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Drop in tourists takes a bite out of U.S. retail

By Michael Baker

With the U.S. economic recovery in its eighth year, it's been getting harder and harder to find discouraging news for retail. New data arriving daily from government statisticians and quarterly earnings reports have, for better or worse, reduced the frequent cautionary warnings of some analysts to white noise.

In the din of good news, one thing has not received a lot of attention: how the economies of other countries have kept foreign tourists from spending in U.S. shopping centers. This is an especially acute issue for value centers that draw a significant number of international tourists. For example, the failure of sales growth at factory outlet centers to keep pace with other sectors of the retail industry has been noted ominously for some time in and out of Wall Street, not to mention in ICSC's own sales databases. (Same-store sales by factory outlet stores declined by 1.5% in the year to date through July, and by 3.2% for the 12 months ending July, according to ICSC's ORMA Monthly Sales Index.) Could big-spending foreign tourism have played a role? It's a difficult thing to quantify, but a few facts and figures are suggestive at the very least.

First, what happened between 1997 and 1998: In 1997, according to the International Trade Administration of the U.S. Commerce Department, 24.2 million international visitors (excluding Canadians and Mexicans) came to the United States. In 1998, the number dropped to 23.7 million, a decrease of approximately half a million visitors.

Each of the 1997 visitors spent an average of $369 per person on gifts and souvenirs, compared with only $333 by the 1998 travelers. That's a difference of $1.04 billion that U.S. retailers missed out on in 1998, either because international visitors stayed home or because they spent less when they came here.

Much of the damage originated from Asia. (See Figure 1.) While arrivals from Europe kept largely up to speed, financial crises and recession in Asia, associated with rapid and huge depreciation of national currencies against the U.S. dollar, combined to have a devastating impact on both Asian arrivals and per capita spending in the United States.

Many potential tourists stayed home — arrivals from the four most important Asian source countries for U.S. visitors declined by almost a million from 1997 to 1998 — and those who did come faced significant erosion of purchasing power due to exchange rate depreciations, ranging from 8% for the Japanese to 32% for South Koreans.

Asia was not the only major source of shopping tourists that was affected. Brazil, for example, also sent far fewer visitors to the United States in 1998 — 32,000 fewer than in 1997 — and Brazilians, like the Japanese, confronted an average exchange rate erosion of 8%. Meanwhile, the number of Canadian visitors dropped by more than 10% — the Canadian dollar lost about 7% of its average value against the U.S. dollar.

In the first half of 1999 the situation shaped up a bit better, but the number of visitors from all countries was again slightly down from the corresponding period in 1998. (See Figure 2.) The good news is that improvement is inevitable as the U.S. currency weakens and economies in Asia show signs of stirring, inducing more shoppers from there into U.S. centers. Tourism from Japan is still well down on a year-over-year basis (-7.2%) but up from both South Korea (+36.8%) and Taiwan (+15.7%).

The Latin American situation is not so sanguine, in the short run at least. In Brazil, whose currency, the real, collapsed early this year, economic recovery is still in the balance. Although the real has since been partially restored to health, outbound Brazilian tourism to the United States had shrunk by almost 20% through midyear compared to the first half of 1998. And Brazilians are big spenders — according to a 1997 Commerce Department survey, Brazilian shoppers spent an average of $760 per trip to the United States, compared with $430 for the Japanese, $304 for Germans and $242 for the British.

The bottom line is that domestic economic conditions are not all that counts. Although a billion dollars in lost retail sales to foreigners is a drop in the ocean compared to the $2 trillion in total U.S. nonauto sales, some of that tourist spending is concentrated at centers that count foreigners among their most valuable customers.

Michael Baker is ICSC assistant director of research.