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Retail Bankruptcies Bring Sharper Image to Weak Consumer Spending
With big retail chains going under, can small businesses find a way to survive?
The list of well-known retail chains going bankrupt lengthens by the day: electronic gadgetry specialist Sharper Image, catalog retailer Lillian Vernon, furniture stores Bombay and Levitz. Soon to be added, according to a recent New York Times article, will be household goods retailer Linens 'n' Things.
As these big chains succumb to too much debt and too few sales, they shine a light on the larger problem in the U.S. economy. If consumers aren't spending as much on gadgets furniture, and clothes, will the economy fall into a deeper recession?
Remember, it's been the free-spending consumer who has propelled the U.S. economy forward even after the dot.com recession in 2000-01. Consumers kept spending even as their savings dropped to nil, meaning that, as a whole, U.S. consumers were buying lots of goods and services on credit. Now that the formerly happy-to-loan banks are tightening their lending standards, credit isn't so easy to come by.
And that tighter credit affects retail businesses every bit as much as it does consumers. Retailers borrow money to tide themselves over during the days between Christmas, Easter and back-to-school when shoppers aren't buying. They also borrow money to buy inventory. But the double whammy of fewer sales and tighter credit is causing once- stalwart businesses to fail. Even big-name retailers like Ann Taylor, Office Depot and the Foot Locker are cutting back on the number of new stores they plan to open in 2008. In an ugly kind of daisy chain, the failure of an established chain store leaves many unpaid debts to suppliers, some of which are other big businesses, some of which are small businesses. For instance, reports the New York Times:
"When it filed for bankruptcy, Sharper Image owed $6.6 million to United Parcel Service. The furniture chain Levitz owed Sealy $1.4 million. And it is not just large companies that are absorbing the losses. When Domain, the furniture retailer, filed for bankruptcy, it owed On Time Express, a 90-employee transportation and logistics company in Tempe, Ariz., about $30,000.
“We’ll be lucky to see pennies on the dollar, if we see anything,” said Ross Musil, the chief financial officer of On Time Express. “It’s a big loss.” (New York Times, 4/15/08)
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These burgeoning retail business failures are being reported now. But here at Elliott Wave International, our Financial Forecast analysts have been warning subscribers about an economic contraction for many months. Here's an excerpt from the February 2008 Elliott Wave Financial Forecast:
Our December issue offered an array of indicators showing that the economic “contraction is on its way.” The exact date of the start of recession remains unknown, but the media are openly speculating upon the possibility. What they will realize only in retrospect is the nature of the predicament and just how combustible the system is this time around. As late as January 8, just one of 54 economists surveyed by The Wall Street Journal was calling for a GDP decline in 2008. Business Week and Newsweek both featured recession cover stories, but both stories underestimate the strength of the contraction. Business Week maintains, for instance, that an “aggressive Fed can “blunt [the bear’s] bite.” Newsweek quotes an economist who says “a global recession is inconceivable,” and the world is not “facing the Great Depression II.”
But everything we see points to Great Depression Plus. The developing deflationary collapse is closely paralleling the depression of 1837-1842 and the Great Depression. With these epics outside the experience of just about every economist, many continue to focus on inflation even though consumers are not responding to the building economic pressure the way that they did in the 1970s. At that time, retailers successfully raised prices to stay in business. This time, they are doing just the opposite; Wal-Mart, the No.1 U.S. retailer, just cut prices 10% to 30% on groceries, electronics and home-related products. Recent weeks also brought the birth of the “world’s cheapest car,” the $2,500 Nano, which will be sold in India, and a return to the $1 cup of coffee at Starbucks…. Most importantly, consumers are adopting a “survival mentality” in which they rein in spending, cut coupons and reduce consumption. “I am pinching pennies [and] eating more cereal and I am not buying clothing,” says a limo driver who is working three days a week instead of five “amid slow business.” These changes fit right in with EWI’s forecast for economic contraction.
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