Is the retail sky falling?

Discussion
Photo: Getty Images/Jurkos
May 19, 2022

Moody’s Investors Service on Tuesday lowered its outlook to negative from stable for the U.S. retail and apparel industry.

The risk assessment firm found plenty of risks for retailers. Inflation, geopolitical developments, supply chain disruptions and falling demand are expected to erode margins and profits. Moody’s sees this scenario playing out across every subsector of retail and apparel.

“Retailers face deteriorating business conditions as they grapple with shipping delays, product shortages and inflation,” Christina Boni, senior vice president, Moody’s Investors Service, said in a statement. “We expect sales to increase two-four percent, while operating profit is set to decline one-three percent over the next 12-18 months.”

First-quarter results released this week by Target and Walmart suggest that Moody’s forecast may have merit. The two retailing giants posted modest sales gains while reporting that operating margins had fallen well below their own expectations.

Moody’s sees higher prices for food, fuel and other necessities weighing on consumer spending in the months ahead. It said that retailers that have been dealing with high demand, product shortages and increased shipping costs will now find themselves having to also plan lower demand.

The pain will be spread across players both large and small.

Moody’s said that online will be the largest underperforming category with Amazon.com and others facing rising costs and excessive capacity as product demand comes back to earth. Big box retailers, department stores, food and gas are going to feel the pain, as well.

Retailers landing on Moody’s exception list include auto and auto parts, home improvement, off-price and value stores. All four segments “have growth potential in coming months,” according to the firm.

One of the biggest challenges facing retailers, according to Moody’s, will be their ability to continue passing on price increases to their customers. The firm sees Russia’s ongoing attack on Ukraine creating economic realities that may undermine the American economy, which currently boasts low unemployment and high savings rates.

Supply chain factors remain an area of concern for Moody’s. It points to potential constraints, specifically the negotiations taking place between West Coast ports and dock workers on a new labor contract. The current one expires on July 1.

DISCUSSION QUESTIONS: What outlook do you see for the retail industry for the next 12 to 18 months? What factors are likely to have the greatest impact on retail industry performance over that time?

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Braintrust
"Retailers who have been working on breaking down internal silos, increasing supply chain flexibility and shore up brick-and-mortar formats will survive, if not thrive."
"The retail sky is not falling, but it will be fragmenting into smaller offline footprints, reduced inventory that is highly curated and greater differentiation of products."

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18 Comments on "Is the retail sky falling?"


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Mark Ryski
BrainTrust

There’s no doubt that the retail industry is in for a rough period – along with every other industry. There are so many challenges, it’s hard to see an end to the calamitous results that we’re seeing. However I continue to have faith in the consumer and in the ability for the economy to return. It’s hard to pin down one factor that’s had the greatest impact, since it’s the confluence of many, however I believe that inflation is biggest headwind retailers face, and this is something they have faced before.

Karen S. Herman
BrainTrust

The retail sky is not falling, but it will be fragmenting into smaller offline footprints, reduced inventory that is highly curated and greater differentiation of products in-store. We will continue to see increased digital choices in-store that maximize the shopper’s use of the smartphone as their primary shopping tool. As operating profits continue to decline, retailers will be looking to make these choices to become more agile and move to improve performance over the next 12-18 months.

DeAnn Campbell
BrainTrust

Retailers who have been working on breaking down internal silos, increasing supply chain flexibility and shore up brick-and-mortar formats will survive, if not thrive. But e-commerce only businesses are going to find it tough to earn sufficient profit margins to navigate the unpredictable global challenges that are becoming the norm.

Brandon Rael
BrainTrust

The following 12 to 18 months will absolutely be a test for the very resilient retail industry. Resiliency, adaptability, and adjusting to the current economic conditions have been the retail sector’s mantra. Those retailers who have invested significantly into customer-first strategies, including digital-first technology architecture, enhanced supply chain and fulfillment capabilities, private-label offerings, sourcing, and a seamless digital/physical experience, are well-positioned to ride out the disruptions to come.

The retail apocalypse’s false narratives of a couple of years ago will not be repeated. While there will be short-term challenges, it’s the more extended-term investments, enhanced capabilities, and a digital-first mindset brought on by the pandemic that great acceleration will help retailers ride out the disruptions. Inflation, supply chain disruptions, and a recessionary fueled economy are not new phenomena, and the retail industry will find a way to get through these challenges.

Dave Wendland
BrainTrust

Just as airplanes take off into the headwinds because it helps to achieve “wheels up” faster, the multitude of pressure that retailers face will be a catalyst to making necessary changes for them not only to survive, but thrive in the face of adversity. We are already seeing measures being taken (some out of supply chain or workforce necessity) to optimize inventories, incorporate technology, and improve customer interactions.

The two factors that I feel will have the greatest impact are:

  1. Inflation (consumers are just now beginning to fully realize the pain at the gas pump, grocery aisles, and general cost of living). This will cause additional pull back on spending which is not good for retailers unless they creatively find ways to meet consumers at their point of pain.
  2. Workforce. Simply put, there are not enough people with a willingness to fill the amassing gaps across the retail supply chain. This is a powder keg with no magic pill.
Neil Saunders
BrainTrust

No, not exactly. This is a correction. Retail is coming off a high from a two-year binge, helped along by the injection of massive stimulus into the consumer economy. That’s impacting demand, which is moderating – although is still holding up well against 2019. It is also impacting operations, which is why retailers have too much inventory. The big problem is that this is occurring at a time when retailers’ costs are rising dramatically. Put together more moderate demand, operational inefficiency, and higher costs and you get a severe profit squeeze. It’s not great, but neither is it disastrous — yet.

Richard Hernandez
BrainTrust

I believe retailers will need to re-evaulate how they conduct their business. Supply chain and labor shortages along with inflation (that we don’t see going away anytime soon) will continue to be big hindrances that need to be considered in the offerings for customers.

storewanderer
Guest
1 month 15 days ago

Consumers will be trading down. There is no question. The price spikes are forcing it to happen. Retailers and big brands are in for a world of trouble going forward if they do not quickly deliver and maintain a realistic value proposition to the consumer.

The one industry and segment of consumers who seems to continue to be able to charge whatever it wants and there is a good sized segment of consumers who keeps patronizing them without complaining — various independent restaurants. Not the chains — you hear people grumbling about pricing at chain restaurants.

If retail stores can differentiate and be “special” enough maybe they can accomplish the same type of customer loyalty but I don’t see any national chain retailers even close to running an operation that accomplishes that. Target was heavily propped as a chain that had that sort of situation but reality has returned for that bloat.

Karen S. Herman
BrainTrust

Agree with your points, storewanderer. One popular example of differentiation in the restaurant sector is the popularity of Food Trucks. They are not inexpensive but they gain tremendous customer loyalty and WOM advertising. Uniqueness, memorable experience, perceived value and contactless shopping all come in to play here. These factors make the “special” difference.

Lisa Goller
BrainTrust

The next 18 months will separate leaders from laggards. Digitally-mature retailers that sell essentials (grocery, pharmacy) and B2B services (ads, logistics) will weather this period best.

The biggest threats to industry performance are Inflation, supply chain disruption and reduced consumption. The biggest opportunities are automation to fuel efficiency, local sourcing and innovative assortments.

Carol Spieckerman
BrainTrust

A combination of surmountable factors finally culminated in a temporarily insurmountable situation. Pent-up demand and shoppers returning to stores, combined with retail’s odds-beating resilience throughout the pandemic created a false sense of security. For now, this is a humbling moment rather than an irreversible downturn.

Rich Kizer
BrainTrust

It’s the best of times and the worst of times. I do believe the retail industry is struggling, but I also believe some of the brightest retail minds are aware of where weaknesses are accruing. The change train has been speeding at breakneck speeds, but I sincerely have faith that our retail leaders will plow new roads to success. But it’s going to be teeth grinding times.

Jeff Sward
BrainTrust

I’m going to say that it’s more like earthquake season. It’s really tough to find solid ground these days. And the tremors don’t show any sign of letting up soon. Peloton gave us a great lesson in reminding us to drive within the range of our headlights. They took a moment of good news and euphorically set out on a strategy totally beyond their ability to accurately predict demand in a highly fluid market. Fluctuating demand and fluctuating ability to supply that fluctuating demand are a particularly volatile combination. So it seems like the next 12-18 months are best served by maximum effort on brand equity and differentiation with a very close eye on balancing predicted demand and the ability to execute to that demand.

Holden Bale
Guest
We know how this works from past lessons. Beauty, household commodities, center store in grocery, etc. — generally tend to be recession “resistant” (of course nothing is recession proof, except for absolute necessities outside of retail). And one of the first shifts is some price substitutability as share of wallet moves toward private label, which will buoy retailers that have worked hard to build a robust private label offering (your Kroger, Target, Wakefern, etc.) that feels elevated instead of like “the store brand.” But unlike 2012, employment numbers are strong, and the “re-opening” of society post-COVID-19 is a variable no one knows how to model for. There’s absolutely going to be margin pressure – there has to be in an inflationary environment – but people want to go to movies and sporting events, they want to travel. They’ve stored up cash and are ready to spend it. Which is all to say – there’s a “buffer” on the pain retailers are going to feel. For at least a little while. The sky isn’t falling, but… Read more »
storewanderer
Guest
1 month 15 days ago
It is worse this time. I have not seen retail stores operated as poorly as the current state of many retail stores, in a long time. And earnings releases from Walmart and Target this week show what happens when your stores are so poorly run. This release really put things back to reality at Target. Walmart’s operational problems (pallets everywhere in the store) have been well documented for months. Staffing shortages even when higher wages are being paid, because these stores are such a chaotic disorganized working environment they cannot attract employees and also have management shortages. Supply chain issues: I know we don’t hear much about this anymore except in certain categories but this issue seems to still be continuing in more categories than it should be. Gas prices: the consumer is continuing to notice more how much they are spending on gas now. As retailers are having to increase prices too dealing with not only the gas prices causing increased costs to them but also increased product costs, consumers will buy less. Is… Read more »
Craig Sundstrom
Guest

A lot of the problems are likely transitory — just because the Fed has stopped using the term doesn’t mean I have to! — relating to unwinding the impact(s) of the Pandemic. And a lot of them probably aren’t. For years, decades even, we’ve heard mixed messages: soaring asset prices are just wonderful, but there’s an “affordability ‘crisis'”; increasing profits and maintaining margins are just great, but retail workers are underpaid … perhaps a correction is in store. For those who find the idea unsettling, tell yourself it’s all about “sustainability” … the financial kind.

Anil Patel
BrainTrust

I am a true believer in the saying “crisis is the mother of invention.” The current ongoing turbulence is going to lead some businesses coming with innovative and fresh ideas to navigate through these turbulent times.

Oliver Guy
BrainTrust

Price inflation is the single biggest threat to retailers over the next couple of years. It impacts cost of items purchased to be sold but at the same time consumer wallets are squeezed thus impacting the amount consumers have to spend in store. Retail margins are getting squeezed from both sides.

The likely consequence is that retailers will look at how they can automate and use leading edge technologies — AI, IoT for example — in order to take cost out of the business.

wpDiscuz
Braintrust
"Retailers who have been working on breaking down internal silos, increasing supply chain flexibility and shore up brick-and-mortar formats will survive, if not thrive."
"The retail sky is not falling, but it will be fragmenting into smaller offline footprints, reduced inventory that is highly curated and greater differentiation of products."

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