Business - US;Consumer Cutbacks;Look who's Benefitting

Moira Herbst

Elissa Montas, a 30-year-old freelance writer in New York, is shopping more often at general-goods discounters, the kind of stores that peddle everything from candles to baking pans to suitcases. She's also doing her holiday shopping early so she can budget better and exploit sales. "There'll be no retail therapy for me this year," Montas says, lamenting the fact that her wardrobe won't see many additions. Instead, she's hunting bargains for two new babies in her family as she pores over discounted children's DVDs. Montas and her friends are also sharing coupons for such stores as Gap (NYSE:GPS - News), Banana Republic, and Lord & Taylor. Those coupons have been circulating in recent days via e-mail. "It's not glamorous, but it's what's happening," she says.

Leonard Stiff, a 30-year-old chef at a catering business in Manhattan, is restraining himself from buying a new flat-screen television. He's also keeping his current mobile phone and skipping an upgrade to a 32GB Apple (NasdaqGS:AAPL - News) iPod Touch music player, opting to make do with a 16GB Touch. "It's a little depressing, but if you're smart now, you'll be better off in the long run," Stiff says.

A recession is typically a news story told in macroeconomic headlines: surging unemployment, decimated home values, the failure of this or that large bank, or, as on Nov. 14, the record decline in U.S. retail sales that hit in October. The Commerce Dept. reported that retail sales dropped 2.8% last month, the steepest decline in the 16 years that data have been tracked. The sales decline was led by a huge fall in auto purchases, but sales of all types of products suffered. Amid the newfound frugality (BusinessWeek, 10/9/08), retailers are preparing for what could be their worst holiday season in decades.

Fewer Christmas Gifts

Craig Von Bargen, 58, an engineering consultant for Coeur d'Alene Mines (NYSE:CDE - News) in Walnut Creek, Calif., is also trimming where he can. Even though he feels his job isn't under threat, the grim economic climate is enough to make Von Bargen and his wife scale back. Instead of giving each other several gifts this holiday season, they've decided to make it only one or two.

In the aggregate, the changes by consumers like Montas, Stiff, and Von Bargen are having a big impact. Circuit City Stores filed bankruptcy (BusinessWeek.com, 11/10/08) on Nov. 10, beset by weak sales and suppliers who became nervous about the electronics chain's ability to pay. Two days later, healthier rival Best Buy (NYSE:BBY - News) slashed its earnings outlook, citing "seismic" changes (BusinessWeek.com, 11/12/08) in consumer behavior that created "the most difficult climate" the company has experienced. "Consumers went into hibernation in October while concerns about the economy were at a peak," says Rosalind Wells, chief economist at the National Retail Federation. "As economic uncertainty went from bad to worse, shoppers pulled back on everything but the basics to weather the storm."

So where are consumers shopping for these basics? According the federation's 2008 Holiday Consumer Intentions and Actions Survey conducted by BIGresearch, 40% of shoppers said sales/promotions are the largest factor when determining where to shop. On Nov. 13, Wal-Mart Stores (NYSE:WMT - News) reported a 10% increase in third-quarter earnings, but cut its profit outlook because of the troubled economy and the dollar's strength. The retailer said its renewed focus on low prices and holiday price bargains is attracting financially squeezed shoppers. As consumers downgrade and hunt for deals, variety/discount stores, such as 99 Cents Only Stores (NYSE:NDN - News) and Dollar General, are also seeing sales rise (BusinessWeek.com, 11/5/08). Competitors Dollar Tree (NasdaqGS:DLTR - News) and Family Dollar Stores (NYSE:FDO - News) have seen double-digit earnings growth the past two quarters, benefiting their share prices.

Happy Hour Customers

While the restaurant business as a whole is suffering, some value-oriented franchises are managing relatively well. Jeremy Schumacher, who manages an Applebee's in Columbus, Ohio, says that for the past three months his restaurant has been pulling in an average of 200 more customers and $4,000 more per week. "People are very happy with happy hour," when drinks and appetizer prices are half off. Schumacher says he thinks people from higher-income brackets who did not previously patronize his restaurant are now coming in. "We're very reasonable," he says, "and people are starting to figure that out."

Consumers are finding still other ways to save, such as switching from name-brand products to generics (BusinessWeek, 10/30/08). U.S. sales of private-label goods rose 10% in the year ended June 28, according to Nielsen, compared with a meager 4% gain for national brands. And consumers lacking cash flow or credit can once again start putting purchases on layaway at such places as Burlington Coat Factory, which saw its percentage of layaway sales rise from 4.6% in August to 5.3% in October. Kmart, a subsidiary of Sears (NasdaqGS:SHLD - News), which has offered layaway for years, has rolled out a new advertisement pushing the plan.

Consumers have varying levels of comfort as they adjust to an era of budget trimming. Stiff, for one, doesn't mind cutting back a little on electronics, but he's not happy when the downturn infringes on his social life. "I'm a single guy, but the dating scene gets expensive," he says. "For most women, a movie and McDonald's isn't a quality date."