RETAIL PERSPECTIVE ON CURRENT ECONOMY
2022 OCTOBER ISSUE
Written by : Terri Fisher
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From the Desk of the Publisher – Andrew Sia
Terri raised many valid questions and that made us think as obviously many of our industries don’t have any contingency plan when the world fall in crisis. In fact, many of us have never encountered for what happened. We have never seen any pandemic in such a scale and also for such extended time. The virus is still mutating and we have seen the cases have been picked up again although it is not as fatal as before.
The world has also been caught up by the war in Ukraine as started by Russia. Putin has taken the world as hostage as the gas and food are falling into crisis. We also don’t have any idea when will this be ended.
Terri, the contributor of this article is asking for the retail industry to respond. We urge the industry to come together to come up with some constructive suggestions.
The economy is everything these days. It is on everyone’s mind and even eclipses Covid, Monkeypox, and the war in Ukraine on the nightly news. How likely is a recession? Will inflation continue? What will happen to retailers with people so concerned about the cost-of-living skyrocketing?
There has been a shift from retail goods like apparel and home décor to hospitality, travel, and entertainment. But mostly the consumer shift has been the need to pay for basic necessities like food, gas and increased rent instead of a new wardrobe.
The Oxford dictionary defines a recession as “a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters.” Well, we have just completed 2 successive quarters of a fall in GDP. Most politicians are reticent to call our current economy a “recession” but many indicators tell us that’s exactly what we are in. If not now, then for sure by the end of the year. Recession indicators include personal income, retail sales, industry productivity, and employment growth among other things.
An inflation gauge closely tracked by the Fed jumped 6.8% in June from a year ago, the biggest such jump in four decades. Much of the increase was driven by energy and food. In late July, Walmart said its profits would fall because its customers are spending more on pricier food and gas, leaving them less able to buy clothes and other discretionary items. Likewise, Best Buy downgraded its sales and profit forecasts because surging inflation has forced consumers to reduce purchases of electronics and appliances. When Target’s sales exploded during the first year of the pandemic, the company was a darling of Wall Street. But in May, the retailer said it was stuck with an oversupply of certain goods and the company’s stock price plummeted nearly 25% in one day. Other retailers’ share prices have also fallen.
Globally, inflation is weighing heavily on other economies as well. In July, prices jumped 8.9% in the 19 European countries that use the euro currency from a year earlier. Europe’s economy has been hit particularly hard by higher natural gas and oil prices stemming from Russia’s invasion of Ukraine.
Central bankers in the United Kingdom have announced in early August the biggest increase in interest rates in 27 years, as spiraling inflation continues to cripple millions of households’ finances. In June, annual consumer price rises reached a four-decade high to hit 9.4%, plunging millions of Britons into a cost-of-living crisis that has forced many to choose between ‘heating or eating’. The Bank of England has also forecast inflation to rise above 13% in the Fall, when energy bills are due to increase, and to “remain at very elevated levels throughout much of 2023”. Britons have tightened their belts in response, spending less in stores and ditching their streaming subscriptions. About 2/3rds of all low-income families have gone without essentials such as heating or taking showers this year (!), according to a June report by the Joseph Rowntree Foundation. A looming recession could make matters worse, ushering in a wave of job losses. Fears of an economic slowdown intensified in June when the Organization for Economic Cooperation and Development said it expected the UK economy to stagnate next year, the only nation among the G7 to do so.
Another recession indicator is the number of companies laying off workers. This is a pivotal number to watch for. Not only will companies layoff, but will leave open positions open. We have started to see layoffs already even in all-stars such as Allbirds. The tech sector has also been initiating layoffs.
These days we are witnessing the decline of “unicorns”, those startups that at some point reached or surpassed a billion-dollar valuation. Allbirds’ share price has fallen more than 80% from its initial public offering and has laid off 8% of its workforce. This sneaker company has 40 brick and mortar stores globally. They are now partnered with Nordstrom and are looking into resale.
Away, the super cool luggage company is another sad story. The pandemic derailed their momentum due to the decline in travel. Sales plummeted 90% and the company was forced to furlough half its staff and layoff another 10%.
Glossier the cosmetic company was gaining cult status among beauty customers in 2019. The 2022 year had hardly begun, however when Glossier laid off 1/3rd of its workforce and admitted the brand had made strategic mistakes. They are grappling with inflation, announcing price hikes to offset higher expenses, and just confirmed another round of layoffs.
Rent the Runway, the resale giant, joined other disruptors in achieving their billion-dollar valuation in 2019. During the pandemic, customers had little use for nice office clothes or dressy clothes, and the company changed its model to allow non-subscribers to purchase used clothing. Their troubles did not impede their IPO last fall, although the stock had tumbled to under $5 per share, far below its previous valuation. In July, off-pricer Saks Off 5th’s online company announced it would sell pre-owned, pre-rented Rent the Runway items on its website.
Stitch Fix, the subscription apparel company had a $1.6 billion valuation at its IPO in 2017. But those days are gone as the apparel e-retailer, which missed out on this year’s brief clothing boom, scrambles to figure out how to stem losses. They have made many changes, resorted to layoffs, and watched its share price drop to below $10. It is easy to go from “hero to zero” these days!
Unemployment is low right now, but there are still 11 million job openings! This is severely hurting retailers who have no one to work in their stores. Hiring has been tough and as you walk the malls, “HIRING NOW” signs are in almost every store window.
Consumer confidence numbers are moving downward at a fast pace although not in the same trouble as in 2008. Savings are lower than pre-pandemic levels and continuing to go down monthly. But there is still enough in savings accounts at this point to pay for basic necessities. But for how long?
The inflationary pressure is obviously highest at the low end of retail consumers. They get pinched the most. Last year’s stimulus money that they received has probably been spent. Due to these pressures, these lower- and middle-income consumers are making fewer trips to stores and buying more items on sale. This bodes well for the off-pricers who not only offer lower prices but also are taking in the gluts of inventory crowding regular price retail floors and distribution centers. Ross Stores, Burlington Stores, and TJX are looking strong, relative to regular price retailers.
Retail inventories are a mess. Retailers are offering more promotions and lower priced promotions just to move goods. When will inventory match sales demand trends? Not in the near future. Supply chain timing is all wrong and is still “off”. Everyone lately has been quoting Mickey Drexler, of Gap fame, who once said, “Inventory is the enemy of every retailer in the world.” When Walmart and Target indicated that they were caught “flat-footed” with all the excess inventory that had piled up after Covid, thus lowering their profitability forecasts, expecting to heavily discount goods to clear their shelves for incoming Back-to-School and Holiday goods, you know there is a global problem here. Robin Lewis, an industry expert, said in a recent article that “Target and Walmart are bellwethers for the industry, because if these two poster children are caught off balance, you can bet the rest of the industry is in worse shape.”’
How did the industry get caught up in this mess? It was a result of bad forecasting for goods ordered pre-pandemic, both the quantities and the categories. So, when the big Covid shutdown of all nonessential retailers occurred, goods just piled up across the board. Then as consumers locked themselves down at home, including working from home, most of the piles of stuff were not in demand for online ordering. Home décor, sweatpants, games and other at-home cocooning items were replacing the cyclical and seasonal products normally in demand. Retailers had the wrong inventory, and not enough of the pandemic related items consumers wanted. This was all exacerbated by the supply chain debacle: factory closings in Vietnam and China due to Covid, empty cargo ships idling offshore in Asia waiting to be loaded, and the cargo companies charging companies 10 times the cost of a normal pre-pandemic journey. They then sat in a queue of hundreds of ships waiting to be unloaded. Then dock workers and truck drivers got sick from Covid. Need I go on?
Adding to this glut of poorly timed and incorrect products, all the things that people bought during the pandemic when they were bored on their couches, and often online, they RETURNED! In 2021, shoppers returned an average of 16.6% of their purchases, up from 10.6% in 2020 and more than double the rate in 2019, according to an analysis by the NRF and Appriss Retail. Last year’s returns, which retailers are not always able to sell themselves, totaled $761 billion in lost sales. This number is more than the Gross Domestic Product of South Africa and two times that of Portugal!
It’s becoming clear that retailers badly misjudged supply and demand. You would think that there would be enough data and enough history to see things a little more clearly, but it also suggests that times are changing and are changing fast and more dramatically. Strong consumer spending during the pandemic may have saved the economy from ruin at that time, but it has also led to enormous excess and waste. “It’s unprecedented,” said Chuck Johnston, a former Walmart executive, who is now chief strategy officer at go TRG, a firm which helps retailers manage returns. “I have never seen the pressure in terms of excess inventory as I am seeing right now.”
How resilient is the consumer? Some categories may end up a bit better than others in the short term. Clothing might have a few bright spots with “back-to-work” and “back-to-going-out”. This may or may not hold up. Will Fall fashions rebound in the 3rd Quarter? Not likely as more people spend less time in the office and have less money to spend on fancy dinners out.
Cosmetics and beauty may not take as big a hit post-Covid as other categories with ULTA being the darling of this category. They have a wide selection, affordable prices, and a decent shopping experience.
How do higher mortgage rates filter down to the retail market? Consumers are still spending on home improvement (including repairs) even if the level of home purchases has peaked and is starting to decline. On top of all this, there is a rapid decline in consumer sentiments but they continue to spend, just not as much.
I know this topic borders on political, but the facts are the facts. Retail is in trouble and no number of layoffs or lower prices are going to fix it in the short term. Changes are happening faster than we can report on them. It’s a tough time to be a retailer and I can only hope that those of you out there are surviving. I’d love to know your thoughts! Feel free to email me your opinions and your recommendations for those retailers out there who are on life-support.
Stay safe,
Retail Correspondent
Email me at:
terri@iappareljournal.com