Retail will recover . . . when?

In the wake of the World Retail Conference this week in Barcelona, and a day after chain stores announced smaller declines in April and first quarter sales, it's fair to ask when retail will recover.

At the conference, retailers sought to dampen hopes of a quick recovery from recession. It wasn't just because of the economy, although many retailers warned about a slow recovery, but also because of the industry's tendency to over-expand, changing consumer habits and growing online competition.

Let's start with the economy. Even though the downturn was the worst many have experienced, government action have boosted consumer confidence -- if not consumer spending yet. But in anticipation of a bottom, even retail stocks have joined the rally. Best Buy (BBY), for example, is up over 50 percent since March 9. Is it justifiable?

Well, while there's definitely some good news, only today April jobs report showed unemployment grew to 8.9 percent in the U.S. In Europe, unemployment is also over eight percent. These increases in unemployment are not expected to be the last, but rather peak at over 10 percent in 2010. In fact, even when the economy will finally be officially out of recession, unemployment will continue to rise, being a lagging indicator. It's likely then that consumer spending will remain subdued for some time.

Then there is the shift toward more cautious spending that will also likely to continue even if spending starts to grow. Consumers now prefer to pay down debt over buying a new pair of jeans. They look for better deals and are more aware of their spending. These habits, while welcome on the one hand, will remain for years as people recover from the jolt they received over their financial security, and continue to hurt spending.

So consumer spending could start recovering soon, but at a much lower pace and some retail veterans, like Vittorio Radice, say there is unlikely to be recovery in the retail sector until 2012. Meaning that the return to 2007 growth and spending levels, may not happen until then.

Meanwhile, the retail environment is continuing to change rapidly and eBay's (EBAY) CEO Donahoe believes that e-commerce will grow to 15-20 percent of the total retail market over the coming years, from around five percent now. While a boon for online sellers, this represents yet another challenge for brick and mortar ones.

And of course, retailers were just as guilty of riding the real estate boom as everybody else. They've over-developed, over-expanded and over-supplied. Now they're stuck with much unwanted space.

The good news? The buyer has more power. With more choice and retailers in a tight spot due to online competition and their own made mess, buyers can demand much more -- in price, service and added value.

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