Retail Has More to Worry About Than Inflation

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.

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.
2. Retailers No Longer Dictate Consumer Trends: In the late 1990s and early 2000s, brands such as J Crew and GAP dictated consumers’ tastes. Orders could be placed nearly a year in advance as consumers could be counted on to buy what was on the shelves because it was on the shelves. Today, influencers on TikTok drive short-lived trends and fast-fashion retailers such as Zara and Shein find ways to get product to market before a fad runs its course.
3. Good Help is Hard to Find: The retail industry is one of the country’s largest employers, representing more than 6% of the entire U.S. workforce. But it’s historically faced incredibly high turnover rates, with retailers like Walmart turning over as much as 80% of their staff every year. The pandemic caused many workers to reevaluate where and how they want to work, which has driven up wages and created a buyer’s market for retail jobs.
4. Global Supply Chain in Tatters: The pandemic was the ultimate unplanned test of the modern global supply chain, and revealed many major vulnerabilities in the intricate system responsible for moving consumer goods around the world. The sudden stress on the global supply chain stretched it to the breaking point, resulting in prolonged, widespread product shortages. Even today the supply chain hasn’t fully recovered, which is pushing up prices to bring goods to store shelves.
5. Consumers Expect Fast Delivery (Even if Economics Don’t Support it): Though not a new concern, the “Amazon Effect” is an enduring challenge for brick-and-mortar retailers. Few retail businesses can match the scale of Amazon’s vast distribution network and speed of delivery. The rise of 30-minute delivery startups fueled by cheap venture capital dollars didn’t help — and while most of those models have faded away, consumer expectations have not.

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.