Is demand slowing at retail? Sure looks like it.
Retail sources say some retailers are starting to rethink their orders, mostly by holding off on core basics while keeping hot-selling trend items unchanged (or even moving these orders up so they don’t have to resort to last-minute air freight).
Gelmart International CEO Yossi Nasser confirmed the receipt slowdown on the part of retail customers. “They’re delaying a lot of their deliveries that they wanted to get because I think they’ve seen a shift,” said Nasser, who runs the world’s largest intimate apparel manufacturer, with clients including Walmart and Target.
Nasser hasn’t seen any cancelations in his market so far but said basics orders started to shift right after the Chinese New Year, and intensified after Russia invaded Ukraine. “That’s when we immediately saw maybe a one-week delay, then a two-week delay,” he said. He suspects the initial shock to consumers jolted by prices skyrocketing across the board ultimately spooked their spending, which prompted “an immediate reaction from the retailers.”
The CEO of a Seventh Avenue women’s sportswear manufacturer who requested anonymity agreed that basics are “clearly” under pressure right now.
“The fashion product is okay, but the basic product is definitely not, at least where we stand,” said the CEO, whose company sells into the department and specialty store channels. “A lot of the retailers are holding back.”
Retailers can’t let up on trend-forward product because that’s what gets people through brick-and-mortar doors, the source said. “Fashion is an instinctive purchase, compared with many core items that consumers typically buy only when they need it,” he said, suggesting that retailers are being conservative even with their initial fashion-oriented purchases.
“Off-price retailers are the ones that are most interesting because they think that there’s going to be a lot of product, and the fact is there really isn’t a lot of product,” the CEO continued, though footwear and kid’s products continue to perform well.
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Beyond moving around deliveries, some vendors are also looking into nearshoring opportunities.
“A lot of companies like us that are distributing either direct-to-consumer or on a wholesale basis are pushing their calendars to get ahead of [the delays],” said Robert D’Loren, chairman and CEO of Xcel Brands. “Almost every CEO I speak with has pulled their calendars forward.”
“I’ve seen other strategies, whether going to Europe where product comes in on the East Coast [as] the ports are not as backed up. More are going down to Latin America. In fact, we set up in Peru and Guatemala for Pima cotton products. And we have some down in the Dominican Republic now. It’s interesting how things are shifting around. The challenges in these places is getting allocation with factories because most of them are at capacity,” D’Loren said.
“We’re looking at some resources in Canada because it’s hard to really build that top portion of the merchandise pyramid where you need speed, and doing it with all the delays that are happening at the current moment,” he added.
D’Loren sees retailers managing their stock with an iron fist.
“At this moment, we do see a lot of retailers running with leaner inventory,” he said, describing the uncertainty many companies feel “when there’s no slowing of inflation in sight.” “So at some point, and I think it is literally around the corner, we are going to see a big slowdown from the consumer.”
Indeed, that corner may be at hand. Last week, the U.S. Federal Reserve’s 0.50 percent rate hike marked the biggest increase since 2000 as the government moved to curb rising inflation. Some believe the coming months will bring additional rate adjustments that could drive higher monthly mortgages payments.
The National Retail Federation (NRF) projects U.S. consumer spending could drive 6 percent to 8 percent retail sales growth for 2022, or $4.86 trillion to $4.95 trillion, though inflation could change that picture. NRF chief economist Jack Kleinhenz said the Fed’s actions could slow down the economy’s fast-paced growth.
“The Fed’s tightening has kicked off a new cycle of adjustment and the outlook for interest rates has consequences for consumers and businesses alike,” Kleinhenz said last week. “There is a growing list of uncertainties, and the risks are mounting. But underlying strength and momentum from both the consumer and business sectors are likely to offset a modest slowdown and should leave the economy bustling forward this year.”
Inflation is a global issue too. On Thursday, the Bank of England raised interest rates by 0.25 percent for the fourth time to 1 percent and a 13-year high.
Mike Watkins, NielsenIQ’s head of retailer and business insight, said inflation and higher prices for non-food products pose “an extra challenge for the high street as fragile consumer confidence and rising living costs are likely to negatively affect consumer spending.”
British Retail Consortium CEO Helen Dickinson fingered the Russia-Ukraine war and its effect on energy costs as the culprit behind April’s higher retail prices.
“Non-food products, particularly furniture, electricals and books, have seen the highest rate of inflation since records began,” she said. “This has been exacerbated by disruption at the world’s largest seaport, following Shanghai’s recent lockdown.”
Some U.S. analysts and consultants say they’re already seeing signs of declining consumer sentiment and some retailers are going back to their discounting ways.
“For us, we saw an increased uptick in promotional activity in mid-January. It accelerated and has been accelerating ever since,” said Gabriella Santaniello, retail consultant and founder of research firm A Line Partners. Though spring break sales were “very, very strong,” “I think what happened then was really more of an attitude like YOLO (You only live once) as they spent on apparel and travel. Then at the beginning of April it slowed again.”
Rising gas prices didn’t help. “People are realizing that these higher prices aren’t going away, despite hearing for some time that inflation is temporary and that the economy’s resilient,” she said.
While higher-end stores like Nordstrom are “still relatively strong, we hear that [at] Macy’s, mid- and lower-income customers are struggling,” Santaniello added.
Jessica Ramirez, retail analyst at Jane Hali & Assocs., said she’s seeing less inventory in stores. “We are not seeing it as necessarily a bad thing. For so long there was so much inventory out there that was not being purchased that no one needed,” she said. Where there’s been a slight increase in the amount of promotions at retail, “so far the discounts are still below 30 percent, so nothing yet that’s alarming.”
UBS softlines retail analyst Jay Sole says data suggests that inflation is causing consumers to have a “negative” view of the U.S. economy, which is “hurting their willingness to spend on apparel and footwear.”