Retail industry performance and the economic cycles in 2006-2008.
Hence in a way we can visualize an economic cycle having taken place in the period between 2006 and 2008.Given this position, the objective of this paper will be to decipher how economic changes affect the performance of the retail industry. First, before the financial crisis became apparent, that is between 2006 to 2007, we would like to see how the retail industry performed vis a vis the economy. Then after the financial crisis began to take its toll on the global community, spending patterns definitely changed, and it is important to note how this affected the industry. Lastly, it would be important to try and come up with an economic relationship between economic performance and the performance of the retail industry. The resultant model should be able to be used to forecast the future of the retail industry based on economic projections that are normally put forward by economic and financial experts from time to time.
LITERATURE REVIEW
Retailing is primarily concerned with the sale of finished products to the end users (Rakhi, 2009).It is comprised of both individuals and companies. On the retailing continuum, we can have a family run store on one hand. On the other extreme we have such global behemoths like Wal-Mart, the worlds largest retailers, operating in numerous states. Retailing is considered to be a primary driver of the global economy given the fact it permeates all levels of the society and employs millions across the world. For instance, according to Jones (2009) a massive 15.5 million people worked in the United States Retail Industry in the fourth quarter of the year 2007.
Economic Indicators and Retail Performance
According to Euromonitor International (2009), the performance of the economy as a whole has a great impact on retailing. This is because a retailers profits are closely correlated with the performance of the economy. This way, performance indicators such as price growth and retail turnover will either show favorable or poor prospects depending on the movements of the various economic parameters. Economic growth trends such as HYPERLINK httpwww.investopedia.comtermsggdp.asp Gross Domestic Product (GDP), HYPERLINK httpwww.investopedia.comtermsiinflation.asp inflation, consumer confidence, personal income and interest rates are extremely important when thinking about the expectations and therefore performance of the retail industry(Jones,2009). A drop in interest rates by say 50 basis points for example, might look as a small gain to an individual consumer, but Jones (2009) notes that if considered in terms of an economy as a whole, it has a big effect on spending patterns. Likewise, if incomes of people fall, or they are less confident about their economic future, they are likely to cut back on expenditure, and save so as to take care of the future uncertainty (Euromonitor International, 2009).This drop in spending means that the retail industry takes a beating in terms of low sales. Coincidentally, spending is a function of peoples income levels and their confidence, and this varies with the performance of the economy. In Spain for example, 2008 saw a slow down in economic growth accompanied by increased rates of inflation and unemployment, and as a consequent, retail sales grew by only 2 compared by over 10 in 2007(Euromonitor International ,2009).
The Economy and Different Retail Segments
Economic hardships are likely to limit peoples spending, in view of the fact that most people will have lost jobs and therefore incomes earmarked for purchases would have fallen. Johnson and Scholes (2003) notes that each segment or range of products is affected differently by the economic cycles. The impact of economic cycles on each retail segment therefore tends to vary substantially. According to Jones (2009), this reflects how each group of goods represents a discretionary form of household expenditure. Some segments of the retail industry will therefore record robust sales figures while others will suffer loses. These trends might cancel out each other. As a result, the retail industry might actually record growth, even in difficult economic times. For instance, only 20 of the variation in the volume of food retailing may be attributed to changing economic conditions, compared to around 85 of movements in the hospitality and services sector (Shulha ,2006).This means that in an economic downfall, the food industry is likely to experience modest changes in sales figures while the service sector suffers huge losses.
Employment and Retail Performance
According to Shulha (2006), employment rates within an economy, which is closely linked with the economic strength, also affects the performance of the retail industry. This is particularly because the unemployed tend to exhibit spending patterns different from the employed. Myers (2004) notes that during difficult economic times, there is a tendency towards hidden unemployment whereby more people are willing to take up part time and casual employment which in many cases represents a form of under employment. On the other hand, the increasing incidence of under funded retirees who are unable to maintain previous levels of consumption takes an upward turn. All these groups represents a form of unemployment given the fact that spending is cut, particularly for discretionary items such as clothing, electronic goods and holidays. And this pattern is likely to negatively impact on retailing. The opposite is true when an economy is experiencing a boom, when people are able to find jobs, are more confident about the future and therefore feel free to maintain high consumption levels.
Income Distribution
Income distribution also impacts significantly upon per capita retail expenditure. This is because of the income elasticity of demand (Johnson and Scholes, 2003).The income elasticity of demand is the extent to which demand for a product changes in response to a change in income. According to Johnson and Scholes (2003), per capita expenditure on clothing, and caf and restaurant meals, increases sharply with household income. This contrasts with spending on food which is relatively more stable across income groups. According to Euromonitor International (2009), these patterns of expenditure have significant implications where changes in household income occur in response a structural change in employment patterns. Considering the period 2006 to 2008, it will be interesting to see how retail industry performed in the face of drastic changes in income patterns, given that millions of people across the world lost their jobs towards the end of 2008.
RESEARCH METHODOLOGY
Information Sources
Given the size, dynamism and complexity of the retail industry, primary methods of data collection might not give a true picture of the happenings in the retail industry. Besides, the sheer volume of work involved in analyzing a representative sample is not only enormous, but also requires a lot of time, which is not available. Consequently, secondary methods will be used to collect data. Information will be sourced from newspaper articles, trade journals and white papers. Data from various government agencies, trade associations, paid databases and credible internet sources will also be considered. Among factors to be considered will include the retail turnover indicators, changes in consumer expenditure patterns, changes in factors driving growth in the industry and the influence of economic performance on retail performance indicators.
Analysis Methods
Given the global economic performance in the period 2006 to 2008, whereby the economy did very well in the beginning (2006) and headed towards a recession (towards the end on 2008) it will be important to find out how economic indicators relate to retail performance. In this regard, Linear Regression Analysis will be employed to determine the existence, if any, of causality between the two parameters. Besides, attempts will be made to come up with a Historical Trend Analysis of the period under review. This will be represented in bar graphs and line graphs. Lastly, Ratio Analysis will be used to analyze performance in the period .This will give us a glimpse of whether the retail industry has the capacity to pose any further growth..