great interactive dance between retailers and consumers, with each gauging each other.
And so, if we see more deep discounts, more sales, more promotions early next week, we'll know that things were not what many, many people hoped today on Black Friday.
JEFFREY BROWN: Well, Joanne Lipman, I mentioned some of the stores that are already in trouble. What kinds of stores or chains are most vulnerable now?
JOANNE LIPMAN, Conde Nast Portfolio Magazine: Well, almost all of the chains are vulnerable at this point, except for the very low-cost retailers, such as Wal-Mart and Costco, which you mentioned.
But in addition to Linens 'n Things, there is Circuit City, there's Mervyns, there's Bombay Company. By one estimate that I saw recently, something like 6,100 individual stores are expected to go out of business just this year, a number that would be 25 percent higher than a year ago. And projecting it forward to next year, the estimate is as high as 14,000 stores that could go out of business.
So this is really a serious situation for all retailers.
Stores' 'relaxed financing deals'
JEFFREY BROWN: And staying with you, Joanne, what do we know so far about consumers? Are they using their credit cards when they're buying? Are they still using debt to make these purchases?
JOANNE LIPMAN: Well, see, this one of the issues that we're facing here, is that the credit crunch that started with the credit markets, the financial markets, has now come over into the consumer market.
And so a lot of consumers who had been depending on their credit cards are finding that their limits, their credit limits, have actually been reduced. So the stores find themselves in a very, very difficult position.
So what we see now are the stores actually extending themselves. You mentioned -- in your excellent report there, you mentioned these huge sales that we've heard now, 75 percent, 80 percent off.
But in addition to that, we now see that some of the stores are offering credit terms to their buyers. For example, Saks Fifth Avenue is offering to certain buyers 0 percent financing. Macy's is sending to some its credit cardholders coupons good for, you know, between $20 and $500 off of a purchase.
So the stores are having to extend themselves even further to bring in that customer.
JEFFREY BROWN: So, Nancy Koehn, by doing that, I mean, I assume they're doing that because no one will buy if there's no sale. But by doing that, they're building in lower profits, right?
NANCY KOEHN: Yes, they are. The good news on that front, though, Jeffrey, is that the supply chain, the value chain behind the retailers now is so supple, so flexible that they can actually protect some of their margin by leaning hard on their own suppliers and by cutting their inventory to very, very, very small amounts and then cutting the time on delivering that inventory.
So I think we'll see a real protection of margin, even in the face of some of these promotions and these really, really relaxed financing deals.
Role of consumer psychology
JEFFREY BROWN: You know, staying with you, Nancy Koehn, we've talked so much about psychology in the last few months here as we look at all aspects of what's going on.
I'm curious about the mixed messages of shopping right now. On the one hand, you have people holding back. On the other hand, you have some lines where people are going for bargains. On one side, you have people feeling they have to save. On the other hand, you have this sort of sense that it's almost patriotic to get out there and shop to get the economy going.
How does all that play out psychologically?
NANCY KOEHN: I think, just as you said, there's a little bit of a schizophrenia here. And you have one other factor, and that is just the holiday overhang, right, the traditions of buying, right, the wish to say something with gifts that's a very important part of consumer psychology this time of year.
I think what we'll really be looking for in these next few weeks is we'll really be looking for the best kind of numbers that we can get on how those countervailing forces, you know, the credit crunch, the unemployment uncertainty, how -- versus the wish to be patriotic, the wish to give to others, how all those forces balance out.
But we'll need some numbers on that, because, as you point out, they really buffet the consumer in two different ways.
JEFFREY BROWN: Do you see that, Joanne Lipman, that sort of schizophrenic consumer out there?
JOANNE LIPMAN: Well, you know, I think the most important issue that you touched on here is the consumer spending accounts for 70 percent of gross domestic product, 70 percent, so that is so key.
And the psychology here, the psychology cannot be underestimated, because what we're seeing is the panic that we've had in the markets and in the financial markets has to a large extent been part of a general panic.
I mean, there's underlying financial causes that have been blown up by the panic in the market, and so it's so key to see what happens in -- with consumer spending and with the retailer in this holiday season, because that will give us some indication of the consumer psychology, which is then going to be driving the rest of the economy.
A consumer 'hibernation'
JEFFREY BROWN: Well, Nancy Koehn, we talked to you in the past about retailing history. When we hear a number like that, 70 percent of the economy dependent on American consumers, is that different from the past? Are we more reliant than in the past? Where are we now in those large terms?
NANCY KOEHN: We're holding slow and steady, Jeffrey. Consumption as a component of GDP has been in that neighborhood for a long, long time. Retail spending is about half of that, two-thirds, so we're talking about literally, you know, a sixth of GDP, dependent on retail spending.
But, again, that's not new news. That has been the case for a long time. What is new is that, for the last six to eight years, consumer spending has held remarkably constant through lots of other vibrations in the larger economy.
And here we're seeing for the first time in six to eight years, you know, in which a business cycle downturn was part of that time, we're seeing the consumer really go into a kind of hibernation, a response to the kind of conflicting psychology and the panic that Joanne was talking about.
JEFFREY BROWN: How far back do you go to see something comparable?
NANCY KOEHN: You have to go back to the early '80s before we see anything that looks like this; '81, '82, we saw consumers literally take their hands off their wallets as dramatically as they have here. But that's going back 26 years now.
JEFFREY BROWN: And, Joanne Lipman, before we go, I want to ask you, the retail industry is also obviously a very large employer, and obviously this is the season when they typically add on people. What are we seeing now?
JOANNE LIPMAN: Yes, you know, we're seeing the same issues play out with employment. In terms of seasonal employment, which is so important at this time of year, there was a survey recently of retailers that found that they were hiring something like -- among the people surveyed, they were hiring 33 percent fewer seasonal employees.
Now, that was a small sampling. But what we're seeing all over is, between the store closings and the fact that the stores themselves are being squeezed, there's less seasonal employment, and that will only add to the really difficult unemployment situation that we've been seeing with the unemployment figures rising from month to month.
JEFFREY BROWN: All right, Joanne Lipman and Nancy Koehn, thank you both very much.