Higher Payroll Taxes Seen Having Subtle Impact on Retail Sector

   By Karen Talley 
 

For most shoppers, the payroll tax increase will not cause a stampede to lower end stores but may involve a more subtle shift.

Middle-income consumers, a good chunk of U.S. shoppers, will likely stick with their favorite stores, but they may buy less or make fewer visits. Higher-end shoppers are unlikely to change their shopping habits, but lower-income customers may be doing so already.

The loss of the tax holiday as of the beginning of this year takes about 2% out of payrolls. A person making $50,000, for instance, would have roughly $1,000 less to spend annually. The increase in payroll tax should lower total consumer spending by an estimated 98 basis points this year, or close to 1%, Credit Suisse estimates.

The loss is a far cry from the recession, when the lack of jobs and job security sent shoppers to lower-end stores, as they tried to make their money stretch as far as possible.

"This time employment, although not recovered, has improved, and people are just tired of being frugal," said Craig Rowley, head of retail for the Hay Group consulting firm. "They've enjoyed being able to spend in the last year and won't easily give it up."

While the unemployment rate remains in the high single digits, at 7.9%, it has recovered somewhat, which goes a long way toward dictating what is spent and where.

"I don't believe most consumers are going to make really big changes to shopping habits," said Edgar Dworsky, founder of ConsumerWorld.org, a consumer information service. "People feel, particularly if they have a job, they are doing better. I don't think you have the pressure of the recession."

This suggests retailers that cater to the mid-market, like Macy's Inc. (M) and Kohl's Corp. (KSS), and teen retailers like Gap Inc. (GPS) and American Eagle Outfitters Inc. (AEO) could somewhat deflect the brunt of higher payroll taxes.

At the same time, the stock market has been making new peaks, a far cry from the days of the recession. Upper-end spending goes hand-in-hand with stocks' performance, so the payroll tax should have little negative impact on this demographic. This is positive news for retailers like Saks Inc. (SKS) and Nordstrom Inc. (JWN).

Lower-income consumers are the group that will be hit hardest, because many already live paycheck-to-paycheck and now face even more money coming out of their wages.

"This could have a lingering impact on spending, especially for lower end retailers," Credit Suisse analyst Gary Balter said.

Wal-Mart Stores Inc. (WMT) already has demonstrated that the payroll tax increase is having a negative impact, which it cited last week as a deterrent to purchasing in a memo obtained by Bloomberg.

Write to Karen Talley at [e-mail]

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