American Retailers Reclaiming Their Former Glory?
All of a sudden, American retail businesses are bubbling with optimism.
And surprisingly, it has nothing to do with consumer confidence, same store sales, or any other metric they use to measure the health of the businesses. In fact, it has nothing at all to do with America.
The truth is companies know growing retail sales in the states will be difficult.
Just look at the facts…
For decades, retail sales growth in the US was driven by increasing consumer and mortgage debt. This process was exaggerated by the real estate boom that ended in 2006. As property values skyrocketed, consumers refinanced mortgages or took out home equity loans to pay for anything and everything.
In short, American households ran up huge debts over the last few decades. And retailers laughed all the way to the bank.
Now US consumers are deleveraging. In other words, they’re paying off debt faster than they are racking it up. This deleveraging process could take years to complete. It means retail sales growth in the US is going to be slow for years to come.
So, why are retailers so optimistic?
In a word… China.
In the 1990s, western companies rushed into China to setup factories. They took advantage of cheap labor to manufacture their wares. Then they transported those products to the US to be sold.
Now, they’re hoping the emerging Chinese middle class will be the source of spending to propel their sales growth to new heights.
And for good reason…
Recently, China’s government has made it perfectly clear they want to increase wages and consumer spending. Their goal is to create a more balanced economy. They know their future success will depend on economic growth fueled by domestic growth more so than by increasing exports.
This is music to American retailers’ ears…
Several major US companies like Wal-Mart (WMT), The Gap (GPS), Starbucks (SBUX), McDonald’s (MCD), and Yum! Brands (YUM) are making China the center piece of their future growth.
By 2015, Starbucks plans to have 1,500 stores in China. That means they’ll be opening 220 new stores per year…
McDonald’s has 1,100 stores and is opening another 200 stores…
YUM! Brands is already seeing 35% to 40% sales growth in China…
And Gap recently opened their first four Chinese retail stores in Shanghai and Beijing.
But this is just the beginning…
Of America’s 100 largest retailers, only about a dozen operate stores in China. That means many US companies will be setting up retail operations in China for the first time.
The opportunities for growth in China are simply too big and the headwinds too strong in the US for retailers to ignore. It has the potential to turn back the clock for many of America’s struggling retail businesses. And they could once again be the growth stories that made them such great investments to begin with.
Category: Foreign Markets
