RETAILNETGROUP STRATEGY ALERT No.

18 Issue
January 2009
Credit Tightening
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Banks across the board are systematically reducing credit card limits.
This ranges from closing under-used or unused ("reserve") credit cards
to cutting chronic balance carriers down to close to their balances.
In This Issue
Credit Impact on the
For retailers and packaged goods firms, the impact will be to remove a
Economy
significant percentage of spending power from the market. According to Consumer Impact
Oppenheimer, the 70% of consumers with credit cards carry a total of New to the RNG Site
more than $976B in credit card balances. 90% of those consumers Banking Credit Reductions
carry a balance at some point during the year year, and 45% carry Further Reading
balances regularly.
Store Tours
In other words, 45% of consumers will likely see their liquidity from
credit card lines substantially reduced AND their minimum payments 10,000+ photos -
and interest costs increased. This in turn will drive further reductions in Views of the most
consumption expenditures, which have been trending downward important new stores
already. opened in North & Latin
America, Europe and soon
Below we provide you with the most important basics you need to know the leading Asian markets
with regards to credit changes and how they will impact your world in
2009. Filter by department -
Search/sort photos across
markets and
Tim O'Connor, retailers by department
Vice President (for brand managers
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great ideas)

"Best Ideas" galleries that

Credit Impact on the Economy highlight the very best
ideas from across all of our
store galleries
The impact to GDP is going to extend the recession further into 2009
and even into 2010. Morgan Stanley estimates the slowdown in real On-Demand - Photos of any
consumption will be -1.6% for the 12 months ended June 30, 2009, a store in most parts of the
post-World War II record. They also estimate growth in consumer world in 72 hours or less.
spending over the next several years will be about 1 to 1 1/2
percentage points less than the 3.5%clip during the decade ending Contact Mark Byrd to
2007. schedule a demo or request
more information.
RNG's latest forecast for "formal" retail (taxed retail) is a compound
annual growth rate '09E-'11E of 2.5%, with chain retail outpacing that
slightly as large retailers leverage scale and access to credit to increase
Prior Strategy
share. Some chain retailers will be the exception where over-leverage Alerts
will put them at a disadvantage.
Visit RetailNetGroup.com
to see all our past
newsletters. Topics
include:
Consumer Impact
A New Look at Retail's
Winners and Losers
Under-used: For this group, additional credit is a matter of flexibility
and security - having back up lines of credit "just in case." Restricting
this credit harms confidence but doesn't cost money directly. Mangaging Through the
Crisis
Chronic balance carriers: The effects are immediate for this group of
consumers. They have less available credit, forcing higher payments to Fending Off the Crisis: The
recapture flexibility at lower credit carrying levels. There is also an Retailer Approach
immediate impact on FairIssac Credit (FICO) scores from the change in
their "usage" percentage, more commonly referred to as "revolving Retail Health Services
utilization," the ratio of the balance outstanding to credit limit. Update

This often triggers a reevaluation of their risk with commensurate Wal-Mart's Marketside - a
Small(er) Supermarket
increases in both the interest rate charged on the balance as well as the
minimum payment percentage, which rises from 2% to more than 5%
in many cases.Unfortunately, this impact is felt regardless of credit also latest format
score and payment record. innovators, and others

This latter impact increases the direct cash cost of maintaining credit
cards and will also likely increasethe number of consumers pushed to
Meet Our
foreclosures and bankruptcy. Analysts

New for RNG site Subscribers

• Understanding the Crisis Report - Key macro conditions
impacting consumers and retailers, in addition to chain retail
forecasts of key winning and losing segments

• Central & South America Market Review - Macro, Dan W. O'Connor is the
President & CEO of the
consumer, and chain retail overview with a focus on Central
RetailNet Group. He also is
America the Founder of
Management Ventures, Inc.
• Updated Retailer Sales and Stores data for: Carrefour, select
(MVI), a WPP Group
Auto Retailers, and Latin America company. Dan is a widely
known industry speaker and
• Retailer presentations from the Morgan Stanley Global thought leader.
Consumer & Retail Conference - WMT, Shoppers Drug Mart LinkedIn | Email
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Background on Banking Credit Reductions

The credit line reductions that started in the first half of 2008 and are
accelerating in 2009 are already showing up in consumer financial
obligations ratios - the estimate of the ratio of debt payments to
disposable personal income. Debt Ratios are based on the estimated Aaron Chio is a Senior
required payments on outstanding mortgage and consumer debt. Analyst leading RNG's
development of new
The financial obligations ratio (FOR) adds automobile lease payments, research, insights and
rental payments on tenant-occupied property, homeowners' insurance, growth strategies in Latin
and property tax payments to the debt service ratio. America.
LinkedIn | Twitter|

Figure 1: Consumer Debt Ratios

 Tim O'Connor is Vice
President at RNG, currently
responsible for RNG's
Growth Strategies
Curriculum and European
market insights.
LinkedIn |

Source: US Federal Reserve Board (click to enlarge)

Banks are attributing this process to normal and appropriate

adjustment of credit to consumers' need and risk profile.

There are a number of additional reasons for why this is happening:

1. Banks anticipating credit card reforms - some of which

could have unintended consequences Keith Anderson is a Senior
Analyst and responsible for
2. Deleveraging the Banks' Balance Sheets in anticipation of RNG's North American
FASB rule changes requiring recognition of off balance sheet research practice and
assets and liabilities on parent bank statements transformational
capabilities
3. Banks want to increase over-the-limit and other fees and curriculum.
interest income to offset losses on consumer defaults LinkedIn | Twitter |
Windows Live Messenger
For those banks looking ahead to significant credit card reforms coming
in the next few years and adjusting their positions to reduce their
impact, the reduction in credit commitments could be greater. According
to research sponsored by the American Banking Institute these reforms
will result in a further reduction of as much as $931B over the next 18
months (for another perspective check out the blog at Naked Capitalism
sections 1-3). The regulation of concern is the elimination of adjusting
interest rates on existing balances, limiting banks from repricing
consumer costs after the purchase due to risk profile changes.

According to Oppenheimer's Meridith Whitney as reported on

MarketWatch and in her detailed analyst report, the total reduction in
consumer liquidity could be as much as $2 trillion.

While providing an insider's view of banking investment, Whitney also

shares insight into the top 5 banks in the USA, which currently
represent ~66% of the outstanding credit card debt. Bank of America
(BAC), Citibank(C), and JPMorgan(JPM) release card commitment data
on a quarterly basis. BAC and C saw commitments decrease 3.6% and
3.0%, respectively, in 3Q08. JPM had commitments increase due to the
Washington Mutual acquisition in the third quarter, but JPM's slowing
commitment growth was evident in 1Q08 and 2Q08, which saw
commitments rise 2.2% and 0.8%, respectively.

Figure 2: Lines Outstanding & Commitments

 (click to enlarge)

The current ratio of borrowing against available credit is about 20%,

according to FDIC figures, with $976B outstanding that means there is
about $5 trillion of credit lines outstanding now. If Whitney is right and
about $2 trillion of available credit is eliminated, that still leaves about
$2 trillion available -- twice as much as is currently tapped by
consumers.

Thus the real impact will be in the details of who gets cut and how
much. According to the Oppenheimer report, which just focuses on the
top 5 banks, "credit-card issuers appear to be both focusing their
efforts on the least creditworthy borrowers as well as making across-
the-board changes regardless of borrowers' credit standing. Some
lenders have pulled lines "from certain perceived high-risk ZIP codes or
areas of weakened home values; others have pulled more uniformly."

Closing Thoughts

• Expect to see further inventory, SKU, and brand pull backs by

retailers in response to the expected further retractions in
consumer spending
• Expect to see more marginal store and retailer closures -
especially in non-discretionary categories and highly-levered
retailers
• The need for retailers to win the trip and hold on to shoppers is
even greater
• Shopper marketing and conversion by brand owners is also key
• Innovation, relevance and value will win

Further Reading

• Coming out later this week will be the update to the Fed's
Report of Consumer Debt. This will give a sense of the impact
of credit balance reductions on consumer spending in the 4th
quarter.

• John Ulzheimer's "Credit Crisis: Facts & Advice"

 • "Understanding 'De-leveraging,' Meredith Whitney on Credit
Cards"

• See story on Federal Reserve's upcoming changes to credit-

card rules.

• "Consumer spending drops 1% in October," to the degree that

limited access to credit dampens consumer spending further,
that could severely hinder an economic recovery.

• To understand how credit utilization effects credit scores, read

more on Fair Isaac Corp.'s site.

• "Say Good-Bye to Credit?," analyst sees credit-card limits cut

by $2 trillion, but devil's in details (WSJ).

• "Jim Rogers calls most big U.S. banks 'bankrupt,'" - driving

massive shifts in leverage (Reuters).

RetailNet Group is the leading insight and advisory firm focused

on retail growth strategies and consumer-facing
transformational capabilities. We are deeply experienced
retail/consumer analysts and strategists working exclusively to
help brand-led businesses and large-scale retailers grow.

Sincerely,

RetailNet Group
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