Katrina's pain

Weeks after Hurricane Katrina devastated a large swath of the Gulf Coast there is a growing acceptance that retail recovery and rebuilding will be painful over the next four to six months. But if retailers—particularly cash-strapped small merchants—can survive that time period, they may have a chance to participate in an almost heady growth market.

“Within a two-year period of time we will be talking about boomtown U.S.A. from Biloxi, Miss., all the way over to New Orleans,” offers Marshall Cohen, an analyst for The NPD Group, Port Washington, N.Y. “There will be bigger, better business. There will be a bigger, better place to live. The two biggest challenges: for the smaller retailers to find a way to hold out until they get [customer] traffic back, because they can't open on an empty street; and for all retailers, is to retain the help they're going to need once they decide to reopen.”

Holding on clearly is the challenge for all retailers in the disaster areas. “We really need to get in and assess the conditions,” Susan McLoughlin, a spokeswoman for Toys “R” Us tells Playthings.

Five TRU stores and one Babies “R” Us store in Louisiana, along with one TRU store in Biloxi, Miss., remained closed following the disaster. What about reopening for the holidays?

“We're looking to reopen [when and where possible],” she says. “Until we get in there and take a look, we just don't know. Some of the stores may be absolutely fine. Others may just have water damage. We haven't estimated [the cost] at all. We just care about finding our people, making sure they're OK and moving on.”

By mid September, direct damage to toy industry retail assets by Hurricane Katrina seemed contained to a relative few locations, for example:

• Wal-Mart still had 15 stores and clubs closed. Of those, nine reported major damage.
• Six Toys “R” Us stores and one Babies “R” Us stores were still closed.
• KB Toys had at least two stores still closed.
• The American Specialty Toy Retailers' Association (ASTRA) reported 10 to 20 of its members were impacted by the storm, but it was unclear how many of those stores remained closed.

Projections of the amount of retail toy sales lost to the hurricane simply don't exist. But based on a fast math of market share and store counts—educated guesswork—actual lost sales industry wide in the region might range from $50 million to $100 million, an admittedly wide spread, a noticeable, if not devastating amount in a $20 billion industry.

Katrina's economic cost has become something of a numbers game, as such disasters often do. One U.S. senator estimated the full cost of clean up and recovery will surpass $150 billion and rise to as much as $200 billion. While such estimates are often not much more than guesswork, dollar amounts of that size often render the numbers nearly meaningless anyway, at least for small businesspeople.

“I don't think anybody knows until they get in there, do their inventories, do their assessment and step back,” says McLoughlin. “For anybody to put a number on anything, I think, is way too early.”

Certainly small retailers are confronted with issues much more pressing and basic to survival: the costs of cleaning up, reopening, paying the rent and utilities.

The truth is the impact will not be known until much later; often the real cost is considerably less than early estimates. But those estimates often don't reflect the personal costs of business owners confronted with the prospect of failure completely out of their control.

Some market researchers, like The NPD Group, expect to have good estimates within a few weeks. But the early suggestions offer a mixed view. “There are some businesses that will reopen for the holidays and they will lose only up to 10 or 15 percent,” says NPD analyst Marshall Cohen. “But the true local one-shop, two-shop businesses—those will be affected well over 50 percent” if they don't open in time for the holidays.

Help. But when?

Help is on the way but as residents of the Gulf Coast learned early in this disaster, the proof is in the performance. FEMA is supposed to be working with businesses, along with the Small Business Administration, to provide low costs loans and aid to help struggling businesses get back on their feet.

President Bush provided assurance that aid would be adequate and timely.

“I sure hope so,” said Jamie Kriesman, ASTRA president and president of toy manufacturer BEKA, St. Paul, Minn. “All I know is the President's comments. Obviously everything has to be proposed and budgeted and worked through Congress. But the indications from his televised presentation were that there would be help. And for that help to be relevant, it has to be substantial.”

Kriesman said he felt “encouraged” by Bush's remarks supporting small business.

Beyond government help, however, ASTRA will be looking to address its members' needs, he said. At a board meeting slated for the weekend of Sept. 24-25, Kriesman said it will consider options to help members that need it. Fund raising was a possibility, he said.

In the first four to six months, merchants will feel the pinch as they struggle to manage the basics of their businesses in an environment of depressed sales. But NPD's Cohen suggests that might start to turn around with the fourth quarter holiday buying period. The smaller the business, the bigger the impact, he says.

“Specifically, in the toy industry, it's going to be interesting because you're going to get a lot of business that's going to come from out of town,” he says. “Come the holidays there will be, no question about it, a lot of toy merchandise that will be shipped in to the needy kids. So we're going to see a lot of movement toward the philanthropic endeavor to bring toys into the region at a possible cost in local sales.”

There was a similar situation following 9/11, Cohen points out. “There was an incredible effort to insulate the kids from these economic woes and the hardship they'd feel,” he explains. “And you will see that same kind of scenario now as parents and relatives and even strangers [shop for toys]. They don't want the kids to suffer at all. And there will be a very strong and conscious effort to make this a fun, happy and healthy Christmas to a lot of these kids.”

The KB Toys store at North Shore Square in Slidell, La., was closed for two weeks, mainly because of lost power to the store. Inventory damage from Katrina was negligible, says assistant store manager Bridget Foley. Since reopening in mid-September, its first week's sales were up 8 percent over last year and the first two days of the following week were up a remarkable 98 percent. The increase was due to replacement and comfort sales, Foley says.

“A lot of people are coming in and buying toys that their children lost,” she explains. “A lot are coming in because they're staying with other family members and a lot of them don't have cable [TV service], so they're buying a lot of games.”

There have also been vast shifts—at least temporarily—in populations that, too, are impacting sales patterns. Lafayette, La., about two hours west of New Orleans, saw its population mushroom by about 7,000 following the storm, according to Marie Darley, owner of J&R Educational Supplies.

“A lot of people are home schooling their children and others who are registering for the local schools coming in to buy their back to school stuff,” she says.

Residents are workers. Workers are shoppers. The stricken areas need to be repopulated again, even as temporary housing is set up. For retail to be viable in these areas there needs to be a customer base to support it. It sounds almost too basic, but the situation demands that approach.

Cohen notes that the initial emphasis will be on building, food, and entertainment-oriented businesses in the early go. The challenge retailers face is getting their workers to return to their old jobs.

Two out of three KB workers returned to the Slidell store, Foley says. The third, who had relocated to an evacuated area, needed to be replaced with a new hire.

“This is why you saw Wal-Mart say very quickly, 'we're going to take any displaced workers who have moved away and we're going to hire them anywhere they are,” he says. “Because they know it's not only the right thing to do for the people, it's also the right thing to do for their businesses.”

Toys “R” Us and other larger businesses have followed suit with similar programs offering salary continuation and work.

(With additional reporting by Tina Benitez)