business

The mood of executives at retail firms normally moves in lock step with that of their customers.

But in America the news on Tuesday that consumer confidence had reached its highest level in two years left them oddly subdued. Consumer spending per person, which fell for two years in a row for the first time since the Depression last year and the year before, has been rising again in recent months. But as retail executives place orders for the crucial end-of-year rush, they are anxiously debating how strong and lasting the consumer's revival will be.

In the first quarter both department store retailers such as Macy's and Saks and big-box retailers like Target and Wal-Mart all announced improved results. The rebound has been strongest in luxury stores: Same-store sales at Neiman Marcus, for example, were 11 percent higher this April than last. But there was also reason for cheer at Home Depot, which relies on humbler consumers and the still-low housing market: Revenues were up by 4.3 percent on the first quarter of 2009.

Although profits were up at Wal-Mart, sales at its U.S. stores fell by 1.4 percent compared with a year earlier. "More than ever, our customers are living paycheck to paycheck," said Tom Schoewe, its chief financial officer. "I'm worried," admits the boss of another large retail chain, privately. "Things seem a little rougher now than in the first quarter."

Improvement from a low base

The effect of the government stimulus is running out and consumers' finances remain stretched, he confides. The International Council of Shopping Centres, a trade group, recently trimmed its sales projections for May.

Everyone agrees that American consumers are more cheerful than they were last year. A new survey by Deloitte, a consultancy, found that nearly two-thirds of them say their financial situation is as good as or better than it was a year ago, and that accordingly they plan to spend the same as last year or more.

"Retailers should be encouraged by consumers' tone as they plan for the critical fall and winter selling seasons," said Stacy Janiak, who heads Deloitte's U.S. practice.

Yet the recent improvement is from a very low base, especially at the grandest stores. Neiman Marcus's strong April marked a rebound from a 22.5 percent decline in the year to April 2009; the 3.2 percent increase in revenues reported by Saks in the first quarter followed a 32 percent decline in the same period a year earlier, points out Steven Dennis, an analyst at Gerson Lehrman, a research firm.

The typical customer "still has a lot of fear in her heart, and she is still being very cautious," said Michael Silverstein, a consultant and co-author of "Women Want More," which argues that women control the lion's share of household spending. "She had over-consumed before the recession. At the bottom of the recession, she had nothing unworn, nothing new. This spring, she looked at her closet, her kitchen, said, 'Goddamit, I still have a job', and decided to loosen the purse strings."

This might explain the recent sharp increase in spending on lingerie, dresses, coats and even the higher sales at Home Depot, given that women, Silverstein argues with dogged consistency, tend to initiate redecorating sprees. Loosening the purse strings did not mean abandoning the frugality that was the clearest consumer trend during the recession. "She still bought everything on sale," said Silverstein. Moreover, the volatile economy is clearly taking its toll; falls in the stockmarket are quickly showing up in lower sales. In short, says Silverstein, "It is going to be a stressful summer for the consumer. She will be moody."

Shorter ordering cycles

"The assumption that when the recession was over consumers would return to where they were has already been disproved," said Paul Leinwand, a consultant at Booz & Co. Retailers are investing heavily to track consumers' behavior in an attempt to work out what they might want to buy and how much they are willing to pay.

In general, retailers have learned to focus far more on lowering prices, and in particular to stock a larger proportion of products at the low end of the price range. Saks has been especially astute at this, not least by increasing significantly the share of goods on its shelves that carry its own label. This has been a trend across the retail industry in the past two years, and no one expects it to be reversed now that consumer sentiment is starting to improve.

Nor does anyone expect any reversal of another trend: Consumers have been buying through a growing number of channels, from department stores to discount warehouses to the Internet, often going online first to hunt for the best prices.

Retailers have also tried to shorten the ordering cycle, so that manufacturers end up carrying more of the risk of managing stock.