Inflation, Recession And Market Uncertainty Are Top Of Mind To A Healthy Retail Market That Is Looking Towards Holiday Planning

Gallups Economic Confidence Index

Reports from today update that the US Economy shrank 1.6% instead of 1.5% even as consumer spending still went up during the period. A bigger trade deficit — from Americans’ buying more foreign goods and services — reduced 3.2 percentage points off the change in January-March GDP and was the primary culprit.

Contribution Change in Real GDP by Industry 2022 Q1

For the full year, the economy is still supposed to grow a healthy 2.5% according to the world bank. But there is still a lot of talk about recession. In fact, it has overtaken inflation in Google Trends search volumes.

Consumer confidence is falling as well, dropping below the pandemic nadir and to levels we haven’t seen since the 2008 financial crisis. NPD researchers found that 83% of U.S consumers plan to make changes to reduce their product spending in the next three to six months. So what’s a retailer to do in planning for the holiday season? “They’re guessing. They’re all guessing. And any one of them that tells you they’re not guessing, they’re lying, because they don’t know,” John McQuiston, managing director and global head of originations, receivables and trade finance with Wells Fargo, said in an interview on retailers’ inventory plans. "The demand levels are entirely unpredictable. Consumer behavior is unpredictable. …" This is a bit of a crystal ball Christmas.”

As a result of the uncertainty even amidst projected healthy annual growth, retailers are weighing what to do with the excess inventories. Target has aggressively been marketing promotional discounts to reduce its inventory, for example, and slashed earnings projection twice in June. Some retailers are trialling new programs to allow customers to donate returns instead of ship them back, because why exacerbate the inventory problem, especially if the economics don’t work on resale.

Grocers are looking at ways to turn this environment to their advantage. Private label has been one way that they are looking to capture spend, especially with discount searching shoppers who have learned to be less brand loyal following periods of uncertain inventories and out-of-stocks. 41% of shoppers surveyed by the Food Industry Association (FMI) this spring bought more store brands than before the pandemic. Shoppers that are buying more private brands chose value (63%) and price (55%) as their leading reasons for doing so.A 77% said they plan to continue to add store brands to their carts in the future, making this a powerful opportunity to grab share and drive profitability.

For the near term, the industry is closely watching key shopping events including Amazon Prime Day, which is July 12th and 13th. According to eMarketer, “Over the two-day period, non-Amazon retailers will rake in $5.22 billion in ecommerce sales in the US, up 17.8% from Prime Day 2021. Meanwhile, Amazon will gross $7.76 billion in digital sales, up 16.7% from last year’s shopping holiday.” What will also be interesting is to measure the lift of competing sales from retailers like Target. This will help address the excess inventory from retailers, so we expect sales to be robust. Eyes will also quickly shift to back-to-school shopping in August as a bellweather for retail.

Amazon vs other retailer 2017-2022

Source: eMarketer

Even though Revlon announced its bankruptcy recently, 2022 has been a record low year for retail bankruptcies, with just 4 bankruptcies to date as of June 16th, 60% less than any year in the last decade. But with rising interest rates on debt, profits will continue to be squeezed, especially if consumer demand growth reverses based on inflationary and economic pressures.

Announced Retail Bankruptcies 2010-2022

“Some retailers have been able to cancel orders to not create more of a bubble on inventory. But a lot of retailers can’t cancel those orders,” Malfitano said. “So if the retailers that can’t cancel orders don’t knock it out of the park during the holiday season, their margins are going to go way down.”