L.A. consumers are being given much of the credit for keeping the local economy from plunging into an abyss. But it's coming at a price for both consumers and retailers alike.
Consumers continue to spend, but they're spending more time at the bargain stores and hiking up their debt levels as they go.
Retailers are responding in kind by aggressively offering sales in an attempt to keep revenues in line.
The result has been a consumer market that has been steady, if somewhat hollow.
"Consumer spending up until now has held up remarkably well," said Richard Giss, partner at Deloitte & Touche LLP. Giss estimated that current consumer spending has been slightly above last year's level about a 1 percent increase. But Giss cautions against mistaking steady revenues with overall financial performance, noting that retailers have aggressively used promotions and markdowns to bolster sales that would have otherwise lagged.
"The message retailers are sending out is, 'don't buy any of our merchandise at full price,"' said Jack Kyser, chief economist of the Los Angeles County Economic Development Corp. The result: while retailers may report sales at the same or slightly increased levels from last year, a dip in earnings is likely.
The growing sense of consumer restraint is hitting auto sales. Year-to-date car sales in Los Angeles County through the end of June are down 5.3 percent from last year, according to R.L. Polk & Co.
The hardest hit segments are minivans and pick-ups, with declines well into the double digits. The three luxury categories show a collective increase of 7.3 percent.
Damon Shelly, who owns two BMW dealerships in Orange County and one Mercedes dealership in Long Beach, points out that even wealthy buyers are taking a more cautious view supported by the 17.4 percent drop in the prestige sporty category. "They're buying a little smarter right now [and] staying away from exotic sports cars," Shelly said.Looking for bargains
Consumers are moving away from department stores and higher end apparel stores toward value and discount retailers. Nordstrom, The Gap, Federated Department Stores Inc. (parent company of Macy's and Bloomingdale's) and May Department Stores Co. (parent company of Robinsons-May) all reported a decrease from year-earlier comparative store sales in their most recent quarterly earnings reports. (Comparative stores are those that have been open at least a year). Meanwhile, Wal-Mart, Walgreens and Costco report increases in comparative store sales.
"Consumers are going to Wal-Mart and Target to take care of needs, not wants," said Bruce Raabe, chief investment officer of Collins and Co.
One local merchant taking full advantage is 99 Cents Only Stores, which has half its 112 units in Los Angeles County. Eric Schiffer, president of the discount chain, said that both the average bill ($8.75) and the numbers of transactions have been on the upswing this year.
Based in City of Commerce, 99 Cents Only Stores reported a 5.5 percent increase in comparative store sales for the quarter ending June 30. "We believe that we've benefited from a weaker economy," said Schiffer. "If any store is recession resistant, it's us."More credit counseling
Even so, many consumers may be in their own private recessions, whether or not they admit it. Joseph Onesta, director of education at the Consumer Credit Counseling Service of Los Angeles, noted that membership in his organization is on the rise especially notable given that membership and class attendance tends to decline during the summer.
Many of his clients have gradually increased their credit allowances and are starting to hit their limits. As a result, costly measures, or "juggling" as Onesta calls it, are being taken to maintain spending habits.
"More people are doing things like cash advances and payday loans," he said.
The only thing preventing more clients from entering debt management plans, he added, is the fear of damaged credit ratings.
For property owners, the combination of a rising real estate market and declining interest rates has made refinancing a primary option for cash. For the first seven months of the year, refinance loans for residential properties in Los Angeles County were up 240 percent over the like period a year ago, according to First American Title.Looking for cash
Angelo Mozilo, chairman of Countrywide Home Loans in Calabasas, said it's the type of refinancing activity that illustrates a homeowner's cash crunch. Historically, 10 to 20 percent of residential refinances have been of the "cash out" variety, with the remainder being done for the purposes of lowering monthly mortgage payments. Currently, "cash out"-type refinances make up 60 to 70 percent of the transactions.
Mozilo points out that a disproportionate amount of Southern Californians are using refinances to consolidate debt because they take out more car loans than other metro areas. "People tend to use consumer debt more here," said Mozilo.
Whether the consumer market is headed for a decline is anybody's guess. "If you'd asked me (when consumer spending would drop) a year ago, I would have said now," said Onesta.
Retailers are bracing themselves for a soft holiday season. Even with the recent tax rebates, the back-to-school season, traditionally an indicator for the holiday season, appears modest.
Giss predicts holiday sales to be 2 to 3 percent over last year's disappointing Holiday season, when sales were about 4.5 percent over 1999. "It's not a disaster," said Giss. "You're disappointed only because you've done so well in previous years."
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