Retailers Turn Cautious As Consumer Confidence SlumpsRetailers Turn Cautious As Consumer Confidence Slumps

It wasn't a surprise that retail sales tanked in September as the nation mourned. But the extent of the fall--down 2.4% from the previous month, the largest drop since 1992--and steep drops in consumer confidence make uncertainty and caution the guiding principles for retailers this holiday season.

"There's a general circling of the wagons right now, an unease and uncertainty about what's ahead and what kind of holiday season this will be," says Cathy Hotka, VP of IT for the National Retail Federation, the world's largest retail trade association.

The association lowered its prediction for fourth-quarter sales, but it's still relatively bullish: a 2.2% increase over a year ago compared with the previously forecast 4%. Believing that consumer spending will begin to return to normal, it predicts holiday retail sales will increase between 2.5% and 3%.

This uncertain environment directly affects IT investments for retailers: Are pricey in-store technologies such as wireless shopping aids a way to stand out in a crowded market or a waste of money when shoppers are interested only in price? Are back-office operations able to track sales and inventory well enough to weather a season where profit margins will be squeezed even more than usual?

Consumers' worries go beyond terrorism threats. With an economy possibly already in recession and companies reporting a steady stream of layoffs, they worry about keeping their jobs. "That breeds insecurity," says Lynn Franco, director of the Conference Board Consumer Research Center, publisher of the widely followed Consumer Confidence Index. The index plummeted by 14% last month, the largest decline in 11 years. That will lead consumers to spend less on nonessentials and save more, and probably mean a flat sales season for retailers, Franco says.

Another closely watched consumer-confidence index, the University of Michigan's Surveys of Consumers, plunged 20 points in September. Only twice before has consumer expectation of economic performances dropped that much in a month--in 1973, in reaction to the oil embargo, and in 1990, after the Iraqi invasion of Kuwait, the precursor of the Gulf War.

Steven Kernkraut, an analyst with investment bank Bear, Stearns & Co., cut his retail sales forecasts by 5% across all categories in late September because he expects consumers to cut spending. "The fourth-quarter outlook could be rather bleak." he says.

When business spending stalled this year, consumer spending kept the economy afloat. Retailers soon will learn if those consumers will do the same for this holiday season.

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