Retailers Face a Challenging Year in 2016 as U.S. Economy Chugs Along

Financial gurus and pundits agree that 2016 will probably be an economic twin of 2015. There will be slow but steady growth and unemployment will remain low.

But clothing retailers and department stores will face a taxing year as consumers continue to release their pent-up demand for going out to dinner, taking in a movie, booking a weekend trip or splurging on a massage. Some are even hiring back their gardeners laid off during the recession.

“For the last year or six quarters, consumers have been spending more money on services than goods,” said Jack Kleinhenz, the chief economist of the National Retail Federation in Washington, D.C. “They also have to spend more on healthcare costs and on rents, which have been increasing.”

Retailers’ tug of war over shoppers’ disposable income was seen during the holidays, when there were winners and losers during a challenging season that saw roses blooming in New York City as the thermometer reached 72 degrees the day before Christmas.

Macy’s attributed its 4.7 percent slip in same-store sales during November and December to unseasonably hot weather, which had consumers shunning winter coats, scarves, knit hats and gloves and donning shorts and T-shirts.

However, JCPenney didn’t have the same problem even though it was influenced by the same unseasonably warm weather right before the holidays. The mid-tier retailer’s same-store sales during the November/December period inched up 3.9 percent as shoppers snapped up JCPenney’s private labels and combed through racks with a wide assortment of clothing.

“This year was a disaster for winter apparel,” said Britt Beemer, a retail analyst and founder of America’s Research Group, which polls 1,200 consumers a week to take the pulse of their retail-spending attitude. “Twenty-six percent of Christmas transactions are winter apparel items.”

While an increasing number of sales were being made online, 91 percent of shoppers made a purchase in a bricks-and-mortar store during the holiday season, said the International Council of Shopping Centers.

So going forward, the trick for many retailers will be to find ways to reel in those shoppers. Creating a cheery, upbeat shopping environment is critical. Beemer said he advised one of his clients with a chain of 100 stores to amp up holiday decorations at one-half of the chain’s stores instead of being conservative with the seasonal cheer. “He took 50 stores and bought all kinds of Christmas decorations and then really decorated,” Beemer said. “His sales went up 23 percent at those stores.”

Price-conscious season

Beemer said shoppers’ budgets are as stretched as ever even though prices at the gas pump are down as much as 3 percent from last year, adding a few hundred dollars to everyone’s pocketbook. But mandatory healthcare coverage costs are in the thousands, which completely wipe out the gas bonus.

For the average shopper, bargain-basement prices have won out over pricier goods when it comes to hitting the malls. Beemer calculates that the five winning retailers this holiday season were Walmart, Dollar Tree, T.J. Maxx,Ross Dress for Less and Marshalls.

Those stores cut into sales for other low-cost retailers such as Old Navy, which saw its same-store sales plummet 7 percent in December versus a positive 8 percent last year and fall 9 percent in November after a positive 18 percent the previous November. In the past, Old Navy has been the jewel in the crown of parent company Gap Inc., accounting for 40 percent of sales.

Gap Inc.’s other nameplates didn’t fare much better with same-store sales at Banana Republic falling 9 percent in December and dipping 2 percent at the Gap stores.

Cutting costs will be one way retailers survive this year. Aéropostale Inc. recently announced it is trimming 13 percent of its staff—or 100 jobs—by the end of fiscal 2015 and is implementing an aggressive new cost-reduction program to generate $35 million to $40 million in pretax savings in fiscal 2016. Last year, the New York–based retailer catering to young men and women lost $206.5 million on $1.84 billion in revenues.

While consumers may be changing their shopping habits, shoppers remain on a fairly solid footing as the unemployment rate in the United States stands at only 5 percent. It is slightly higher in California at 5.7 percent but down from 7.2 percent the previous year.

“The fact that we have had strong employment numbers is a good base going forward into 2016 and should keep consumers really engaged,” said the National Retail Federation’s Kleinhenz. “The challenge we have is that wages have not been all that superlative. But they should lift in 2016.”

Despite all the economic turmoil in China, which is roiling Wall Street markets, the United States’ GDP is expected to grow between 2.6 and 2.8 percent in 2016, up slightly from the expected 2.5 percent in GDP growth in 2015.

The devaluation in China’s currency, the renminbi, means that importing clothing from that country will be cheaper, adding to the annual falling price of apparel in the United States. Last year, clothing prices were down 1.7 percent, jewelry prices dipped 2.6 percent, and furniture and home furnishings dropped 5.7 percent, according to the U.S. Bureau of Economic Analysis.

Golden state

California’s economy is poised for positive growth in 2016, following in the footsteps of the United States. “We are not looking at any breakout growth but slow and steady,” said Robert Kleinhenz, the chief economist at the Los Angeles County Economic Development Corp. His brother is Jack Kleinhenz.

In 2015, for the fourth year in a row, California added more jobs at a faster clip than the United States. The number of new jobs in the United States rose 2 percent in 2015 while they were up 3 percent in California, Robert Kleinhenz said.

Construction jobs in California have been the winners—up 6.6 percent in 2015, followed by professional, scientific and technical service jobs rising 6.3 percent.

With tourism at a record high in Los Angeles County—climbing 2.8 percent to 45.5 million visitors last year—the hospitality and leisure sector will continue to add workers.

The only sector that might take a hit is trade because a strong U.S. dollar and weaker economies in developing countries mean less demand for U.S. exports. “It is going to be a pretty steady ship moving forward for the next 12 months,” the LAEDC’s Kleinhenz said. “And we are expecting to see wages increase in the Los Angeles County area.”