State of the State Mid-2022: Retailers could face a rocky back half of 2022

Retailers large and small are likely to continue managing through a mountain of challenges in the back half of 2022. Continued supply chain delays, escalating prices, labor shortages and the threat of a recession are among the top concerns, according to market watchers.

Bank of America analysts have predicted the U.S. will fall into a mild recession this year. Five of the 12 Federal Reserve Districts are predicting an increased risk of recession in the July 13 Beige Book report. Most districts reported that consumer spending moderated as higher food and gas prices diminished households’ discretionary income. A majority of districts expect consumer demand to weaken over the next six months to 12 months. Wells Fargo economists agree the consumer is waning and they forecast a mild recession in early 2023.

Dr. Randall Waldron, professor of economics at John Brown University, said he’s not yet sure the U.S. will land in a recession as long as the job market remains strong. He said there is plenty of pressure on households with the highest prices in 40 years. But even with record high gasoline prices, consumers are still spending.

“Consumer optimism levels are sinking, but people are still spending so at least for now their attitudes have not yet impacted their behaviors,” Waldron said.

Pent-up consumer demand has been great for retailers thus far, but Waldron warns that if inflation remains this high into the third quarter, the compounded effect will likely lead to a spending pullback toward the end of the year.

“Regardless of the prospect of a downturn or whether it will meet the threshold of a recession, the consumer outlook over the next few months remains favorable,” said Jack Kleinhenz, chief economist for the National Retail Federation (NRF). “I am not betting on an official recession in the near term, but the most recent research pegs the risk over the next year as about one in three and it will be touch and go in 2023. In the meantime, a contracting economy short of a recession is not out of the question.”

He said the economy is slowing down but at least for now the job market remains healthy as the Fed tries to put the brakes on inflation through ongoing fiscal and monetary actions.

The NRF remains bullish for the sector this year, noting there could be some ups and downs but sales are forecast to grow between 6% and 8% to more than $4.86 trillion. The 2022 figure compares with 14% annual growth rate in 2021, the highest growth rate in more than 20 years. Sales will also be lifted by the inflationary prices of goods and services.

“Most households have never experienced anything like this level of inflation, and it is expected to remain elevated well into 2023,” Kleinhenz said. “In addition to inflation, the forces impacting the economy include COVID-19 impacts, international tensions and policy variability.”

He said although a roller coaster ride of incoming data is expected in the next few months, consumer fundamentals remain in place. Household finances are healthy and strong job and wage growth should support solid growth for consumer spending for 2022.

WIDER RETAIL DIVIDE
Deborah Weinswig, CEO of Coresight Research, expects the gaps between the retail winners and losers to widen this year and into early 2023. She said the strong players will likely grow stronger taking share from the weaker. She expects Walmart, Target, Home Depot and Costco to do well amid any economic slowdown. She said the dollar stores and the off-price chains will also fare well as consumers try and stretch their money into the holiday season.

Reversing a trend from last year, Coresight reports foot traffic in discount and dollar stores has been higher than foot traffic at shopping centers since April of this year. She said discounters and dollar stores are likely going to be winners in the back-to-school shopping season already underway. Coresight predicts indoor malls and department stores will again be challenged this holiday season as more shopping moves online and to the off-price, club and dollar store segments.

Analysts at Salesforce said while online sales will be big this holiday, they expect physical stores will drive growth across all segments during the 2022 holiday. That said, a Salesforce survey indicated 51% of consumers plan to purchase fewer holiday gifts this year.

“With rising gas prices, food shortages, skyrocketing interest rates and ever-present inflation, consumers are worried and will likely shift their buying behavior,” said Caila Schwartz, Salesforce director, consumer strategy & insights. “In the face of uniquely challenging factors, the stars are aligning to deliver another unprecedented holiday season for the retail industry.”

PHYSICAL STORE TRENDS
Salesforce said 60% of digital orders are now influenced by the store – whether demand is generated or fulfilled. This year, with stores fully operational once again, they expect to see consumers gravitate to physical stores in even greater numbers. Salesforce predicts that retailers with physical stores will grow online sales at a rate 1.5 times faster than those without.

“There’s real opportunity for retailers with both physical and digital stores to grow faster than digital natives and e-commerce brands,” Schwartz said.

Other predictions from Salesforce for the holiday include shoppers buying earlier to avoid potential price hikes as 42% more shoppers worldwide and 37% more in the U.S. plan to start buying gifts earlier. This was No. 1 behavioral change this holiday due to inflation.

While many expect the holiday season to be somewhat promotional, Salesforce said it will be product value that will trump convenience for shoppers. Half of all shoppers will switch brands during the 2022 holiday due to pricing, which means 2.5 billion shoppers worldwide could ditch their brand for a lower-priced competitor. Salesforce warns the luxury brands, grocery and department stores are more susceptible to waning loyalty due to price sensitivity.

“For retailers 2022 is about playing the long game. Economic challenges and shifting consumer preferences mean that leading with a data-driven strategy will be critical to reacting to conditions in real-time. And while we can’t stop inflation, we can recession-proof our businesses by improving profitability and solving for operational inefficiencies,” Schwarz said.

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