HARVARD BUSINESS SCHOOL FACULTY SHARE
PERSPECTIVES ON HOLIDAY CONSUMER SPENDING

BOSTON-November 17, 2009-As the holiday retail season approaches, Harvard Business School professors Nancy F. Koehn and Rajiv Lal share their outlooks for consumer spending.

NANCY F. KOEHN, James E. Robison Professor of Business Administration. Author of, "The Story of American Business: From the Pages of the New York Times."

Professor Nancy Koehn

It's going to be an interesting holiday shopping season on both sides of the register.

If we start with the big picture, holiday retail spending in 2009 is likely to be flat or marginally better than last
year. In 2008, holiday retail sales were $442 billion or
about one tenth of total retail sales for the year. While
this year is likely to see little or no increase on 2008
holiday sales, the difference, year-over-year, is expected
to be much smaller than the 3.4% drop in holiday spending
last year-relative to 2007-when consumers pulled back
dramatically on all manner of buying in the midst of the
financial crisis.

On the demand side of the economy, consumers face several headwinds as they embark on their holiday shopping journeys, including uncertainty about jobs, housing values, the availability of credit, and the stock market. Even more important, consumers' attitudes about getting and spending and how they deal with household budgets are undergoing a huge shift, the biggest shift since the end of the Great Depression and World War II. And this change will likely play a role not only this holiday season but for years to come. After the shock and awe of last year's financial crisis, households are taking stock, abandoning the "next new thing" in favor of more enduring priorities, and establishing distinct notions of value from those that have prevailed during the last decade. All of this adds up to the New Normal.

On the supply side of the economy, retailers-from Wal-Mart to Macy's to Best Buy-will use promotions (including loss leaders), coupons and other price enticements to bring shoppers into their stores and to their web sites. Savvy retailers will also experiment-more vigorously and audaciously than in the past-with how they merchandise their offerings: putting products together in new ways, moving products into new, prominent places in the store, and just generally working hard to excite customers in value-conscious ways. (In the past year, we have seen some of this smart experimentation pay off for retailers like Whole Foods, JCrew, and the Cheesecake Factory).

The best retailers will be doing more than trying to maximize sales this holiday season. They will be trying to deepen their knowledge of how consumers are changing and what this means for 2010 and beyond. This means looking carefully at the effectiveness of specific promotions and merchandising efforts and then if necessary, quickly changing the mix. It means walking the aisles. Or manning the 1-800 lines and listening carefully to customers. It means a range of actions directed to earning and keeping customers' trust (at a moment when households' trust in all kinds of organizations has been shattered). It means paying strategic attention to the seven-week dance between buyers and sellers that the holiday shopping season represents.

RAJIV LAL, Stanley Roth, Sr. Professor of Retailing and Co-Chair, General Management Program (GMP)

Professor Rajiv Lal

Despite the significant GDP growth of 3.5% in the most recent quarter, American consumers are still reeling from the worst recession since the Great Depression. The drop in consumer spending by 0.5% in September, after five months of successive growth, would seem to cast a shadow over retail sales during the all-important holiday season. This number has also reinforced our doubts about GDP growth, a significant part of which was fueled by the government-supported cash-for-clunkers program and the tax break for new home buyers. Unfortunately, the decline in American consumer confidence from 73.5 in September to 70.6 in October, as reported by The University of Michigan survey, reinforces this concern. Finally, and most important, the unemployment rate has climbed above 10% for the first time since 1983.

That said, I am still betting on the power of Santa Claus. While consumer spending may never reach pre-recession levels, I think it will be much better than expected for a number of reasons. First and foremost is the difference in the psychology of the American consumer. At this time last year, the economy was in a free fall. The stock market was tanking, major Wall Street firms were facing extinction, 401ks were evaporating, and the nation's confidence in our economic system was badly shaken. A 6% contraction in the GDP was hardly surprising. Consequently, most consumers spent their money only on essentials. Sales in categories where purchase could be delayed suffered the most -- automobiles in particular and apparel to a lesser extent. Thankfully, things have changed for the better.

Within four quarters, the economy has come out of the recession's deepest doldrums. While government support is still critical, the future looks more secure. The improving stock market has provided some relief to the declining values of 401ks and has made us all more optimistic about the future. And while credit is still not easily available, the increasing savings rate over the last year should leave us with more to spend this holiday season. Therefore, forget about last year's Scrooge-like retail results. I expect this season's sales to be significantly improved.

As long as consumption is a source of happiness, however fleeting, consumption shall not be denied. The changes in economic conditions and the forthcoming bonus season on Wall Street, for example, should provide a big kick in spending by the well-to-do. Luxury retailers should therefore see the biggest increase in their top line, with sales increasing by as much as 7-8%.

In some ways, the millions of less affluent consumers on Main Street are no different. If they believe the worst is behind them, they will be eager to head for their favorite stores and malls and spend their money on non-durables that don't feel frivolous. Children's clothing falls into that category. Pants and coats that were a tad short last year will need to be replaced. Apparel and shoes that are used every day, along with utilitarian household goods, should also be popular. Companies like Target might be in the sweet spot of this changing sentiment.

October sales reports seem to provide some relief to the wary. Retail sales at stores opened at least a year rose by 2.1%, beating estimates of 1%. Macy's posted a 0.8% decline in October as compared to a drop of 6.3% in October, 2008, and a drop of 13.3% in November, 2008. Saks posted a 0.7% increase in October, much better than expected, and Nordstrom enjoyed an increase of 6.5%. That kind of good news is one more reason I'm optimistic about the holidays ahead.