By Jeffery Pielusko, Carl Marks Advisors
Once the nation finally began rolling out COVID vaccines in 2021, the pent-up consumer demand for products, which had been building during various lockdowns, exploded. Paired with government relief packages and tax credits, retailers saw a surge in sales that led to a very strong year, capped by a solid holiday season. Now, halfway through 2022, the picture is less rosy. With inflation top-of-mind, rising interest rates, high gas prices, increasing wages, declining consumer confidence, and a possible recession on the horizon, retailers should expect new challenges for the balance of 2022. What can and should they do to prepare for and survive what look to be rough seas ahead?
Due to the supply chain crisis of the past 18 months, which although loosening up (traffic at the Port of Los Angeles is actually 15% higher than last year, just in time for peak shipping season), may take years to “normalize,” retailers struggled at first to get inventory on the shelves, then over-ordered to compensate for the lack of products and lengthy fulfillment times. Larger and well capitalized retailers invested heavily in their supply chain to minimize business interruption and create more flexible and dynamic supply chains which included (1) diversifying supply chains to minimize the risk of localized disruption having an outsized impact on global supply chains; (2) investing in supply chain infrastructure (chartering boats, planes, more warehouse space) to enable a more reliable flow of products; (3) and increasing capital investments in supply chain technologies to anticipate and minimize risks, improve visibility, and allow for more flexibility.
While much of this technology change has happened at larger retailers with more resources, Main Street retailers have adopted tech investments of their own. As the pandemic increased demand for contactless, cashless payments, many small businesses signed on for the first time to payment technologies like Square, which saw a 10% increase in adoption from February 2020 to February 2021. Other POS systems, such as Toast and Clover, have also seen increased usage, giving retailers the added benefit of being an all-in-one POS system, with inventory management, time clock/scheduling and cloud backup.
While these business model updates were both necessary and effective, the economic dynamics we are seeing in 2022 will require Main Street retailers to continue to maintain a flexible business model that reflects a stark change in the trends from a year ago. With inflation rates at their highest in 40 years, consumers are more price sensitive and less confident in their outlook than they were coming out of lockdowns in 2021, when demand was surging. Two major bellwether retailers, Walmart and Target, recently posted profit declines related to lagging consumer demand, higher fuel and transportations costs, and continued supply chain disruptions. This should serve as a red flag for the sector as a whole.
The impact of rising prices on buying behavior is also reflected in consumer credit. Credit card debt levels, which we saw decline during the pandemic, have turned around dramatically, jumping 20% in April, breaking pre-pandemic metrics. The impact of this increase in consumer credit spending has been further magnified by higher interest rates (making this money more expensive). Recent reports also indicate that the US consumer just hit is lowest personal savings rates since 2008. As all of these factors continue to impact consumers, there will be less and less available credit and fewer dollars to be allocated toward discretionary spending, with larger percentages of household income spent on staples (food and gas) – negatively impacting retailers.
Regardless of whether your business has yet been impacted by the expected pullback in consumer spending, it’s prudent to revisit some of the strategies employed both before and during the pandemic to ensure your business is best positioned to manage through what many expect to be a recessionary period in 2022. Here are four key areas retailers should focus on:
- Reviewing Sales Forecasts – 2022 budgets should be revisited and sales forecasts adjusted to reflect an expected decline in consumer spending. The impact for your business will depend on how discretionary your product is, but a softness in original sales forecasts should be expected and cash flows evaluated under a downturn scenario.
- Evaluate On-Hand Inventory – Retailers should have a firm understanding of their current inventory levels and the velocity of their inventory to help guide future purchases based on revised demand forecasts.
- Revisit Procurement Strategy – For many retailers procurement discipline was cast aside in 2021 to ensure that product made it to the store shelves. 2022 procurement strategies should be revisited to ensure that purchases equate with expected demand.
- Employ Discounts – For surplus or slow-moving inventory, taking a margin hit by offering price discounts or promotions, and converting product into cash, can help with cash flow.
The most important part of managing your business heading into a potential demand downturn is focusing on cash. With borrowing costs increasing, ensuring you have the cash flow to survive through to the end of a recession is what may ultimately separate the winners from the losers. Revising sales forecasts and paring back budgets to match, strategically deploying capital, improving expense discipline, and converting as much inventory as possible to cash can make the difference between surviving a recession and falling victim to one.
About the author
A Director at Carl Marks Advisors, Jeffrey has over 10 years of financial and operational restructuring and investment banking experience. He serves as both company and lender advisor in evaluating and executing financial and operational restructurings. He can be reached at firstname.lastname@example.org.
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