The Ghost of Christmas Future

In the United States they used to say that no retailer ever goes bankrupt before Christmas. The consumers flooding into the stores during the holiday season provided even sagging shopkeepers with a last dose of income and hope. The closing days of 2008 appear to be putting an end to such dreams, and not just for Detroit's distressed automakers.

The retail blight in the US is likely to spell big trouble across the Pacific for the thousands of factories that supply consumer goods to the west. The upshot could be a hard landing for China, despite official projections of 8-9 percent gross domestic product growth.

As many as 6,500 retail shops are estimated to be closed for good in the US by the end of the year. US consumers habitually slow their spending to a minimum for the entire first quarter of the year. Many retailers who claw their way through a slow Christmas season will now be closing in greater numbers, synapsing their way up and down the food chain — to advertising agencies, newspapers and magazines, shopping mall owners and factories in Asia that supply them with gadgets, gizmos and finery.

The United States, Europe and Japan – all three of which are descending into recession – account for at least 56 percent of China's exports, which went negative month-on-month in November for the first time in seven years. Although exports to emerging markets grew by 20 percent in the first 10 months of 2008, these economies are also slipping. China’s imports from other Asian countries are intermediate goods used as imports for export processing, meaning they will have little impact on the regional economies. China can be expected to face an export collapse in the first quarter of 2009, perhaps by as much as 19 percent to 20 percent from the cyclical high and a fall of perhaps 3 percent year on year for 2009, according to an estimate by Qu Hongbin, China chief economist for global banking for HSBC.

China's exporters are already in trouble, particularly in the export-driven Pearl River Delta. For more than a year, squeezed by rising labor costs and falling margins, manufacturers have been facing a mounting crisis. Now, as bankruptcies and store closures rise in the west, fears are rising that the credit facilities on which the Asian supply chain is built will be severely strained.

"All the decoupling theory is total bunk," says a top figure in Hong Kong's outsourcing industry. "People are holding out China as the locomotive that is going to pull the rest of the world through. But China is just one big factory export processing zone for low-cost goods, based on western demand and cheap credit. It isn't going to work."

The pace of western retailing bankruptcies is rising. The most recent collapse was KB Toys, a toy chain in the eastern United States that filed for protection on Dec. 11, saying it planned to hold going out-of-business sales at hundreds of stores. It has 4,400 full-time employees and 6,515 seasonal employees. In the same week, Woolworths, the venerable British chain, greeted its 100th anniversary year by announcing that it would appoint administrators in an attempt to sell its stores for cash.


A partial list of store closures:

  • Ann Taylor (117)

  • Movie Gallery (378)

  • Sprint/Nextel (125)

  • Ethan Allen (12)

  • Dell (140)

  • Friedmans (120)

  • Pier 1 (25)

  • Sigrid Olsen (54)

  • Talbots Kids/Mens (78)

  • Home Depot (15)

  • Eddie Bauer (29)

  • GAP (85)

  • Footlocker (140)

  • Bombay (all 384 stores)

  • Disney (98)

  • Macy's (11)

  • JC Penney (scaling back)

  • Loews (scaling back)

  • Sharper Image (184)

  • Wilson Leather (160)

  • Pep Boys (31)

  • Pacific Sunwear / PacSun (154 Demo stores)

  • Zales (105)

  • Cache (20)

  • Lane Bryant (40)

  • KB Toys (356)

  • Dillards (26)

  • Fashion Bug (100)

  • CompUSA (all stores)

  • Linens 'N Things (all 371 stores)

  • Mervyn's (all 149 stores)

  • Club Libby Lu (Saks owned) (all 78 stores)

  • Steve & Barry's (all 173 stores)

  • Sergio Rossi (all standalone US stores)

  • Office Depot (126 stores)


In November the US electronics retailer Circuit City announced it would file for Chapter 11 protection and close 155 of its locations, leaving some 8,000 employees jobless. Spectrum Brands, which sells batteries, lawn care equipment, pet supplies, grooming products and many other items, was said by Morningstar, Inc. to be in serious distress. Although it was not filing for protection, Office Depot, which sources most of its supplies in Asia, announced on December 10 that it would close 126 stores and 33 distribution facilities in 2009.

Joseph Skrupa, editor in chief for RIS News, which follows the retail industry, told the Washington Post in December that an estimated 6,500 retail stores will close.

Consumer spending accounted for 72 percent of the US economy in 2007, built personal debt that ran to 133 percent of disposable income by the end of 2007. With the US economy headed down, average per capita bank credit card debt was US$5,710 as of November, the equivalent of two months average salary. As an example of how consumers stopped spending, toy traffic through the ports of Los Angeles and Long Beach, which handle about half of US consumer imports, has declined by 10.3 percent as measured by tonnage according to IHS Global Insight.

China makes nine of every 10 toys sold in American stores. In 2007 it exported US$14.2 billion worth of leather products, more than half the world's shoes, according to the US Department of Agriculture.

China and India between them produce well over half the world's textiles, according to the USDA. Consequently the shoe manufacturers, textile producers and toy makers of the Pearl River Delta, on whom a large extent of China's torrid prosperity has rested, face even more frightening times going forward than they have faced over the last two years.

Exacerbating the fact that there are fewer orders – and substantial questions whether the strapped or bankrupt retailers at the other end of the supply chain are going to be able to pay off what already has been shipped – is the credit crisis. Certainly, Hong Kong's banks are continuing to ration credit despite the fact that the Hong Kong Monetary Authority has pourd almost HK$130 billion into the system since September Hong Kong dollar lending has virtually stopped, with loans going negative in October. Credit facilities are being withdrawn in China and Hong Kong as well, a growing problem for export-oriented companies.

This can be expected to play itself out with the loss of hundreds of thousands of jobs in export-oriented industries in China and other Asian countries, and growing concern over social unrest.

There is plenty of room for the leaders to get worried. According to a study of migrant workers reported by the highly respected Caijing Magazine, only a fraction of the unemployed have returned to their villages. Some 10 million peasant workers have lost their jobs, according to the report, but the more severe impact is expected after the spring festival, when the thousads of closed factories don't open up again. Riot police have already had to make their appearance in southern cities to contain laid-off — and unpaid — workers. The scenario is a vast army of angry jobless workers wandering the streets of once-prosperous southern China with little to eat and no prospects.

That could be the ghost of revolution past.