Major retailers have been forced to adjust as uncertainty and changes in consumer shopping habits are molded by the country’s soaring inflation and emergence from pandemic-era restrictions.
Target recently announced it is slashing prices on specific items and predicting worse short-term profits as inflation swirls and demand for various goods changes. That comes after the retailer reported lower-than-anticipated profits just weeks earlier.
Target’s biggest competitor, Walmart, has also reported struggles this year. Both companies, as well as other major retailers, said some inventory is bloated as customers shy away from certain goods in favor of others. Walmart U.S. CEO John Furner said about 20% of its inventory is merchandise the company doesn’t want to have.
Consumer prices are running above 8% compared to this time last year, the highest change for the consumer price index since the 1980s at the tail end of the Great Inflation.
Mark Mathews, vice president of research development and industry analysis at the National Retail Federation, said the seasonal trends of when and what people buy were distorted by the pandemic. He said people were overbuying stretchy clothes and leisure wear, given that many didn’t have to come into the office, and were also spending more on household goods, given how much of their lives were confined to their homes.
“As people are returning to work all of a sudden, those things that retailers had been stocking up on are suddenly less in demand, and people are buying suits and dresses,” Mathews told the Washington Examiner. “So it’s not so much that we’re seeing a reduction in demand — we’re seeing a shift in demand.”
Mathews said that despite hiccups with supply chains, changing demand patterns, and inflation, total retail sales are still going strong.
The pandemic was a boon for retailers. Retail sales before the pandemic grew at about 3.7% per year. In 2020, they rose 7%, and last year, retail sales grew a whopping 14%, according to Mathews, who said this year is on track to continue that growth.
During the pandemic, there were many canceled vacation plans and a marked decrease in spending on services. Add the three rounds of fiscal stimulus checks that most people received, and the country became flush with savings.
Mathews said a lot of that translated into retail demand, which put a great deal of stress on global supply chains.
The supply chain problems contribute to how quickly retailers can pivot to meet these evolving shifts in demand. Because of how long some goods take to make it from factories abroad to retailers, the lead times have made it challenging to keep inventories of various products at levels sought by companies.
Mathews pointed out that retailers sometimes order goods six or nine months in advance, not necessarily knowing what the state of the pandemic will be in the future.
Victor Claar, an economics professor at Florida Gulf Coast University, also highlighted the challenges that retailers face in keeping inventory balanced and up to date with the needs of consumers.
“Consumers changed their buying patterns so much during the pandemic — they bought more electronics for at home, they bought more appliances at home, they bought more casual clothes,” Claar said. “I think retailers now are sort of struggling to figure out what the right inventory mix is now.”
Claar told the Washington Examiner that even for those going back to the office, there appears there will be a bit of a “business casual or business extra-casual hangover” because apparel standards in offices across the country have evolved.
Consumer spending continues to be fairly strong even in the face of the country’s towering inflation, Claar pointed out. Still, he noted that consumers have still expressed concerns about the future of the economy and where it might be headed.
“I think that’s an interesting empirical puzzle. Of course, as an economist, I know that if you have a choice between what people are actually doing and what they tell you, then you always go with what they’re doing because that’s way more reliable,” he said.
China’s coronavirus lockdown policies are also having a dramatic effect on the retail space. China has a zero-COVID-19 policy, which entails the imposition of strict mitigation measures that include isolating individual cases, a sharp contrast to Western countries that have focused on mass vaccination and masking.
Because of those strictures, some factories have been shuttered and production has slowed, further snarling the global supply chains. Many goods sold in U.S. retail stores are made in China, which presents another obstacle for retailers this year.
One factor that has assuaged some of the problems with China’s shutdowns is that during the pandemic, because supply chains were frayed globally, retailers focused on diversifying their supply chains, including getting goods from multiple locations.
A factor that is helping U.S. retailers is the relative strength of the dollar.
Domestic manufacturers that ship products abroad typically like a weaker dollar so that overseas buyers are more willing to buy their products, while domestic retailers, which import cheaper goods from other countries to sell in the United States, typically favor the dollar being stronger.
“That could be one possible way for U.S. retailers to keep prices a little lower than they would otherwise be because they’re able to pass along some of those lower costs of inventory to the ultimate consumer,” Claar said.
The stock performances of some major retailers have also underperformed. Walmart’s stock has dropped by more than 15% in value since the start of the year, while Target’s stock has plunged by more than 30%.
Some of those declines likely come from uncertainty from investors about the shift from goods to services and how strong that shift will be. If people start going on vacations and spending more on outside entertainment, it could dampen demand for goods, a transition that investors worry will begin to accelerate.
“It’s really uncertainty. It’s not about fundamentals,” Mathews said of the declining stocks.
Donna Hoffman, a professor of marketing at George Washington University, told the Washington Examiner that the state of the retail space right now is a “tale of two segments.” She emphasized the difference that income makes in the retail equation.
She said inflation is taking a severe toll on what lower-income workers can afford to spend. Hoffman said that segment of the population is dialing back spending on entertainment goods and other things they might have purchased while their wallets were still flush with stimulus and savings during the pandemic.
She noted that credit card debt is going up and could hit a record soon, which might indicate the highly inflated prices that consumers, particularly low-income consumers, are facing at stores across the country.
“That’s the segment that is shopping at Target and Walmart and not buying the fun stuff anymore, not buying the video games, not buying the clothes, but worried about how to buy food,” Hoffman said.
She said that despite the higher prices, the high-income workers are doing well and still have money for entertainment, travel, and dining.
“I think the story is nuanced,” Hoffman said.
