Additional economic uncertainty comes from the credit markets. More than other lines of retail trade, the outlook for home goods retailers is very closely tied to the direction of interest rates and the availability of credit.
Having raised interest rates six times in the past year, the Fed seems far from done. Despite the absence of inflation, the Fed is focused on keeping interest rates high and the pace of growth low. Their purpose is to reduce the outflow of capital, protect the value of the U.S. dollar and preempt any possible inflationary pickup.
Over the past 25 years, the Fed has continued to raise interest rates until it precipitated a financial crisis. Whether it was the Mexican debt crisis in 1982, Continental Bank in 1984 or the Savings and Loan crisis in 1990, the only thing the Fed fears more than rising inflation is failing banks.
The likely source of a financial meltdown this time is the derivative craze. Some large financial institution will get in trouble with them. The problem will spread like the plague to other financial institutions and the Fed will be forced to ease credit and bail them all out.
Still more uncertainty can be found in the changing capabilities of competition. More than in any other segment of retailing, home goods retailing has witnessed an explosion in competitive activity. New concepts abound. New players are entering the business. The net result has been the emergence of a new economic model for the home goods business.
At the heart of this new model is a different operating philosophy toward inventory. Technology has allowed home goods retailers to view inventory as a flow instead of as a stock. Faster turns, lower operating costs and higher volumes have all worked to increase efficiency and reduce the margin needed to make this business work.
As lower margins brought lower prices to consumers, demand incresed and home goods retailers operating on this new economic model found themselves in a positive productivity loop. Rising efficiency drove down prices. Lower prices pushed up consumer demand, driving productivity even higher.
No home goods retailer’s anxiety closet would be complete without added uncertainty from the consumer. Like home goods retailers, consumers are dealing with their own mix of uncertainty. When consumer confidence was down, spending on home goods soared. Now that consumer confidence is on the rebound, the pace of spending growth in home goods is slowing.
Uncertainty is not going away. If anything, it is going to become more endemic. Dealing with such pervasive uncertainty requires both patience and flexibility. It also demands that home goods retailers look more to their future and depend less on their past experiences in managing their businesses.