Early 2013 Retail Sales Observations
The 4 Consumer Headwinds of Jan / Feb. Will Sequester Fester Through 2013? Fiscal Cliff Drag. Marketing Compensation?

Updated 3.11.13

The 4 Consumer Headwinds of Q 2013 1. Social Security tax hike. 2. Increased healthcare costs. 3. Big increases in gas prices. 4. Tax refunds delayed.

2% Social Security Tax Hike = Smaller Paycheck
With new Federal tax structure, how much less is in someone's pocket?
Annual Salary # of Paychecks Old Social Security Tax New Social Security Tax Difference Per Paycheck Annual Difference
24 $25,000 $35,000 $45,000 $55,000 $65,000 $75,000

$1,042

$1,458

$1,875

$2,292

$2,708

$3,125

4.2%

$43.75

$61.25

$78.75

$96.25

$113.75

$131.25

6.2%

$64.58

$90.42

$116.25

$142.08

$167.92

$193.75

-$20.83

-$29.17

-$37.50

-$45.83

-$54.17

-$62.50

-$500

-$700

-$900

-$1,100

-$1,300

-$1,500

Source: Monthly Consumer Survey, Na6onal Retail Federa6on, February 13, 2013

Increased Healthcare Costs = Smaller Paycheck
Total Plan Premium Costs 2013 (Projected) 2012 2011 2010 2009 2008 2007 Percentage Increase 6.3% 4.9% 8.5% 6.2% 5.0% 5.3% 5.3% Average Cost Per Employee $11,188 $10,522 $10,034 $92,456 $8,703 $8,290 $7,874 Average Employee Premium Cost $2,385 $2,204 $2,090 $1,927 $1,797 $1,691 $1,567 Average Employee Out-ofPocket Cost $2,429 $2,200 $2,072 $1,761 $1,580 $1,508 $1,364

Source: Aon Hewitt Health Value Initiative Database of Large U.S. Employers' Health Care Costs.

Feb / March Gas Prices = Less Discretionary $S
$3.90 $3.80 $3.70 $3.60 $3.50 $3.40 $3.30 $3.20
12/17/12 12/24/12 12/31/12 1/7/13 1/14/13 1/21/13 1/28/13 2/4/13 2/11/13
Source: Energy Information Administration: Weekly U.S. All Grades All Formulations Retail Gasoline Prices (Dollars per Gallon)!

$3.75 AVG

$3.37 AVG

2/18/13

2/25/13

3/4/13

U.S. Weekly Gasoline Prices

Tax Refunds Delayed

Bloomberg on Early 2013 Walmart headlines the retail skid in February… what are implications ahead?

Will Sequester Fester Through 2013?

Sequestra6on

Early Polls Suggest Contraction
• CBS Poll: 53% say they personally will be affected by sequester cuts. • Fox News Poll: 45% of voters think the consequences of the cuts would be negative. • NBC/WSJ Poll: majorities of Americans believe that approach is not a good idea and the contentious budget negotiations make them less confident about the U.S. economy. • Gallup Poll: 51% of Americans say they don’t know enough to judge whether the cuts are good or bad. The remainder tilt toward negative evaluations of the sequestration’s impact on the country. • Rasmussen: 39% predict the sequester cuts will have a long-term negative impact on their lives, with nine percent (9%) who say it will be Very Negative. Sixteen percent (16%) are not sure.

Sequester Impact Would Vary Significantly State-by-State • Clearly, the cuts would impact some states much more than others, the heaviest $ variables being military cuts followed by public health & education programs…

11 states would get hit hardest by sequester
TX, NY, CA, VA, MD, FL, PA, OH, IL, MI, AK

To explore state-­‐by-­‐state cuts in detail click below: hAp://www.addic6nginfo.org/2013/02/28/how-­‐much-­‐will-­‐the-­‐sequestra6on-­‐affect-­‐your-­‐state-­‐interac6ve-­‐map/

More Economic Headwinds At Play
• The Congressional Budget Office forecasts unemployment will remain above 7.5% through next year; if that happens, 2014 will be the sixth consecutive year exceeding 7.5%, the longest such period in 70 years. • In January, Brent crude oil forecast for 2013 was $105 a barrel vs $112 in 2012. However, mid February, the EIA (U.S. Energy Information Administration) raised the forecast for 2013 to $109. • Gas prices typically climb from February to Memorial Day on expectations of rising consumption and costlier summer-blend gas. But so far this year, prices are surging sooner and faster than ever before — up 45 cents since mid-January. • According to the Oil Price Information Service, “A lot of speculators bet on higher prices beginning earlier in the year.” Some industry observers forecast prices will peak at $3.95 by April. Others say prices will eclipse July 2008's record $4.11. "Whatever you pay on St. Patrick's Day will be considerably more than you'll pay on July 4th or Labor Day," Kloza says.

ICSC’s President & CEO Michael Kercheval Sequestration & Retail Sales

Jan Hatzius, Chief Economist, Global Investment Goldman Sachs While we didn't go over the cliff in December, fiscal cliff drag will impact 2013…

4 Dates To Watch
March 27 The continuing resolution (CR) by which the federal government is being funded expires March 27. If a new CR is not approved by Congress, there could be a government shutdown at that point. Congress is scheduled to begin a two-week spring recess March 22, so lawmakers must agree on a new CR, or face losing some of their break trying to eke out a deal averting a shutdown. April 1 First federal employees can be furloughed with no new agreement regarding sequestration. Mid-Summer The statutory debt ceiling has been suspended by Congress through May 19, meaning the Treasury Department can accrue additional debt until then without violating any legal limit. So all the stopgap measures Treasury has at its disposal to stave off default once the debt limit has been reached are still available, and thus will likely make it unnecessary to raise the debt limit until mid-summer. That's when we could see thereat of another showdown.

4 Dates To Watch
October 1 The beginning of fiscal year 2014 could prove another crisis point. There's little agreement about how sequestration should be dealt with in next year's budget, so passing appropriations bills may prove difficult.

Moroch POV
• The facts suggest consumer headwinds will sustain into 2013 which will negatively impact retail sales. • But the market shows no early negative reaction. • And Consumer Confidence in February actually rebounded after 3 straight months of decline. • There are many wild cards yet played. First, will Congress create a Continuing Resolution prior to March 27 deadline? • For now, we should bias our marketing planning expectations and strategies on the side of tougher growth until the fog clears. • The following outlines marketing actions to consider.

Near-Term Retail Marketing Considerations
1. Keep your brand relevant. Leverage your brands’ differentiating attributes combined with affordability that doesn’t break the bank. In so doing, value positioning will be attractive to those forced to trade down due to personal economic pressure…”customers in play”…ripe to switch. 2. Leverage exclusive product lines to drive higher tickets and margin. 3. Over deliver on your brand promise. People seek out positive experiences during tough times. 4. Be promotionally attentive to the lower-to-mid-level income and 60+ customer segments to ensure quality offerings are affordable. Provide real value for shoppers versus “just cheap price” through unique promotions in stores and online. 5. Be thankful. Customers have lots of choices and when they take the time to stop into your retail establishment, thank them for their loyalty.

Near Term Retail Marketing Considerations
6. Remain visible and connected to your community. During and after recession, customers remember and reward retailers that are connected to activities and causes that speak to their values. 7. Have a strong retail presence during the March thru May retail spending uptick in spending due to tax refunds. 8. If price increases are eminent, keep higher value loss leaders to drive traffic. 9. Study the state by state implications of sequestration in great detail and heavy up marketing presence and value in areas hardest hit. 10. This is an opportunity to become the customers “ally” during a tough economic time for them, that has potential to develop into a long term relationship.

Thanks.