Retail Needs Promotions to Survive ‘Picky’ Consumers and Weak Sales

Vicki M. Young
·5 min read

Retail and apparel worldwide have a consumer spending problem.

Growth in the global retail and apparel sectors stalled this, but the industry should see modest growth in 2024, according to credit analysts at ratings firm Moody’s Investors Service. They also expect that U.S. retailers will continue to face margin pressures as weak sales outpace inventory cutbacks.

More from Sourcing Journal

Consumers continue to feel inflationary pressures chipping away at their ability spend on discretionary items, such as apparel and footwear. That’s unlikely to let up anytime soon, and not before the upcoming holiday season.

Across the pond, footfall across all U.K. retail destinations fell 2.8 percent for the four weeks ended Sept. 30, according to data from MRI Software, formerly MRI Springboard. It said that consumers are tightening their purse strings ahead of the holiday season.

In August, global identity marketing firm SheerID said most of 3,500 consumers surveyed across the U.K., Germany and France don’t believe the economy will improve this year. Eighty percent said they expect the current downturn to last more than 12 months. Moreover, over 90 percent said they were spending less or otherwise changing their shopping habits. Forty-four percent said they were purchasing less expensive brands. Over half, at 54 percent, said they were buying less apparel, footwear and accessories

And in China, youth unemployment could be as high as 40 percent outside of key cities, according to a report from TD Cowen’s retail, apparel and textiles equity research team. Analysts concluded that higher income consumers still favor premium positioned brands, while middle to low income consumers are trading down and cutting their spend.

In the U.S., National Retail Federation chief economist Jack Kleinhenz said in the retail trade organization’s Monthly Economic Review that the country’s economy continues to grow even as labor disputes across the country and uncertainty created by Congress add to the ongoing challenges of inflation and high interest rates.

But consumer sentiment continues to backslide and student loan payments resumed this month. The Placer.ai Mall Index update for September 2023 shows that visits to malls last month fell once again, following a downward trend since July. In September, visits to indoor malls were down 6.9 percent year-over-year, while foot traffic fell 8.7 percent and slipped 2.5 percent at indoor malls and outlet malls, respectively.

Global retail and apparel outlook

Moody’s retail credit analysts said in a report that they expect revenues in the global retail and apparel sectors to increase 1 percent to 3 percent next year. Lower container and product costs are expected to help the bottom line. Plus, continued inventory realignment will support 2024 growth.

But analysts said that improvements will take time. That’s because clearing through inventory while people aren’t shopping as much is a tall order. And after outsized post-pandemic demand, sales have slowed in discretionary categories from home goods and big box, to apparel and footwear.

“Active and footwear has been hit particularly hard due to weakening demand and inventory misalignment, even after a heavily promotional 2022,” analysts said.

They expect that lower cargo rates will benefit retailers working through excess inventory and lead times will get back to normal. And while inventory levels “have room to fall,” getting stock under control will provide “deeper support down the road,” analysts said.

Although analysts maintained their outlook at “stable,” they noted that a potential slowdown in consumer spending presents significant risks. Inflation fatigue has caused consumers to become increasingly selective in what they’re buying. And rising credit delinquencies present other risks, including a decline in consumer net worth. Other risks that could delay the recovery include the global economic and political backdrop, more aggressive monetary tightening and additional stress to the banking systems.

U.S. retail

The Moody’s retail team believes that home, jewelry and apparel retailers will be among those impacted the most by margin pressure. These discretionary categories are “particularly exposed” because of significant above-trend consumer spending in 2021 and 2022 as this year’s retail sales volume laps year-ago comparisons.

Meanwhile, nominal retail sales grew 1.8 percent for the first eight months of 2023, but inflation came in at 3.7 percent for the 12 months through August.

The analysts expect U.S. retailers to experience continued margin pressure over the next six to nine months as they readjust inventory levels to reflect weakening retail sales. Most retailers in the discretionary space—apparel and footwear retailers in particular overestimated demand—were caught off guard by how “picky” consumers have become in their spending as they grappled with a higher cost of living.

As consumers dial back on spending, retailers will need to ramp up promotions to clear out inventory. That’s because even though inventories are lower than their peak in August 2022, they “are still higher than May 2022.” Credit analysts believe retail inventory levels will need to fall further to align with weaker sales. They “expect promotions to increase over the next six to nine months as retail sales falter.”

Retailers that have cut inventory down to size will see a decline in working capital costs and a less frenzied promotional pace than in 2022. But those benefits will be “muted” as consumers become more intentional with their spending, resulting in weaker sales activity, analysts said. And the consumer mindset could worsen if people are worried about their job prospects. Moody’s expects the unemployment rate will rise to 4.2 percent in 2024 from 3.6 percent in 2023, with real GDP growth at 1.9 percent to 2023 that slows to 1 percent in 2024.

Click here to read the full article.