Economists Offer 2010 Outlook

Economists presented both sides of the picture to retailers at the NACS State of the Industry Summit in Chicago this week.

The 2010 NACS State of the Industry Summit marked the 40th anniversary of the State of the Industry survey conducted by NACS. When the survey began, industry sales were recorded at just over  $1 billion. In 2010 industry sales total more than $500 billion.

“We’re still where America shops,”  Greg Parker, CEO of the Parker Companies, told the crowd of retailers. Despite one of the worst economic recessions, the industry has fared well, he said.

Parker noted that gasoline consumption has decreased and retailers must therefore pay greater emphasis to their backcourts. “The nimble retailer will come out ahead with less competition than they did in the past. I encourage you to watch your numbers.”

He reminded attendees that the economic downturn has created a deeper pool of better employees, and that the costs for expanding are favorable. “A recession is a terrible thing to waste, ” he said.

David Nelson, professor of Economics at Western Washington University and president of Study Groups (FRMC Inc.), offered encouraging news, declaring that the financial system has stabilized and that the economy is growing again.


Key Points

-The housing market is not yet in recovery.
-The economy was unable to realize the full effects of the federal stimulus because of offsets at state levels.
-For every 1% increase in fuel volume, there is a corresponding rise of between 0.36%  and  0.57%  in in-store sales.
-The average duration of unemployment during the current recession is 31.2 weeks, far higher than it was during other recessions. Some economists predict it won’t return to “normal” levels (about 6%) until 2014.
-Not all of the unemployment news is negative. For retailers, that translates to lower employee turnover, lower training costs and lower wage growth.

Nelson said the U.S. economy is finally in recovery, so retailers should position their stores for the new environment, but even as things are looking up, he cautioned against becoming overly optimistic. “Economic growth will be slow,” he said.

The country is producing 6% less goods and services than we would if we were operating at a typical level of output.  Unemployment still is high and will remain that way for the foreseeable future. This is a chance for c-store chains to focus on making sure they have the right people in positions so they can hit the ground running as things improve.

“The-store industry is recession resistant,” Nelson said.


Tobacco Is Back

Cigarettes accounted for 35.8% of in-store sales in 2009. The growth in sales dollars was driven by the increase in the federal tax on cigarettes to $1 per pack that took effect in April 2009, as well as additional state tax increases. Still, cigarette sales were up 18.8%, which Nelson said means it’s too soon to think profits are going away in this category. The industry also is seeing a huge growth in OTP. Consumers also might not be trading down when it comes to cigarettes as previously predicted. Premium brands dipped 4.2% (unit change), but surprisingly 4th tier cigarettes are down 4.5% . Nelson said some 4th tier cigarette shoppers may have left the category all together in favor of OTP.

Retailers reported seeing similar results at their chains. For example, Country Fair Inc., which operates 70+ convenience stores in northwestern Pennsylvania, western New York, and eastern Ohio has seen cigarettes holding steady to increasing, and big increases in OTP, noted Karen Kuehn, financial controller for Country Fair.

But it’s important to take into account how excise taxes and state minimum price laws for cigarettes are impacting sales data numbers, noted Gary Arnold, chief financial officer for Motomart Convenience stores, which operates 75 stores in six states (Illinois, Missouri, Indiana, Ohio, Wisconsin and Minnesota). Motomart “isn’t experiencing the same margin increase on cigarettes as the rest of the industry. A lot of chains are operating in states with minimum markups and Illinois and Missouri don’t have that, so the averages showed are skewed by different locations.”  

Spurring Sales

Looking at sales, fuel brought in 68.4%, food brought in 5.5%, merchandise brought in 26.1% but looking at profit, fuel brought in 30% while food and merchandise combined accounted for 70%, Nelson noted. He added package beverages and beer sales have slowed and milk sales were down a whopping 28%. Meanwhile, foodservice still offers opportunity for retailers.

There is little inflationary pressure on the horizon, so seek good value and take a measured approach to risk, he advised. Both short-term and long-term interest rates will rise gradually over time.

Nelson concluded by stating that fiscal and monetary stimuli are winding down and that the ball is being passed to the private sector. “Are you ready?” he asked.

Retailers reported feeling optimistic about the future and business going into 2010 following Nelson’s speech.


Sobering News

Walter Zimmermann, chief technical analyst at United Energy, was up next with a sobering viewpoint, showing that the economy isn’t bouncing back anytime soon. He noted the following:

-30% of foreclosures are strategic and relate to consumers being able to rent a house for less than they can pay a mortgage.
-If banks had to write down the value of all their mortgages to current home values, they would have to write off $900 billion. “And banks do not have that as a net worth.”
-He predicted the real estate market still had four years before it bottomed out.
-Consumer credit is in a nosedive, lending is tight and there is a “terrible risk” of deflation.  “Deflation can grind the economy to a halt,” he warned.
-More consumers are saving their money, as they realize how difficult it is to obtain loans.  

He added the global economic problem for the next several years is a revenue shortage. “There is not enough revenue to support the debt that exists…We believe that there is caution if not alarm [on the horizon] for the economy.”

Tom Kloza, chief analyst at OPIS, delivered the same sense of restrained economic optimism.

“It’s been a quiet first quarter of 2010,” he began, “with relatively small day-to-day [oil] price changes…But I don’t expect that to continue. If volatility is your friend, it’s coming back. And he’s like the guy who empties the chemical toilet in National Lampoon. He’s coming back and he’s annoying.”


Key Points

-Kloza said he was 95% certain the EPA would approve the higher percentage for ethanol. “You must consider how to deal with cars that come in and are not supposed to have anything higher than E10.”
-Refining margins for gasoline will not be great from May through August.
-He urged retailers to focus more on evidence and less on hype delivered by various news channels as they conduct business in 2010.





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