Living in Santa Barbara, and Southern California in general, we tend to take the weather for granted. I moved to California from Texas specifically because of the bad weather in Texas and for the good weather here. For businesses, the weather can actually be a serious consideration, and a factor that can make or break others.
Over the past several weeks, the U.S. has experienced several powerful winter storms that have dropped huge amounts of snow, and iced streets. The two days after Christmas were so bad in some areas that after-Christmas sales were affected so significantly that some retailers missed their earnings projections for the fourth quarter. This week’s storm that hit Chicago buried cars and trucks on freeways, and was the third heaviest day for snow on record for the city, in more than 126 years.
When the employment numbers were released for December, we were informed that unemployment claims were down significantly from estimates, not because more people found jobs, but because the weather in December was so bad in several states that unemployment offices had to operate for fewer hours on several days.
The development of the Internet and e-commerce is still in its infancy, but it is clear that online commerce is here to stay. In fact, Christmas sales saw a 12%+ increase in online sales, versus less than 1% for brick and mortar only operations.
Many retailers including Target Corp., Costco Wholesale Corp. and Macy’s Inc. reported sales gains below Wall Street expectations for the third quarter, and especially for December. Bon-Ton Stores Inc.’s sales were virtually flat and company officials blamed the severe snowstorms., and The Gap suffered a surprise 3 percent drop in December. (Analysts had expected a 2.6 percent increase.)
The overall holiday retail sales season was actually the strongest since 2006, but sales really fell off in December, in large part due to the poor weather around the country. Early holiday discounts, which started in late October, drove big sales early in the season but also had consumers completing their shopping before December even began. A lull early in December and the blizzard of December 26th in the Northeast also took a heavy toll on sales.
From October 31st through January 1st, revenue at stores open at least a year rose 3.8 percent over last year, according to an index compiled by the International Council of Shopping Centers. That’s the biggest increase since 2006, when the measurement rose 4.4 percent. However, the index slid to a 3.1 percent increase in December after a 5.4 percent rise in November, highlighting the drop off in December activity. More expensive retailers saw better-than-expected sales. Abercrombie & Fitch Co., which saw robust gains that beat Wall Street estimates, though it had to discount to lure shoppers in. Luxury stores, including Saks Inc. and Nordstrom Inc., also reported big increases as the rallying stock market kept affluent customers spending.
“The overall season was good, but the strength came from the beginning of the season,” said Michael P. Niemira, chief economist at International Council of Shopping Centers.
December’s gains came on top of a 3.6 percent gain in December 2009, while November’s impressive increase compares with a 0.2 percent decline in November of 2009. These numbers are based on “same-store-sales,” or sales from stores open at least one year (excluding sales from stores open less than one year).
However, changes in shopping habits and other factors have led the figure to lose some of its luster as a yardstick. Some stores exclude online revenue, which soared 12 percent overall and accounts for 8 to 10 percent of total holiday spending. Online spending spiked 17 percent the week after Christmas, according to comScore, possibly getting a boost from shoppers cooped up by snow.
In addition, many retailers have stopped reporting monthly figures, including some of the biggest chains: Wal-Mart Stores, Best Buy Co. and Sears Holdings Corp. Only about 30 merchants report now, down from about 60 at the end of 2005.
Analysts say that the holiday 2010 season also marked the time that spending in many categories returned to pre-recession levels. Online spending, as well as spending on groceries, auto parts and clothing, are now above the pre-recession peak, according to MasterCard Advisors’ SpendingPulse, which tracks all transactions including cash.
Despite spending increases overall for the holiday season, many retailers are planning to raise prices in the Spring to counter skyrocketing commodity prices. Brooks Brothers Inc. is raising prices on all cotton items by an average of 10 percent, for example. It is not clear whether price increases will result in higher profit margins, or lower revenues and therefore lower profits.
One thing appears certain – weather-related disruptions, which have always been a problem for retailers, will continue to impact sales. More importantly, with the increase in online sales volumes, and the increasing level of comfort consumers have with online purchasing, brick and mortar retailers will be fighting an uphill battle.
The growth in online sales of better than 12 percent during the holidays, dwarfing the 3.6% increase in overall sales, underscores the growing importance of online sales for retailers, and also the risk to those not offering an online shopping option.
My feeling is that, each time a consumer attempts to shop at a brick and mortar store, only to be thwarted, due to weather, traffic, time-constraints, or because the store simply does not stock the item of interest, the retailer is vulnerable to losing that consumer permanently to the e-commerce world. Human beings are creatures of habit, and behaviors are difficult to change, whether it is overeating, watching too much television or spending too much time at the mall. But, once that behavior is changed, especially when a consumer becomes an online shopper, there is a high likelihood (and a high risk to the brick and mortar retailer) that the consumer will be an online shopper for good.
To me, this is a significant trend that will only expand as time passes. We see its impact all around us, with stores closing, such as Borders and Barnes & Nobel, and others, such as Blockbuster, barely clinging to life as they navigate bankruptcy court. More and more, online retailers are gaining market-share at the expense of the traditional, brick and mortar businesses.
Local businesses can benefit in at least two ways from the trend towards online commerce and poor weather in many parts of the country. First, the Internet is not going away, and e-commerce will continue to outpace overall sales, and sales growth at brick and mortar stores. Local businesses should take this to heart, and wherever possible, offer their wares online. Second, to the extent possible, Santa Barbara businesses should try to draw consumers here during those months when the weather is usually poor elsewhere. A more concerted, focused effort on the part of local businesses to attract consumers to town during the winter months to shop could result in meaningful sales increases.
Many businesses have waited and watched as e-commerce sites have exploded, not wanting to embrace new technologies, or to spend the extra money to develop e-commerce sites for their businesses. They have stood by and watched other lesser companies in many cases, take their customers away, and have watched their profits dwindle. Local businesses should embrace these trends and aggressive pursue strategies to appeal to the growing number of online shoppers, who are here to stay.