2005 Retail Outlook Solid, Not Stellar

The Ernst & Young 2005 Retail and Consumer Products Industry Forecast is out, promising a fairly healthy year for retailers on the one hand, and a certain amount of deflation for manufacturers. Steady but not spectacular growth in the economy—in spite of negative indicators outweighing positives—is likely to translate to a 6.5% increase in retail sales in the United States. Still, the report warns, rising interest rates and energy and health care costs will pressure middle- and lower-income consumers to spend less on retail. The real growth will come in luxury and niche markets, as wealthier consumers will be less affected by these other trends; mid- to low-range retailers can expect rougher sailing this year than last.

Other factors that may affect manufacturers include competitive pressure, the ending of apparel quotas, and an expected moderation in the housing market. The report suggests that consolidation among supermarkets and mid-range department stores is likely, while only big-box retailers and dollar stores can be expected to open new stores. Look for restructuring in the toy segment. Online sales are expected to continue to increase at last year’s double-digit pace, and technology will be a major factor in attempts to streamline supply chain efficiencies, merchandise optimization systems, and CRM. Mega-retailers will continue to seek new markets in China, Russia, Brazil, and India.

Mega-retailers will likely be a driving force in merger and acquisition activity in the coming year, as consumer products companies look for ways to combat the huge, global retail chains. consumer demand is forcing companies to emphasize product innovation; with an emphasis on brand loyalty. The end of apparel quotas will put pressure on manufacturers and therefore on wholesale apparel prices.

The report lists gift cards, channel blurring, off-mall location for department stores, and security as trends of especial interest for the coming year. For more information, visit http://www.ey.com.

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