The retail industry looked ready to get back on its feet by the end of last year, after battling the pandemic and possible bankruptcies. But with economic uncertainty and rising prices, the future looks grim.
Although the economy was initially on the mend, the latest retail sales data show that customers are being frugal. Translation – this is bad news for the retail industry. The b word – bankruptcy – might soon become a common phenomenon.
Is retail industry growing or declining?
The Commerce Department revealed that in May retail and food service spending fell by 0.3% versus the prior month. With rising prices, the number could dip even lower for the month of June.
Furniture and home furnishings retailers, electronics and appliances stores, and health- and personal-care chains all saw month-over-month declines. This could be because customers are choosing to prioritize food and other necessities as inflation squeezes household budgets, leaving no room for discretionary spending.
Marshal Cohen, chief retail industry advisor at NPD Group, told CNBC, “Consumers aren’t just buying less stuff, they are shopping less, which means a loss of the impulse-shopping moments that are critical to retail growth.” In the first three months of 2022, consumers shopped 6% lesser than what they did in comparison to the same time last year. Through a survey, the NPD Group also learned that more than eight of 10 customers plan to pull back on their spending in the coming three to six months.
Cash-strapped consumers have been forced to navigate the tricky aisles of retail as stores have also been known to overcharge customers under the pretext of inflation.
Retail woes began with the pandemic but there seems to be no respite for the industry. Rising fuel prices, supply chain disruptions, and falling demand have all contributed towards pushing it to the edge of bankruptcy. The Federal Reserve, meanwhile, has been aggressively raising interest rates in an attempt to bring inflation under control.
Consumer debt levels are hovering at an all-time high while retailers are pushing out maturities or buying back debt to stay in the game. A UBS survey found that customers are prepared to spend less money this year on back-to-school purchases in comparison to 2021. Consumers are more concerned about preserving the value of their existing cash and covering their debt and daily expenses than investing or splurging on discretionary items. This is bad news for retailers, as it leads to decreased revenue and inventory forecasting issues.
In March, Macy’s refinanced $850 million in bonds that were coming due in the next two years. Towards the end of 2020, Revlon avoided bankruptcy by convincing bondholders to extend its maturing debt. But it soon buckled under supply chain disruptions and a heavy debt load. David Berliner, chief of BDO’s business restructuring and turnaround practice, told CNBC that retail woes will push businesses to consider priorities. The ones with the heaviest debt loads will be most vulnerable to retail bankruptcy. He believes that mom and pop shops will face greater distress as they are not equipped to ride such hard times. There might be hope if consumers decide to loosen their purse strings a little more.
Rising inventory levels are another indicator of things going wrong. An increase in inventory shows that the retail industry has been wrong about consumer spends and that shopping patterns have changed. As retailers deal with these changes, it also translates to lesser profits, which will eventually affect earnings reports and stock prices. According to the SBAF Small Business Survey released in March 2022, over 60% of small business owners cited inflation as their top challenge. Experts state that retail bankruptcies will most likely not pick up until 2023, but holding the fort will surely become difficult as inflation is not togging anywhere. It can also lead to big players buying up the smaller chains reducing competition. Despite low retail bankruptcy filings in the second half of 2021 and the first quarter of 2022, numerous stores, apparel retailers, and department stores have announced efforts to right-size and close stores.
As of May, miscellaneous store retailers saw a 1.1% drop in sales, while online stores posted a 1% decline. Taking note of the recent changes, many large retailers have already started adjusting their revenue forecasts for 2023.
