October 20, 2003
by Irwin Stelzer
You don’t have to be a close reader of the business pages to know that the free-spending American consumer gets credit for keeping the American economy from slipping into a serious recession. What is less heralded is just how the supply side of the economy has contributed to the willingness of American consumers to put their hard-earned and easily borrowed dollars to work shoring up the economy.
Start with Wal-Mart, as any discussion of the retail sector must. With revenues of almost $250 billion, it is the world’s largest company. As Business Week points out in a recent cover story, “Every week, 138 million shoppers visit Wal-Mart’s 4,750 stores; last year, 82 percent of American households made at least one purchase at Wal-Mart.”
For President Bush that is both good and bad news. The good news is that Wal-Mart’s use of its mass buying power to keep its costs, and therefore consumer prices, low, has made it unnecessary for the Federal Reserve Board’s monetary policymakers to worry that low interest rates will trigger inflation. The bad news for the president is that Wal-Mart’s purchases account for some 10 percent of America’s trade deficit with China, a deficit that manufacturers and trade unions complain is costing American workers their jobs. To cool things down at home, and to head off congressional pressure to impose tariffs on Chinese goods, President Bush will use the Asian Pacific Economic Conference (APEC) later this week to press China to allow its currency to float upwards so as to make its goods less competitive in the US market.
But even if Bush gets what he wants, the increase in retail prices should not be great, given Wal-Mart’s power vis-à-vis its major suppliers. So it will continue to dominate the pile-‘em-high-and-sell-‘em-low segment of the retail market, and keep customers spending.
The emergence of Wal-Mart is not the only revolution on the sell side of the consumer market. The Internet, discounted as a force when the dot.com bust hit the high-tech sector, is finally making an impact on consumer markets. Books and CDs have always been products that webtailers can move. But consumers are now using the Internet for purchases of apparel, something few thought would ever happen. ComScore Networks Inc. estimates that in one month alone, 34 million consumers bought more than $500 million worth of clothes at websites, up 44 percent on the previous year.
And another consultancy, Jupitor/Ipsos, estimates that between 16 percent and 25 percent of Americans purchased a product or service online. Which is why Barry Diller’s InterActive Corp., which includes the Expedia travel agency, general TV and webretailer HSN, Ticketmaster, and other e-commerce operations, is expecting revenues to rise by 34 percent this year, to $6.2 billion.
Not only must the retail segment accommodate a growing Web segment. It must also find a way of separating increasingly affluent and fickle youngsters from funds that now consist of a lot more than the measly allowances of yesteryear. Youth will be served, and well served, or else. Teenagers last year spent about $120 billion in the shops, about 40 percent of it on clothing and accessories, according to Trevor Delaney, writing in Smart Money. Not for them any item that is “so five minutes ago,” meaning that retailers now have to be more fleet of foot than ever to guess just what will strike the fancy of this with-it crowd. That means low inventories, quick adjustments of ad campaigns, and the risk of rack upon rack of discounted merchandise.
Adding to the turmoil in the retail sector is the demand of many customers for something more than good prices or an easy transaction. They want a shopping experience. This is forcing many malls to become what can only be described as destination resorts. The more than 150 malls managed by publicly traded General Growth Properties cover the United States, and in addition to their 15,000 stores, these malls include theatres, ice-skating rinks, and other forms of family entertainment. In Minnesota, during the peak shopping season, 900,000 customers per week visit the Mall of America’s 4.2 million square feet (“big enough to hold 32 Boeing 747s”, boasts its web site). That mall is home to more than 520 shops, over eighty eateries, eight nightclubs, and 2,500 marriages since its opening.
That means that in addition to the cheery service and low prices of a Wal-Mart, consumers can boost the economy in the more pricey shops that populate the shopping malls that offer “free” entertainment and a place to socialize—the Pentagon mall in Washington, D.C., opens early to allow pensioners to use its oval balcony as a running, well, walking track.
And for those for whom fashion counts, there are always the boutiques with their top brands. But it isn’t the unwearable dresses of the catwalks of New York, Paris, and Milan that really matter. It is the accessories that have been developed to keep tills ringing. Handbags and such account for 70 percent of Gucci’s sales, and 60 percent of the profits of LVMH, and are expected to fuel a 10-20 percent rise in that sector this year. And while female customers are choosing among ever-widening lines of fashion accessories, what Forbes magazine calls the “metrosexual male,” modeled on “David Beckham, the tough soccer player who isn’t afraid to wear sarongs and nail polish (off the field),” is buying cosmetics, defoliating, and choosing among washers and dryers designed specifically for men.
In short, consumers may be the heroes of the economic recovery. But sellers have done their bit by keeping prices low for price-conscious consumers, expanding the number of ways customers can order goods and services, putting fun into buying, and dazzling the high rollers with great products. They deserve a bit of credit, too.
This article appeared in London’s Sunday Times on October 19, 2003.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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