You don’t have to be an expert to realize retailing is up against the ropes. The industry has lost many thousands of employees, thousands of stores have already closed, and experts are warning that many thousands more could follow.
Retail was never an easy business – competition, inflation, and extreme weather are just a few of the numerous factors that can wreak havoc on profits. But these days it has become tougher than ever because the pressures have increased while the good times are just not as good as they once were.
Some analysts are warning that 50,000 additional stores may be forced to close in the coming years, and if conditions in the industry don’t improve, that number might be more like 70,000. The prospects for retail may be further complicated if: inflation remains high, the Fed continues to raise interest rates, or the price of oil rises significantly – and all of these are very real possibilities.
Decisions, Decisions
A report on Yahoo Finance warns about a looming recession because of a seemingly minor change in consumers’ shopping habits: Instead of purchasing their preferred choice, they are switching to less expensive alternatives. Although this sounds simple enough, it is actually very telling.
Costco CFO Richard Galanti elaborated. Instead of buying beef, they may choose less expensive alternatives items such as chicken or fish. Or they may buy canned meat because it, too, is less expensive and has a longer shelf life. In the past these changes have proven to be a very good indicator of an approaching recession.
Do Statistics Lie?
Statistics can make bold but misleading statements. For example, they can be taken out of context to show that food prices are under control when in fact they are still at or near record highs and are forecast to go higher.
Similarly, if a store reports that sales are higher than they were the year before, that number could easily be interpreted as meaning business is improving. But in the current environment, that would be a mistake, as it may mean that sales are decreasing and inflation is making the results appear better than they really are.
In the case of Costco, its sales both in the US and abroad have declined in the first quarter; worldwide sales dropped by 4.2%, while in the US they fell by 3.5%. In CFO Galanti’s view, this was in part due to financially-pressured consumers holding back purchasing big ticket items like TVs and refrigerators. Obviously, this problem is not limited to Costco.
A Questionable Solution
The Fed’s approach to controlling inflation – raising interest rates – has not had the desired results as prices are still increasing rapidly. Retailers, however, have lost business, and many that were barely hanging on may not be able to survive if these conditions persist.
Swiss banking powerhouse UBS estimates there are approximately 940,000 retailers in the US. 50,000 of these could be forced out of business by 2028 and closures could reach 70,000 unless the industry can resume its traditional 4% annual growth rate.
According to Business Insider, clothing and consumer electronic stores will lead these declines, “and will make up nearly half of the total expected closures.” But, it adds, the news is not all gloom and doom, as home improvement and auto parts stores are expected to remain relatively unscathed.
If another 50.000 stores do close, there could be a silver lining, as the combined total of $265 billion of consumer spending that they account for would be up for grabs. This would be welcome at any time, but particularly now as consumers have tightened their budgets and the additional business is really needed.
If this scenario unfolds, major retailers including Walmart, Costco, and Target stand to capture more business and market share. Their smaller rivals, however, would be further pressured.
A Gathering Storm?
Meanwhile, investors will want to consider a new development that could complicate the outlook for retailers; the market and the economy as a whole.
On June 6, Saudi Arabia announced it would cut its oil production by one million barrels/day to prop up the price of crude. Saudi Energy Minister Abdulaziz bin Salman was quoted by AP News as saying that “the kingdom will do whatever is necessary to bring stability to this market.”
Initially the energy market rallied at this news. Crude, however, soon gave back those initial gains and on June 8 it was trading in the $71.50/barrel range – little changed from the price before the Saudi production cut.
If the price of oil remains steady, the market likely will take that in stride. But if the market tightens and oil soars, that would put pressure on the Fed to raise rates – the nightmare scenario for markets, companies, banks and investors.
On the other hand, if oil continues to decline, that would be a sign that business is very weak and this could spook the market.
High Five
At first glance, the market appears to have held up relatively well despite all the rate hikes and bank jitters, but that impression is misleading.
Gains in the S&P 500 are due almost entirely to those in just five companies: Apple, Microsoft, Alphabet, Amazon, and more recently from Nvidia, the latest AI darling.
Any political or economic development that would cause a spike in oil prices, higher inflation, or higher rates could very well upset the Wall Street apple cart. And there are many of those, a credit crunch, CRE crisis, and more bank failures to name just a few.
Right now, the market is balanced on the edge of a knife, and how much longer this can continue without crashing is anyone’s guess.
Investors should keep an eye on retail because it is one of the canaries in the coal mine and the song it sings will have far-reaching effects. Keep your dancing shoes and running shoes close by. No one knows which way this industry’s developments will break.
Sources: apnews.com; axios.com; bloomberg.com; businessinsider.com; yahoofinance.com; zerohedge
Gerald Harris is a financial and feature writer. Gerald can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.
