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    Retail Index Calls for Overcast Skies Ahead

    Retailers nationwide anticipate lingering negative impacts from Katrina on business conditions.

    NEW YORK -- The economic ripple effect from Hurricane Katrina will reach much wider than the storm’s actual wake, judging by the sober assessments of current business conditions and future prospects collected from the industry by the VNU Retail Index.

    The Index of sentiments about current business conditions among several major retail channels sank to 82.3 in September, its lowest mark since the Index was established in December 2003. The survey fielded in early September, just days after Hurricane Katrina hit, and its results clearly reflect severe current disruptions and serious uncertainty about the future.

    Only 46.2 percent of retailers in the September survey rated current business conditions as positive -- the first time this indicator has fallen below 50 percent. Perhaps even more tellingly, 21.8 percent of retailers put a negative cast on current conditions, the largest number to do so in the history of VNU’s gauge of retailer sentiment. The impact was dramatic and rapid; positive ratings were down 12 points since September 2004, while negative ratings were up 16 points over the same period.

    Interestingly, on a regional basis, the largest percent of negative ratings came from retailers in the Northeast, while those in the South followed in second place. It appears that retailers across the country are bracing themselves for the long-term aftermath of the hurricane, which will be felt in a wide variety of industries.

    Like the Retail Index, several measures of consumer sentiment have also posted declines in the past month. The Conference Board’s Consumer Confidence Index for September suffered its biggest drop in 15 years. While this result reflected anxiety felt nationwide after Hurricane Katrina hit, Index results in August also showed consumers struggling to fit higher gasoline prices into their budgets.

    Likewise, the RBC CASH Index reported that consumer confidence in September shrank to its lowest point since March 2003, which is when the war in Iraq started. These declines raise questions about consumer spending for the rest of the year, including the crucial holiday shopping season.

    The VNU Index of future business conditions tumbled to a new low of 84.7. Only 53.8 percent of retailers have positive expectations of business conditions six months from now, compared with 71.4 percent a year ago, while 14.3 percent have negative expectations, versus only 7 percent last year.

    The Index for hiring expectations in the next six months dropped by about five points to 108.8, as did the Index concerning store counts in the next six months, which declined to 95.8.

    Finally, it appears to have taken a hurricane of Katrina’s force to dislodge one of the most consistent responses in our survey. For each month, retailers have cited the competitive environment as the single biggest challenge to earnings growth. In September, for the first time, economic conditions were cited as the top challenge.

    Even before the hurricane hit, gasoline pricing was Topic A among retailers and consumers. When asked what the impact of motor fuel price inflation has been among lower-end consumers, most retail comments centered on the fact that higher gas prices left this group with significantly lower disposable income.

    Some retailers insist the effects to date have been negligible. "So far they appear to be absorbing the increase," reports one c-store operator. However, many more retailers report changes in the shopping patterns of their customers, most often a reduction in in-store purchases. "These consumers will have no choice but to reallocate limited resources to purchase gasoline as opposed to other categories," commented one drugstore retailer. Several retailers mention that these lower-end consumers are already making initial cuts in their entertainment spending.

    Some small-town operators, on the other hand, have seen an increase in business. "It has kept dollars in town instead of giving them to bigger city businesses," noted one such grocer. Another supermarket retailer in a rural area said he’s hoping "that higher gas costs will decrease trips out of town to Wal-Mart." Another supermarket operator reported that "customer counts and transactions are down, but average order size is up, which indicates customers are making fewer trips to the stores." Overall, said a mass operator, "the impact will be slow but significant."

    The VNU Retail Index is based on a monthly panel survey of more than 500 convenience, drug, grocery, mass, and specialty retailers across the country. The survey contains six questions calling for an appraisal of current business conditions and operational challenges, as well as expectations regarding business conditions, hiring, and store count in the next six months.

    If you are a retailer interested in joining the VNU Retail Index panel, please contact Debra Chanil, Director of Market Research, at [email protected]. Among the benefits to participants are access to results in advance of publication and also exclusive access to some data.

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