Frank Badillo, vice president and senior retail economist at Kantar Retail specializes in analysis and forecasting of economic, retail and consumer trends. He contributes to Kantar’s retail intelligence platform and regularly writes about the economic outlook for the monthly Retail Economist newsletter. He also directs the retail channel and product category forecasts for the annual US Retail Outlook. I chatted with Badillo about the upcoming holiday season and the state of the retail sector.

eMarketer: What is your outlook for the upcoming online holiday shopping season?

Badillo:

What we see that non-store sales and online shopping in particular have been very strong for the last six months. It’s been the strongest channel among of all of retailing. The channel is benefiting, to some extent, from a very weak year-ago comparison period, but it’s pretty clear that there’s strong demand for goods online. Right now through September is going to be key. There’s the back-to-school spurt, but we don’t really know what it portends for the holiday exactly.

A lot of demand we see tends to be skewed toward electronics. There are a lot of hot gadgets out there between the iPad, e-book readers and smartphones. All those things are driving very strong demand. Particularly with the e book readers, there’s a lot of demand among early adopters. The big question is to what extent a lot of that growth can be sustained in the longer term.

I suspect that we’re going to see very healthy growth into the holiday. It just may moderate somewhat from the very strong growth we’ve seen in recent months.

eMarketer: So consumer electronics in particular will have a strong holiday season.

Badillo:

Exactly, and particularly online.

eMarketer: Do you think online shopping behavior will be different this year?

Badillo:

In our monthly Shopperscape surveys, we ask a question about consumers’ spending intentions. The response has been steadily improving over the past year. There was a bit of a blip in our June number, but generally there’s been improvement in spending intentions over time. We expect that to continue and result in much better spending into the holiday than we saw last year.

But at the same time, there is some renewed uncertainty among shoppers that could curb some of the spending improvement in the coming months. I suspect that by the holiday time frame, some of that uncertainty should be cleared up and we’ll see the recovery continue, albeit at a bit more modest pace than we saw in the initial months of the year.

eMarketer: What key challenges will retailers face this holiday season?

Badillo:

Retailers cut prices pretty dramatically last year to draw shoppers and, in the end, it probably did more to weaken their top line sales as well as their profits. They will want to try to avoid the kind of ruinous price competition that they engaged in last year and try to be more strategic about it for this holiday.

Retailers are struggling with the extent to which they need to boost their inventories amid signs of rebounding demand. We’ve gone through a phase where retailers dramatically cut back their inventories. So now they’re slowly increasing those inventories again. The question is, to what extent they should continue to do that? There’s just a lot of uncertainty about whether they should do that.

I suspect we’ll see inventories expand a bit too much, which is going to put some downward pressure on prices for the second half of the year. We’ve already seen some signs of that in the apparel sector. There’s some growing price pressure in the sector after a good year or so of very slight price increases.

The inventory question is huge for a lot of retailers heading into the holidays, as well as the related pricing question. If there’s inventory overhang through the holiday, that’s going to put downward pressure on prices.

But there’s also the question as to when retailers should roll out promotions. Given how much price competition there was last year, I think retailers are going to look all the more closely about what they price-promote and the timing of those price promotions.

eMarketer: What are your projections for overall retail growth?

Badillo:

For total retail sales, excluding autos and gasoline, we’re looking for overall growth in the second half of the year of about 3.5%. The government numbers out today [July 14] show that we’ve had growth averaging about 3.9% for the last two months.

In terms of the government numbers, non-store sales are growing at a double-digit pace. Online probably represents the lion’s share of non-store sales. It’s also going to include catalog sales but I suspect that it’s the online shopping that’s driving the double-digit growth. We’ll continue to see double-digit growth in online sales through the holiday which can only mean that the average market basket size for any given shopper will grow significantly compared to a year ago.

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A new proposal governing distance selling (including online retail) will be debated by the French National Assembly on January 19 and 20, 2010. Its main aim is to ensure that merchants dealing with non-local buyers follow clear standards of business practice. Online stores would not be entitled to accept orders and payment when they are in danger of bankruptcy or anticipate being unable to meet their obligations as suppliers. Sellers that break the law would be fined €30,000 ($42,000 at average 2009 exchange rates).

In some notorious cases (link is in French), online buyers in France have been left without refunds or immediate legal recourse when an e-tailer has ceased to trade.

In addition, the new law would prevent transport firms claiming costs from the customers they deliver to, when a merchant is unable or unwilling to pay for delivery as promised. At the moment, Internet shoppers may pay delivery charges online in the course of a purchase, and still be asked for more money when the goods arrive.

Internet retailers would also be required to make their terms and conditions available via a link from their home pages (many firms have allowed customers to see the small print only after an online transaction).

The proposed law—expected to pass without major opposition—should encourage more French Internet users to buy online. But e-commerce has caught on in a big way even without these safeguards, and now plays a key part in consumer purchase patterns.

For example, 72% of online buyers in France polled at the end of 2009 said they would be buying on the Web during the post-holiday sales period, according to a survey by DirectPanel for the Fédération du e-commerce et de la vente à distance (Fevad). The intention to purchase online was higher among women than men. It was also relatively high in households of three or more people (55%) and respondents younger than age 35 (about half of these said they hoped to take advantage of sales online). The average budget for those planning Web buys was €168 ($235).

Fevad has also said it expects online sales in the 2009 holiday shopping season to top €5 billion ($7 billion), 25% more than for the equivalent period in 2008.

Founded in 1999, GSI Commerce works with over 80 pure-play and multichannel retailers, including Toys “R” Us and RadioShack, as well as brands, including Ralph Lauren and Timberland. Clients look to GSI to implement strategies for customer acquisition to Web stores. We spoke with Jeff McCall, who leads the strategy services group at GSI, about how retailers are approaching the 2009 holiday season. A taste:

eMarketer: Where have retailers invested in their Websites, and where have they cut costs in preparation for the holiday season?

Mr. McCall: Retailers have spent time this year over the past few months making the shopping experience easier and better. Some have invested in usability studies, so they can remove some of the roadblocks that are keeping people from buying. It makes it a better customer experience, and it also raises the ROI on the marketing dollars that drove that traffic there, so we could argue that’s a cost savings.

The other place people invest that always seems to pay off is online gift centers. Retailers are anticipating what customers’ needs are and make some great suggestions, adding in customer reviews. It builds a community. Finally, we’ll see a push for gift cards and gift certificates for when customers can’t find the perfect gift or it’s late in the buying season.

eMarketer: Do you see differences in Website priorities for Web-only retailers versus the multichannel retailers?

Mr. McCall: Web-only retailers will do a lot of things we just talked about. Brick-and-mortar retailers have finally embraced the idea of tools such as associate ordering systems, where an associate can order an item not in the physical store from the online channel and ship it directly to the consumer. We’ve seen clients have great results with doing that. The same goes with in-store pickup. This has been around for a decade, but retailers have been slow to really embrace it, because there are challenges.

While we’ve seen divisions before between online and offline channels, I think a lot of those silos are breaking down. Customers are signing up for e-mail marketing in stores. Multichannel retailers are finally realizing that’s a good thing for both sides of the business.

eMarketer: How can small online retailers compete against large retailers such as Wal-Mart and Amazon during the holiday season?

Mr. McCall: The couple things I’d recommend to the smaller retailers would be first, make sure the site experience is everything it can possibly be, really fine-tune it to make it as compelling as possible.

No. 2 is to make sure that when you do get someone to come to your site and either sign up for e-mail or make a purchase, do everything you can to create that cycle of re-engagement with that consumer and bring them back again. Three or four years ago, retailers would throw lots of money into bringing consumers to their sites, but they didn’t worry about them after that. Now there’s a big shift, especially over the last year. Retailers know how much of their sales come from repeat customers. Make sure you’re locking those customers in and becoming their go-to source for whatever it is they’re shopping for.

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