THE CRUNCH THAT STOLE CHRISTMAS

By John Greenwald

BOHDAN ZACHARY, A HOLLYWOOD producer for the cable channel E! Entertainment, has embellished his life-style with credit-card slips. He vacationed in Paris, London and Hawaii, dined at Beverly Hills restaurants and splurged on computer programs and compact discs. But Zachary, 39, recently canceled three of his four credit cards and has begun to pay off the $20,000 he piled up in plastic debt. He is also rethinking his holiday shopping list. "I'll be much more practical and much less extravagant," Zachary says. "I'll just buy things that people really need or want."

He is not alone. And the impact of such born-again frugality will be harsh. It threatens to turn the Christmas shopping season that starts this week into a "pretty crummy" one, says Ed Yardeni, the chief economist for the C.J. Lawrence securities firm. Consumers are buckling beneath nearly $1 trillion in installment loans--almost twice the level of a decade ago. The average household carries $3,900 in credit-card debt alone. "Consumers are tapped out," says Peter Caruso, who follows retailing for Merrill Lynch. "There is no spending power left." Indeed, the government reported last week that retail sales dipped 0.2% in October compared with the previous month. Even the normally upbeat National Retail Federation expects holiday sales to increase no more than 5% this year, down from at least 7% growth in each of the past three years.

That could put a brake on the U.S. economy, which grew a zesty 4.2% in this year's third quarter. Consumers account for two-thirds of the country's total spending, so any sharp decline in their purchases could slow the nearly five-year-old recovery or threaten to end it. "I see a 25% risk of a consumer-led recession in the first half of next year," Yardeni says.

The good news for shoppers is that hard-pressed retailers across the country are already slashing prices to bring people into their stores. "Consumers tell us that 50% off is what it will take to motivate them," says C. Britt Beemer, chairman of America's Research Group, which studies consumer behavior. Predicts Carl Steidtmann, chief economist for Management Horizons, the retail-consulting arm of Price Waterhouse: "This will be the most promotional Christmas in a decade. Most stores are in far worse financial shape than their customers."

Catalog operators, for their part, are facing not just slack demand but also the rising costs of paper and postage this year. L.L. Bean, which experienced a $25 million jump in such expenses, will launch television commercials for the first time in its 83-year history this Christmas to help promote its 800 number. Rival catalog giant Lands' End plans to resist the industry price-cutting trend by holding its prices level with those of last year and offering extras such as free gift boxes and monograms. Says Lands' End president Michael Smith: "If you're selling computers or electronics, you're doing very well this year. The price cutting on everything else is earlier and more aggressive than I've seen it in years."

Even before the bleak Christmas outlook, the U.S. retailing industry was suffering through a traumatic restructuring brought on by too few shoppers and too many stores. Retailers have nearly doubled their selling space since 1985, bringing it to a ratio of 19 sq. ft. for every man, woman and child in the U.S. "There will be closed and empty stores in almost every single mall in the country," says retail analyst Walter Loeb. "Some customers are going to feel like they're shopping in ghost towns."

The shake-out has already led to bankruptcy filings by such regional discounters as Caldor, Bradlee's, Jamesway and Edison Bros. Stores, whose core clientele are overleveraged households earning $30,000 to $50,000 a year. "This group is under extreme pressure, and the retailers who cater to it are in a recession," says Mark Zandi, chief economist for Regional Financial Associates, a Pennsylvania consulting firm.

In this climate, a new kind of retailing culture has emerged--one divided between discount kings with the technology to dominate (Wal-Mart and cavernous "category killer" outlets like Sports Authority and Circuit City electronics stores) and discount kings with the nerve to sell a little flair. "The newer national chains have come in with better technology, better inventory control and better investing management than the older regional companies," concedes Michael Sherman, executive vice president of Jamesway. That situation forced the 34-year-old retailer to liquidate its merchandise and close its 90 East Coast stores.

At the same time, stores like the Old Navy division of the Gap (T shirts and jeans) or the Structures division of the Limited (fashionable casual wear), both of which have opened in the past five years, are going after a new generation of customers who want cheap prices and have yuppie pretensions. That's partly why niche retailers like Crate & Barrel, which specializes in affordable housewares, expect to continue their rapid growth. Gordon Segal, the founder of Crate & Barrel, predicts an 8% sales gain this Christmas for his stores.

Even as consumers head to the malls this Friday--the day after Thanksgiving is traditionally the year's busiest shopping day, with more than $2 billion in sales--the outlines of what's hot and what's not this Christmas are swiftly becoming clear. Topping most wish lists are consumer-electronics items ranging from Apple laptop computers that can cost thousands of dollars to kid's gadgets like Ricochet, a big-wheeled, radio-controlled car by Hasbro that sells for about $55. Educational cd-rom titles, such as Reader Rabbit and the Encarta encyclopedia, and videogame players like Sony's new 32-bit PlayStation ($300) are also likely to be in big demand this year.

Clothing from specialty apparel stores, like jerseys from the Limited or sweaters from Casual Corner, could languish on the racks this season. Reason: shoppers seem to view a lot of the current selections as the same old thing. According to Tactical Retail Solutions, a New York City consulting firm, sales of such clothing could dip 1.4% this Christmas from the level of last year. "It should tell you something," says Loeb, "when almost the entire interest in American fashion is on the color of Calvin Klein's underwear."

Sears, a once troubled company that has undergone a makeover, expects its Christmas sales to rise 5% to 6% as shoppers hunt for bargains and down-to-earth wares. "It's a homebody's Christmas," says John Costello, a senior executive vice president of Sears, whose third-quarter profits of $220 million were up 19% compared with the same period last year. "The focus will be on practical gifts as well as a few little luxuries that can make the holidays special. A new tool, a cellular phone, a bottle of perfume, and that's it."

In the practical category, bicycles are as hot as it gets. In Harbor Springs, Michigan, bike-shop owner Bill Prall boasts that "we just shipped almost our entire inventory to customers around the country, while everybody else is marking down gloves and sweaters. Every shop should be lucky enough to sell bikes this year." And in the luxury category, gourmet dog biscuits top the list of petty indulgences. In Kansas City, Missouri, Dan Dye, co-owner of Three Dog Bakery, says boxes of carob-coated reindeer and other savories baked by trained pastry chefs sell briskly for $12 a dozen.

Most shoppers, however, won't make any big purchases this year until they get a bargain. Last week Shelley Draheim and her husband Jim looked longingly at a $300 NordicTrack exerciser but said they probably would not buy the machine unless it goes on sale. "It's something that would be good for us long term," says Draheim, a research director for the Chamber of Commerce in Omaha, Nebraska. "But what we spend on it is money that doesn't buy groceries." Also watching every buck is Anne Branigan, a Chamber of Commerce colleague whose husband recently lost his job in a corporate downsizing. The couple plans to spend no more than $400 this Christmas, down from $800 to $1,000 in previous years.

Yet retailers can take consolation in the fact that at least a few borrow-and-spenders seem to be putting off the day of reckoning. Meredith Richman, 28, a developer of computer programs in New York City, is one of them. Richman "maxed out" the $6,000 credit line on her American Express Optima card this year by charging a $3,000 income tax payment along with her rent and a $1,700 computer. "It doesn't matter, though," says Richman, who has rolled over unpaid balances to new cards three times this year. "I can always get other cards."

That's undoubtedly true. Card issuers mailed out 2.1 billion solicitations in 1994, enough for eight cards for every American, according to RAM Research, a Maryland consulting firm. But with debt already weighing down many consumers, those invitations to spend are more likely than ever to go straight into the trash can, along with a stack of mail-order catalogs.

--Reported by Bernard Baumohl, Stacy Perman and Jane Van Tassel/New York, Elaine Lafferty/Los Angeles and William A. McWhirter/Chicago

With reporting by BERNARD BAUMOHL, STACY PERMAN AND JANE VAN TASSEL/NEW YORK, ELAINE LAFFERTY/LOS ANGELES AND WILLIAM A. MCWHIRTER/CHICAGO