Retailers Must Plan for Economic Downturn in 2010

We're currently seeing elements of economic recovery but how solid is the road back to prosperity? Chairman Bernacke at the Federal Reserve recently stated that we appear to be climbing out of the recession but do not expect substantial increases in job creation. In Canada, 40,000 jobs were lost in the last quarter in spite of the so called recovery. If we look at the economic recovery closely we see that its largely interpreted through the current stock market positions. The TSX and Dow Jones have clawed their way up to an impressive 11,000 and 10,000 points level and many people see this as an opportunity to jump back into the market with the remaining funds they salvaged from the 2008 downturn.

Large and small retailers alike must understand what is going on and prepare for 12 more months of a truly weak economy. Retailers must not be lulled into a sense of security because of this short term market recovery. There are other forces at play that may bring the economy to a crippling halt in 2010, and retailers who are prepared for this event can get though this and get back on track.

If the stock market has passed the 10,000 point, shouldn't we be celebrating and putting the economic woes behind us? Firstly, I believe that this "recovery" is artificial and may be short lived. This is because stock prices have been going up because of short term earnings. If you examine just about every company on the stock exchange revenues are dropping yet earnings are up, hence increases in stock value. This is because in spite of dropping revenues, massive layoffs of employees in 2008 has created a short term benefit in lowering operating costs. Companies have reduced their employees to the bare minimum, however as revenues continue to drop the options that remain are either bankruptcy or a significant drop in earnings. With an unemployment rate of 10% in the USA, that is more like 15% in reality, people just won't be buying anything in the near future. The stock market will then start its sure decline back down to perhaps half of its current value or less.

When the stock market drops combined with a 15% unemployment rate, we'll be back in the economic abyss. There are other forces in play that will surface in 2010. Similar to the sub prime mortgage meltdown that occurred in 2007-2008, massive amounts of conventional mortgages are coming due. Although these are not sub prime mortgages, about a sixth of them are high risk low equity ones that will have the same effect as the sub prime mortgage fiasco. The number of high risk mortgages out there is about equal to the total of sub prime mortgages that collapsed last time.

However the bottom line though all of this remains as the chronically high unemployment rate. Consumerism drives the economy and retail. People without employment do not spend.

The retailers who understand what is going to happen, and prepare for it now will be able to survive this economic storm. There is a road to prosperity coming again, however the small retailer must get ready for one more very challenging phase in our economic recovery.

Lastly, based on the timelines of all these forces, I suspect that this will start early summer 2010.

Take Action Today:

1) Do your own research NOW and decide whether the upcoming economic downturn I speak about will happen and if it will affect your retail operation.

2) Plan to enter 2010 in as strong a financial position as possible. Defer any major purchases or renovations.

3) Price will be more important than ever in 2010 to the consumer. Continue to lower price points in your store and drive the price value brand statement.