Higher energy costs are clearly on the minds of holiday shoppers St. Thomas Newsroom November 17, 2005 Higher energy costs are clearly on the minds of holiday shoppers It’s not known if Santa is concerned about fuel costs for his sleigh this year, but higher energy costs clearly are on the minds of holiday shoppers in the Twin Cities, according to the results of a study just concluded by two marketing professors at the University of St. Thomas’ Institute for Retailing Excellence. Respondents to the fourth annual survey said holiday spending in their households will drop nearly 6 percent compared to last year; meanwhile, more than 70 percent said increases in gasoline prices will have a negative effect on their holiday shopping budgets. According to data collected and analyzed by researchers Dr. Lorman Lundsten and Dr. Dave Brennan at St. Thomas’ College of Business, holiday spending will total $750 per metro-area household. That is down 5.8 percent from last year’s $796. It is also the lowest amount in the four years of the study, even without adjusting for inflation. In 2003, respondents said they planned to spend $779, and in 2002, they said $792. The decrease in planned spending per household this year means that total holiday spending in the 13-county Minneapolis-St. Paul area also will decrease, although it will be offset a bit thanks to a boost in population. Based on household spending and adjusted for population growth, total spending in the metro area will be $914 million. That’s down 4.7 percent from last year’s $959 million, and is down from the predicted $928 million in 2003 and $924 million in 2002. Concern over energy costs surfaced in two parts of this year’s survey, which was conducted in October and early November. At the time, consumers were paying higher prices at gas pumps and were reading about soaring heating costs predicted for their homes this winter. One open-ended question in the four-page survey asked if there were any important reasons for changes in holiday purchasing plans this year. Nearly one out of five respondents cited higher energy costs. “This is significant for several reasons,” Lundsten said. “For one, these were unaided, unprompted responses. For another, they far outnumbered other kinds of responses, and finally, energy concerns weren’t even mentioned by respondents last year.” The question “What effect have the recent increases in gasoline prices had on your holiday shopping budget?” was added to the end of this year’s survey. While 29 percent said gas prices would have no effect, 71 percent said it would have at least some effect. In more detail, 27 percent said it would have slight effect, 23 percent said it would have moderate effect, 11 percent said it would have substantial effect, and 10 percent said it would have a very major negative effect. As would be expected, there was a statistical link showing that the lower the household income, the more the gas prices would put a dent in holiday shopping. Those who said gas prices would have a major impact, on average, are planning to spend $379 this year; those who said gas would have no impact are planning to spend $907. “There are other reasons just above or just below the radar that could be influencing holiday spending plans,” Brennan said. “Higher interest rates, combined with record levels of household debt, translate into higher minimum payments for credit card accounts and, in turn, less discretionary money for gifts. “In addition, consumer-confidence indicators have been slipping lately. And Americans are not just generous at Christmas. Many have donated to natural-disaster relief funds this year, reducing the amount available for holiday spending. When you add energy costs on top of those factors, we think Americans are feeling a little more pinched and a little less wealthy.” The survey, the only one of its kind in the Twin Cities, found that 46 percent of households expect to spend about the same this holiday season, which is down 10 percent from last year. More households expect to spend less (46 percent this year compared to 32 percent last year) while fewer households expect to spend more (7.5 percent this year compared to 12 percent last year). The researchers once again looked at where Twin Cities residents like to shop, what’s on their gift lists, if they prefer malls or the Internet, and as mentioned earlier, why they plan to spend more or less. Because the professors have used the same yardstick to measure consumer spending plans over the past four years, the survey findings help confirm some shopping trends and point out new ones. Among their findings: Retailing had three lackluster years from 2000 to 2002, with 2001 being especially slow. Things got better in 2003 and 2004, but 2005 should see a Twin Cities-area downturn. This holiday season appears better for upscale retailers such as Talbot’s and Brooks Brothers, for department stores such as Marshall-Field’s and Nordstrom, and for stores selling big-ticket items. The outlook isn’t as bright for discount stores such as Kmart and Wal-Mart. Most shopping is still done in traditional stores. While shopping via the Internet had been increasing in recent years, its popularity appears to have leveled off this year. For the second year, Rosedale edged out the Mall of America as the most popular mall for Twin Cities shoppers. While it has mirrored most national shopping trends, over the past three years the Twin Cities shopping scene has been both less euphoric and less pessimistic. What is unusual is that while the St. Thomas study is predicting a slight decrease in holiday shopping, national surveys are predicting a slight increase. If you are a holiday shopper, this is a year to look for sales and discounts. Retailers might need to offer deals to increase foot traffic in their stores. In more detail, here are results from the 2005 survey: The things we buy What will Twin Cities-area shoppers buy with their $750 this year? Clothing and accessories top the list and were mentioned by 93 percent of the respondents. That was followed closely by books at 89 percent, gift certificates at 87 percent, entertainment products such as recorded music and movies at 84 percent, and toys and hobby items at 81 percent. Next in line were gifts of cash, 77 percent; jewelry, 69 percent; sporting goods, 68 percent; consumer electronics, 67 percent; video games, 64 percent; furniture, 61 percent; and computers, 57 percent. That mix of spending by category is fairly close to last year’s wish-list predictions. Clothing and accessories, for example, has been and continues to be the holiday front-runner. What is different this year is how much consumers are planning to spend within those categories. “The only category that shows a slight increase this year is gift certificates,” Lundsten said. “Survey responses show decreases in all other categories, and significant decreases within the categories of computers and computer-related products, as well as other home electronic items such as CD or DVD players.” “As we noticed last year, it again appears that consumers see computers as necessary household items, rather than something you give as a gift,” Brennan said. A note about planned spending and actual spending Lundsten and Brennan point out that their findings are based on what consumers predicted when they completed the surveys between Oct. 6 and Nov. 4. Actual spending might be higher, they said, because shoppers could spend more than they planned once they get into the stores. National surveys are predicting a 3 percent to 5 percent increase in holiday spending this season, which is fairly close to last year’s prediction. This year the National Retail Federation is forecasting a 5.1 percent increase, while the International Council of Shopping Centers is looking at a 3 to 3.5 percent increase. “Until this year, our findings in the Twin Cities have followed national trends,” Lundsten said. He noted that it is almost a universal trait for survey respondents to underestimate actual spending when they are answering survey questions in October. Where we shop Where do Twin Cities shoppers spend their holiday dollars? According to survey results, the big, regional malls are holding their own as the most popular place for holiday shopping. This year, respondents said they would do 50 percent of their shopping at the malls, up slightly from 48 percent last year. Nonmall stores also gained a little ground. They will receive 34 percent of the shopping dollars, compared to 30 percent last year. If the stores gain a little, according to the survey, that means nonstore shopping will lose a little. This year 7 percent of the planned holiday budget will be spent via catalog, telephone and phone shopping, which is down from 12 percent last year. And Internet shopping, which had been gaining a larger slice of the spending pie each year, leveled off this year at about 10 percent. “The news here isn’t so much that consumers will do 10 percent of their shopping on the Internet this year, but that Internet spending has leveled off rather than significantly increasing,” Brennan said. Which of the regional malls are going to get the largest share of that $750 holiday budget? The researchers approached that question from two perspectives: first, which mall in the region would metro-area consumers visit at least once, and second, which mall would they shop at the most. Those questions are similar but the results are not the same; however, for the second year in a row, Rosedale came out on top in both categories. When asked which malls they planned to visit at least once this holiday season, Rosedale edged out the Mall of America, which had been No. 2 last year and No. 1 in the 2002 and 2003 surveys. Ridgedale was third, Southdale was fourth and Maplewood was fifth. Last year, Southdale was third and Ridgedale was fourth. This year’s top malls, based on where respondents planned to shop the most, were Rosedale followed by Ridgedale, Maplewood, Southdale, and in a tie for fifth, Mall of America and Burnsville. Compared to the large regional malls, the downtowns of Minneapolis and St. Paul did not fare well as holiday shopping destinations. By comparing the malls of choice and where the respondents live, the researchers found that shoppers clearly favored malls closest to home. Shoppers occasionally, but not routinely, will drive past one mall in order to visit another mall. About the survey The results of the study were based on a survey that was mailed to 3,000 Twin Cities-area households in 13 counties, including two counties in western Wisconsin. The households were selected to match the demographic characteristics of Twin Cities residents, including age, income, education, religion and location. The researchers received 339 completed and usable surveys. The demographic characteristics of those who returned the surveys matched the characteristics of the original sample, and in turn, the characteristics of a cross section of Twin Cities residents. The researchers Lundsten and Brennan are both longtime members of the St. Thomas College of Business faculty. Lundsten is a professor of marketing and chairs the university’s Marketing Department. He holds a doctorate from the University of Michigan. Brennan, who holds his Ph.D. from Kent State University, is a professor of marketing and co-director of the university’s Institute for Retailing Excellence. The Institute for Retailing Excellence, part of the St. Thomas College of Business, conducts research and offers educational programs for those who work in retailing.