As Goes Wal-Mart, So Goes the Nation

No matter how bad the economy gets this year, Americans aren't about to stop buying groceries or gas. But as fuel tops $4 a gallon and the costs of basics like bread and milk rise, consumers are learning to economize. How?

For a clear view of our readjusted shopping habits, head to Wal-Mart. With an average of more than 100 million customers a week, the world's largest retailer offers a telling glimpse of how consumers are responding to the economic downturn. Not surprisingly, the company has largely benefited from the increase in budget-consciousness: it reported record sales of more than $106 billion for the quarter that ended Jan. 31, the majority of that coming from its domestic stores. What's hot and not? During a presentation to analysts last week, Eduardo Castro-Wright, CEO of Wal-Mart's U.S. stores, pointed to strong sales in groceries, health and wellness products, as well as flat-screen televisions and other consumer electronics. Clothing and furniture, however, are not selling well.

Apparently, new wardrobes and home-decorating projects are giving way to economic woes. Recently, the Labor Department said clothing prices nationwide fell by 1.3 percent in March, the largest monthly drop in nearly a decade. Recent markdowns, say analysts, haven't done much to move clothes off the racks or furniture off the showroom floors. Furniture stores have reported slower sales in the first quarter of the year. "It's less about the new couch and more about a new slipcover," says Pam Goodfellow, a senior analyst at BIGresearch, a firm that tracks consumer behavior. "The losing categories in this downturn include things you can make last a little longer or things that you don't really need like furniture and jewelry."

As in previous downturns, Americans are once again tightening their fiscal belts by eating at home. Stephen Quinn, Wal-Mart's senior vice president for marketing, says the company's sales of frozen dinners and premade pizzas are up. So too are sales of coffee and cappuccino makers. That's more bad news for stores like Starbucks, which last week reported a 28 percent drop in profits during the last quarter.

As for brand loyalty, it's not something retailers can count on anymore. Wal-Mart, for example, has seen double-digit growth in sales of its more than 1,000 private-brand, or generic, products--from toaster pastries to pain relievers. That supports findings in a recent nationwide survey by BIGResearch that found nearly 29 percent of consumers are now buying store-brand products, up more than 6 percent from a year ago.

That's when they are buying. The Commerce Department reported last week that consumer spending grew just .1 percent in March, after being adjusted for inflation. And it was clear why: income rose just .3 percent while inflation was up 3.2 percent from a year earlier. And the situation isn't likely to improve anytime soon. The Conference Board, which administers a monthly survey of 5,000 households, said consumer confidence has plummeted since last summer. It described consumers' short-term outlook as "quite grim." Peter Hooper, chief U.S. economist for Deutsche Bank, says he doesn't expect consumer spending to pick up significantly until next year when economic conditions improve. In the meantime, Americans are going to have to keep coming up with ways to cut back.