1
A Presentation Given To
FTA Revenue Estimating ConferenceBurlington, VT
September 19-22, 2004
The Retail Sector EncountersThe Retail Sector EncountersThe The ““Soft PatchSoft Patch””
Michael P. NiemiraMichael P. NiemiraChief Economist & Director of Research
International Council of Shopping Centers1221 Avenue of the Americas, 41st Floor
New York, New York [email protected]
Retail Sector IssuesRetail Sector Issues
•• The Consumer is No Longer in the Driver SeatThe Consumer is No Longer in the Driver Seatof the Economyof the Economy
•• The State of the Retail Industry The State of the Retail Industry –– Experiencing Experiencingthe Soft Patchthe Soft Patch
•• The State of the Consumer - MixedThe State of the Consumer - Mixed
•• Gasoline Price ImpactsGasoline Price Impacts
•• 2004 Christmas Outlook & Beyond2004 Christmas Outlook & Beyond
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2
05040302010099
15
10
5
0
-5
-10
15
10
5
0
-5
-10
% C
hang
e (TQ
SAR)
% Cha nge (TQS AR)
Consumption Expenditures vs. Business Fixed InvestmentInflation Adjusted
Consumption Fixed Investment
Sources: U.S. Department of Commerce; ICSC Research.
TQSAR = Two-QuarterSmoothed AnnualizedRate.
Business Spending Takes the Lead Over Consumer SpendingBusiness Spending Takes the Lead Over Consumer Spending-2-
040200989694929088868482807876747270
115
110
105
100
95
90
85
20
18
16
14
12
10
8
Inde
xM
illions o f Un it s ( 3 - M
on t h Ce nt e r e d A ve r a g e )
Souce: ICSC Research.
ICSC Leading Indicator of Motor Vehicle Salesvs. Motor Vehicle Sales
Leading Indicator (Left Scale) Motor Vehicle Sales (Right Scale)
Motor Vehicle Leading Indicator Signals Softness inMotor Vehicle Leading Indicator Signals Softness inKey Discretionary Spending ComponentKey Discretionary Spending Component……But IndicatorBut Indicator
has been Improving in Last Two Monthshas been Improving in Last Two Months
2004 LEAD SALES JAN 103.7 16.7 mn. FEB 103.9 16.9 MAR 103.1 17.1 APR 103.3 17.0 MAY 102.3 18.1 JUN 101.5 15.8 JUL 102.5 17.6 AUG 102.9 17.0
ICSC Leading Index, 1990=100
Retail Sector Encounters the Soft Patch – Where? -3-
3
050301999795939189
10
8
6
4
2
0
10
8
6
4
2
0
% Ch
ange
from
Pr io
r Yea
r (3- M
o. A v
e r ag e
s ) % C h an g e fr o m Pr i o r Ye a r ( 3- M o . Av e r ag e s )
Note: Shaded Areas Represent Classical Business Cycle Recessions as Defined by theNational Bureau of Economic Research.
U.S. Chain Store Sales GrowthComparable Store Sales
The State of the Non-Auto Retail IndustryThe State of the Non-Auto Retail Industry
A Long Eight-Year Retail CycleCycle Upswing: 1995-1999 (4 Years)
Cycle Downswing: 1999-2003 (4 Years)
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200308200309
200310200311
200312200401
200402200403
200404200405
200406200407
200408
Year/Month
53
54
55
56
57
58
59
60
Diff
usio
n In
dex
(%)
53
54
55
56
57
58
59
60
Shopping Center Executive Business BarometerReadings Over 50% Represent Growth
ICSC Shopping Center Executive Component Diffusion Indexes (%)Components Aug '03 Sep '03 Oct '03 Nov '03 Dec '03 Jan '04 Feb '04 Mar '04 Apr '04 May '04 Jun '04 Jul '04 Aug '04SCE Barometer 56.458.959.658.955.757.257.456.855.756.457.354.255.5
Current Conditions 54.657.057.658.056.455.956.856.155.755.857.353.654.3 Sales 56.859.362.564.261.660.559.559.161.559.262.756.356.1 Customer Traffic 57.457.460.263.661.456.062.160.461.060.162.857.958.5 Occupancy Rates 57.762.958.554.055.758.055.753.653.357.860.457.854.9 Rent Spreads 52.151.657.655.857.554.254.854.754.954.359.152.657.9 Capitalization Rate 48.953.649.452.345.851.051.952.647.847.741.543.644.2
Expectations 58.260.861.559.855.058.458.157.555.757.057.354.856.6 Sales 64.067.667.966.361.264.264.163.363.264.864.563.359.6 Customer Traffic 64.467.669.068.058.262.563.761.662.861.861.762.559.6 Occupancy Rates 63.266.163.159.957.263.959.859.457.561.463.258.560.9 Rent Spreads 55.158.660.458.756.357.555.955.857.056.460.954.860.3 Capitalization Rate 44.443.947.345.942.143.846.947.538.040.736.334.742.6
Note: Capitalization rate diffusion indexes are inverted to capture the effect that a higher capitalization rate will lower the value of the property, other things being equal.
The Soft Patch ThroughThe Soft Patch Throughthe Eyes of the Industrythe Eyes of the Industry
The ICSC Shopping CenterExecutive Opinion Survey foundthat industry business conditionsimproved in August 2004, but the
pace of the improvement was a tadsofter than the same time of 2003.
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4
How Is the Shopping-Center Industry Performing?How Is the Shopping-Center Industry Performing?
0504030201009998979695949392
160
140
120
100
80
60
160
140
120
100
80
60
Inde
x, 1
995=
1 00 In d e x , 1 99 5 = 1 0 0
ICSC Shopping Center Activity Index
05040302010099989796959493
10
8
6
4
2
0
10
8
6
4
2
0
% C
hang
e fro
m P r
i or Y
e ar % C ha ng e fro m P rio r Y ea r
Sources: U.S. Census Bureau; ICSC Research.
U.S. Shopping Center-Inclined Retail Sales
05040302010099989796959493
5
4
3
2
1
0
-1
-2
-3
5
4
3
2
1
0
-1
-2
-3
% C
hang
e fr o
m P
r ior Y
ear % C
h ange f r om P
r io r Ye ar
Sources: U.S. Bureau of Labor Statistics; ICSC Research.
U.S. Shopping Center-Related Employment
05040302010099989796959493
60
40
20
0
-20
-40
60
40
20
0
-20
-40
% C
hang
e f ro
m P
r i or Y
e ar % C hange f rom
Pr io r Yea r
Sources: U.S. Census Bureau; ICSC Research.
U.S. Shopping Center Construction Spending
Composite Index ofSales, Jobs and
ConstructionSpending.
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The New Katona ParadigmThe New Katona ParadigmFor Understanding Consumer Spending MotivationFor Understanding Consumer Spending Motivation
The Expanded Katona Paradigm
Income
Wealth
CreditAvailability
Abilityto Spend
Confidence
Willingnessto Spend
New Demand
ReplacementDemand
GiftBuying
ComplementarySpending
Needto Spend
Weather
Time orConvenience
Buyer ResearchCompleted
ProductSelection
Opportunityto Spend
Consumer Spending
Original ParadigmConsumer Spending = f(Ability to Spend, Willingness to Spend)
Motivation for Spending
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5
A Closer Look: Store Sales Growth Rate Trends WeakenA Closer Look: Store Sales Growth Rate Trends WeakenSustainable Pace About 3% For Remainder of YearSustainable Pace About 3% For Remainder of Year
040200989694
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8
6
4
2
0
10
8
6
4
2
0
% C
hang
e fro
m P
ri or Y
ear (
3 -M
o. A
v er a
ges)
% C
ha nge f ro m P r io r Ye ar ( 3- M
o. A v er age s)
Note: Shaded Areas Represent Classical Business Cycle Recessions as Defined by theNational Bureau of Economic Research.
U.S. Chain Store Sales GrowthComparable Store Sales
Jan-May 2004 Average %Change Per Month = 5.9% y/y
Jun-Aug 2004 Average %Change Per Month = 2.4% y/y
Source: ICSC Research.
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-0.0
-1.7
0.7
6.2
-5.1
-2.8
3.5
Apparel Chain Stores
Department Stores
Discount Stores
Drug Stores
Footwear Stores
Furniture Chain Stores
Wholesale Clubs
-6 -4 -2 0 2 4 6 8
% Change (Y/Y)
August 2004 Sector Performance
August 2004 Comp-Store Industry Sales Grew By 1.1% Year/Year
The Relative Sales StoryThe Relative Sales Story
Even the Once Mighty Discount Sector Has Slowed Sharply
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6
Jan
01
Ma
rM
ay Jul
Se
pN
ov
Jan
02
Ma
rM
ay Jul
Se
pN
ov
Jan
03
Ma
rM
ay Jul
Se
pN
ov
Jan
04
Mar
04
May
04
Jul 0
4
Month/Year
-15
-10
-5
0
5
10
% C
hang
e (Y
ear/
Yea
r)
Apparel
Industry
Source: ICSC Research.
Apparel Specialty Sales vs. IndustryComparable-Store Sales Performance
Jan
01
Ma
rM
ay Jul
Se
pN
ov
Jan
02
Ma
rM
ay Jul
Se
pN
ov
Jan
03
Ma
rM
ay Jul
Se
pN
ov
Jan
04
Mar
04
May
04
Jul 0
4
Month/Year
-10
-5
0
5
10
% C
hang
e (Y
ear/
Yea
r)
Department Store
Industry
Source: ICSC Research.
Department Store Sales vs. IndustryComparable-Store Sales Performance
Jan
01
Ma
rM
ay Jul
Se
pN
ov
Jan
02
Ma
rM
ay Jul
Se
pN
ov
Jan
03
Ma
rM
ay Jul
Se
pN
ov
Jan
04
Mar
04
May
04
Jul 0
4
Month/Year
-202468
1012
% C
hang
e (Y
ear/
Yea
r)
Discount Store
Industry
Source: ICSC Research.
Discount Store Sales vs. IndustryComparable-Store Sales Performance
Jan
01
Ma
rM
ay Jul
Se
pN
ov
Jan
02
Ma
rM
ay Jul
Se
pN
ov
Jan
03
Ma
rM
ay Jul
Se
pN
ov
Jan
04
Mar
04
May
04
Jul 0
4
Month/Year
-5
0
5
10
15
% C
hang
e (Y
ear/
Yea
r)
Wholesale Club
Industry
Source: ICSC Research.
Wholesale Club Sales vs. IndustryComparable-Store Sales Performance
A Further Look at Sector Sales PerformanceA Further Look at Sector Sales Performance -10-
0403020100999897969594939291
2.00
1.80
1.60
1.40
1.20
1.00
0.80
2.00
1.80
1.60
1.40
1.20
1.00
0.80
Dol
lars
Dolla rs
Source: U.S. Energy Information Administration.
U.S Regular Gasoline PricesDollars Per Gallon, Including Taxes
Causes of the Economic Soft Patch andCauses of the Economic Soft Patch andWhy It LingersWhy It Lingers
High Gasoline PricesHigh Gasoline Prices……
But prices have recededBut prices have recededa bit since late Maya bit since late Mayrecord high.record high.
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Data Through September 6, 2004
2004 % Change (Y/Y)JAN 7.8FEB 2.1MAR 2.5APR 13.1MAY 32.5JUN 31.9JUL 26.4AUG 15.9
Retail Sector Encounters the Soft Patch – Why
7
Examining the Gasoline Price Impact
How Sensitive are Store Sales to Gasoline Price Swings?Estimated Consumption Function, November 1996 - April 2004
Store/Store Type
Every 10% Increasein Gasoline Impacts
Store Sales By
August 2004Estimated Impact of
Gasoline PriceIncrease (in
Percentage Points)Wal-Mart -0.77 -1.2
Discount Stores -0.66 -1.0Furniture Stores -0.60 -1.0
Overall Chain Store Sales -0.36 -0.6Department Stores -0.34 -0.5
Drug Stores -0.31 -0.5Footwear -0.21 -0.3
GAFO Sales -0.14 -0.2Wholesale Clubs -0.13 -0.2Apparel Specialty -0.11 -0.2
Note: Those rows shaded in gray represent not statistically significant results.
04030201009998979695949392
25
20
15
10
5
0
25
20
15
10
5
0
Dol
lars
, Th r
ee- M
onth
Mov
i ng
Aver
a ge Dol l ars, Thr ee- M
onth Mov i ng Av era ge
Excess Weekly Earnings After Average Gasoline Expenditures,Assuming 15,000 Annual Miles Driven and 20 MPG
Chart to Right: How much moreis the consumer spending forgasoline relative to the increasein average weekly earnings?
Average Expenditure Per Weekfor Gasoline: Early September $26.70 May 2004 $28.60 December 2003 $21.30
Discounters mostsensitive sector tohigh gasolineprices.
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0504030201009998979695949392919089888786
2.5
2.0
1.5
1.0
0.5
0.0
10
8
6
4
2
0
% C
hang
e (3
/12)
% Ch an ge (3/1 2)
Household Formation & Chain Store SalesHousehold Formation Growth Leads By 12 Months
Household Formation Growth (Left Scale)Chain Store Sales, Three-Month Average (Right Scale)
Short-Term Demographics Turned NegativeShort-Term Demographics Turned Negative-13-Retail Sector Encounters the Soft Patch – Why
8
Consumers React to Price Volatility (as Uncertainty) and Curtail SpendingConsumers React to Price Volatility (as Uncertainty) and Curtail Spending
-14-Retail Sector Encounters the Soft Patch – Why
050301999795939189878583817977753.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0 8
6
4
2
0
-2
-4
Vola
tility
in th
e Pr
i ce
Lev e
l%
Ch a n ge ( S M
S AR w i t h a F i l t e r )
The Katona Effect and U.S. Consumer SpendingVolatility in the Consumer Price Level Inverted
Price Level Volatility on Left ScaleReal Consumer Spending Growth (Smoothed) on Right Scale
Consumer Debt TrendsConsumer Debt Trends
050403020100999897
12
10
8
6
4
2
10
8
6
4
2
0
% C
hang
e fro
m P
ri or Y
ear ,
3 -M
o. A
v er a
ge
% C
hang e fr om P
r io r Year , 3- M
o . Av era ge
The Relationship Between Credit and Spending
Consumer Credit Use (Left Scale)Consumer Goods Expenditure (Right Scale)
040302010099989796959493929190898887868584838281807978
60
40
20
0
-20
-40
-60
-80
-100
30
20
10
0
-10
-20
-30
Net
Per
cen t
age
Rep
o rtin
g ( %
)
% C
ha ng e (T QS A R
)
Banks' Willingness to Lend to Consumersand Durable Goods Spending
Willingness-to-Spend Measure (Left Scale)Durable Goods Spending (Right Scale)
04030201009998979695949392
50
40
30
20
10
0
-10
50
40
30
20
10
0
-10
% C
hang
e f ro
m P
rior Y
e ar % C
ha ng e f rom P
rio r Ye ar
Home Equity Loan Demand
04030201009998979695949392919089888786858483828180
13.5
13.0
12.5
12.0
11.5
11.0
10.5
10.0
13.5
13.0
12.5
12.0
11.5
11.0
10.5
10.0
% o
f Dis
pos a
b le
I nc o
me % o f D
i sp os ab le I n co me
Household Debt-Service Burden
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9
0403020100999897969594
15
10
5
0
-5
-10
15
10
5
0
-5
-10
% C
hang
e (T
QSA
R)
% Ch ange ( TQ
S AR)
Source: U.S. Department of Commerce; ICSC Research.
Passive Income Rises Interest andDividendIncomeAccount forabout 14% ofPersonalIncome.These twocategories of“passiveincome”have startedto rise morerapidly thisyear.
But Not Everything is Negative…Some Sources of Income Are Improving
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The The DiderotDiderot Effect Still Exists Effect Still Exists
Consumer Fundamentals…
0504030201009998979695949392919089888786
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15
10
5
0
-5
-10
-15
10
8
6
4
2
0
% C
hang
e fr
om P
ri or Y
ear (
12/1
2)%
Change fr om Pr ior Y
ear ( 12/12 )
Home Demand as a Trigger for the Diderot EffectNine-Month Lead Time
Home Demand (Left Scale) Retail Sales (Right Scale)
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10
Holiday Sales Outlook and BeyondHoliday Sales Outlook and Beyond
Stocking Those Racks and ShelvesStocking Those Racks and ShelvesCan The Ordering Flow of Apparel Tell Us About RetailersCan The Ordering Flow of Apparel Tell Us About Retailers’’ Holiday Expectations? Holiday Expectations?
04030201009998
20
15
10
5
0
-5
-10
-15
20
15
10
5
0
-5
-10
-15
% C
hang
e fro
m P
r ior Y
e ar % Ch a n g e fr o m
Prio r Ye a r
Apparel Imports
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11
Changing Importance of Christmas SalesChanging Importance of Christmas Sales
030201009998979695949392919089888786858483828180
25.5
25.0
24.5
24.0
23.5
23.0
22.5
22.0
25.5
25.0
24.5
24.0
23.5
23.0
22.5
22.0
% o
f Ann
ual % of Ann ua l
November-December GAFO Sales as Share of Annual SalesShifting Importance of Christmas Sales
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2004 Christmas Sales Expectations
Table 1
U.S. Chain Store Holiday SalesYear/Year Percentage Change)
4-to-5%-1.13-to-4%------2004 est.
6.5-2.54.04.33.72003
2.0-1.50.51.00.02002
2.5-0.32.22.22.12001
1.80.62.40.74.02000
5.20.25.46.74.11999
3.91.25.15.74.51998
4.10.44.54.94.11997
2.11.03.13.42.91996
0.41.72.11.62.61995
2.41.43.84.13.61994
2.01.63.64.23.11993
3.02.65.67.43.81992
-1.64.12.52.62.41991
-1.43.42.02.71.31990
Real Spending InflationAverageDec.Nov.Year
NOTE: Sales are based on the monthly ICSC Chain Store Sales Index, whichis a composite of chain store sales on a comparable store basis. Inflation isbased on the Consumer Price Index for commodities less food and energy on aDecember-over-December percentage change basis, except for 2004 which isbased for July 2004.
Sources: International Council of Shopping Centers ; U.S. Bureau of Labor Statistics.Sources: U.S. Department of Commerce; ICSC Research.
5.0%4.5%5.5%2004 est.4.8%5.4%4.0%20031.1%0.7%1.6%20023.7%3.5%3.9%20013.8%1.9%6.8%20008.4%9.4%6.8%19996.1%6.4%5.7%19983.9%4.0%3.8%19972.7%2.6%3.0%19963.6%2.3%5.6%19958.4%8.2%8.7%19946.6%5.8%7.8%1993
Nov-DecDecemberNovemberYear(Based on NOT Seasonally Adjusted Data
Table 2
Tracking GAFO Holiday Sales(Year/Year Percentage Change)
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040200989694
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8
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4
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% C
hang
e fr
om P
r i or Y
ear % C han ge fr om
P ri or Ye ar
ICSC's Chain Store Sales Leading Index vs. Chain Store Sales12-Month Lead Time in Leading Indicator
ICSC Leading Indicator (left scale)Chain Store Sales, Three-Month Average (right scale)
Retail Sector Encounters the Soft Patch – Where?
Looking Ahead: WhatLooking Ahead: What’’s In Store For Sales?s In Store For Sales?Leading Indicator Suggests a Roller Coaster over the Next YearLeading Indicator Suggests a Roller Coaster over the Next Year——But Reasonably Healthy TrendBut Reasonably Healthy Trend
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