Interest Rates and Inflation: A Big Deal or Business as Usual?

All sectors of the economy have been impacted by the historic increase in interest rates and inflation over the past several months. Not all sectors have been affected equally.

As the Federal Reserve continues to aggressively raise rates to stem the rising tide of inflation, retailers will feel the impact as consumer sentiment worsens. But for an industry that’s faced a persistent onslaught of challenges in recent years, inflation itself isn’t the most pressing issue facing retailers. A fundamental shift in consumer demand combined with supply chain challenges have made inventory-related issues loom larger than inflation or interest rates.

Unlike retail, financial services will likely experience a tectonic shift driven by a change in the conditions that have defined the past decade. These conditions — notably the availability of cheap capital, easy credit, and surplus savings — led to the explosion of several large FinTech categories, including BNPL, bank challengers, retail brokerage, crypto, and embedded lending. We are beginning to see these fault lines emerge: Layoffs at Stripe and Chime; down-rounds at Klarna and BlockFi; a valuation reset at MoneyLion, Dave, and Opendoor; and the implosion of FTX. The impact is direct, variable, and extreme.

Retail: Inflation Dwarfed by Structural Shifts

Retail has faced more concurrent hardships in recent memory than perhaps any other industry on the planet. The rise of e-commerce and seismic shifts in consumer preferences had already been weighing on retailers’ minds for years. Then the economic tsunami of the pandemic hit, which broke global supply chains and forced the overhaul of entire business models virtually overnight.

Retailers like Walmart and Target discussed inflation in their most recent earnings releases but blamed excess/wrong inventory as the primary headwind. Inflation has some role in this — as some consumers shifted purchases from discretionary goods to non-discretionary categories. However, the vast majority of this challenge is a result of multi-year trends coming to a head in recent quarters. Retailing is simply becoming more challenging as a result of these five mega-trends:

  1. COVID Changed (and Continues to Change) Buying Behavior in Unpredictable Ways: The pandemic dramatically transformed consumer behavior, causing significant swings in demand across sectors. Apparel retailers saw their revenue plummet as customers on lockdown deprioritized adding to their wardrobes. With everybody spending more time at home, there were huge upticks in demand for things like furniture and home exercise equipment. The rise and fall of Peloton may be the most stark example of this trend.

To be clear — inflation is a real risk, and the impact of inflation on consumer confidence and, thus spending is likely to be significant. However, as we talk to our friends in the retail world, they spend more time worrying about these longer-term structural trends that have fundamentally changed what it means to be a retailer.

Financial Services: The Capital Reset

Increasing interest rates are fueling a growing divide between models that have been reliant on cheap cost of capital to maintain business operations and fuel customer growth and those that can leverage yield for sustainable income. We believe rising rates will likely impact different areas of financial services in materially distinct ways. Below are seven scenarios that could present meaningful risks over the next 6 months and reset the “winners” and “losers” across financial services.

  1. Real Estate Market Freezes Over: With the average 30-year fixed mortgage rate in the U.S. reaching a 20-year high (7%), real estate transactions are set to grind to a halt. Real estate transactions have hit a 28-month low in Q3 ’22, reflecting an (unsurprising) diminished appetite among consumers to transact and take on new, high-interest rate mortgages. While this reduction in demand will likely drive down housing prices, the corresponding reduction in supply may cushion an otherwise painful crash. Regardless of where prices go, the dramatic slowdown will create headwinds for lenders, mortgage originators,and other transaction-based businesses. The public markets have already reacted as at-scale challengers (e.g. Open Door, Rocket Mortgage) saw massive valuation resets and we expect to see the same play out in the private markets.



Early-stage venture capital firm investing in technology innovators in the retail and financial services eco-systems.

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Commerce Ventures

Early-stage venture capital firm investing in technology innovators in the retail and financial services eco-systems.