Ricochet Recession

There is no doubt that things are beginning to improve in the retail environment.

This Labor Day I saw a huge increase in sales in my store. It kind of reminded everyone of the good old days when consumers spent more than they made and used their homes like ATM machines.

But it’s not the good old days; it’s still the bad current days. A reduction in the rate of decline in unemployment is just not the same as an increase in employment.

Sales have continued to be strong this past week and with any luck we should hit budget for the first time in close to a year, but it’s not time to pull out the Champagne.

Continued good news on the economic front is reason for hope, and I for one would love to see some life step back into the retail marketplace, it’s just that things will never be like they were because…well mostly because, they never are.

What we are witnessing now is the release of a great deal of pent up demand on the part of those 85% of consumers who have not lost their jobs, who have not had their homes foreclosed on and who did not loose a bundle in the stock market.

People can only put off spending for so long, some because they really need things like water heaters and washing machines, and others because the habit of spending is so addictive that they have been jonesing for a fix since January.

So while sales have improved and the pundits will soon start cautiously calling for an end to the recession, don’t be too quick to believe the next round of hype. Things are going to dip again real soon and the level of dip will depend on how strung out consumers get living it up on this pseudo-recovery spike in good economic news.

Anyone who has every driven the 405 in Orange County California knows about “Ricochet Accidents”. They are as common to the daily commuter as the infamous “SigAlert”.

As rush hour traffic, (or any hour traffic since the 405 through Orange County is always heavy) slows to a crawl, you will inevitably see people craning their heads out of car windows to see where the accident is. As people approach the accident, they instinctively slow down to look at it. In Orange County the rubberneckers are not just looking for gory details, they honestly think it might be somebody famous who is crying over the crumpled front end of the Escalade stuck sideways in the fourth of the seven lanes.

As soon as they clear the accident site, Cali drivers immediately accelerate to 85 MPH to make up for the time they lost seeing if Brittney would be appearing on the cover of People with a neck brace. Since everybody is going 85 MPH and changing lanes like Hollywood couples change spouses, there is sure to be another traffic accident no less than one and a half miles down the road. Hence the name “Ricochet Accident”.

That’s what we are about to experience in retail sales, a “Ricochet Recession”. Anyone who builds up inventory or adds too much staff right now will be in a world of hurt by the end of the year. This surge in spending might make it into the beginning of the holiday season and it will be hard to determine exactly if lower Christmas sales are result of the drop in pent up demand or of lackluster holiday performance, but the fundamentals of the recession are still too strong to allow for any real recovery until the second quarter of 2010.

This is not the end of the recession, not even close. Things are going to get bad again before they get better. The only question is how bad and for how long. The answer will vary from retailer to retailer depending on how individual retailers react to the current economic uptick and how well they prepare for the “Ricochet Recession”. Any attempt to back off of aggressive pricing and marketing to regain valuable margin dollars will be met with disastrous results.

In fact, I don’t see how big name retailers are ever going to get back the margins they have lost. I also don’t know how they are going to keep shareholders from revolting. I don’t see how the current model of big box retail can hope to increase shareholder value in a slow-grow to no-grow economic environment.

In addition, we can’t loose sight of the fact that consumers are going to school right now. They are learning exactly just how far retailers are willing to go to get sales in tough economic times. Just because they may start coming back into the stores after the first quarter of 2010 doesn’t mean that they will accept businesses going back to 2004 practices.

It’s going to be a whole new ball game when the economy “recovers”. The old way of retailing is entering an age of decline and new retailing models are rising from the economic ashes to challenge everything current retail mavens believe about how to make money.

It’s going to be very, very interesting.