Skip to main content

Warning Signs and Challenges Ahead: Consumer Spending in Flux

“The perfect storm” best describes all-too-common perspectives on the current retail market—and according to Getzler Henrich, a New York-based middle market corporate turnaround and restructuring firm, retailers have resorted to early aggressive promotional activity to overcome sales slowdowns and inventory build heading into Q4 and the new year.

Michael Appel, head of Getzler Henrich’s Retail Practice, explained that current market dynamics are driven by significant cuts in consumers’ discretionary spending due to the end of stimulus payments, rising concerns with global macro-economic conditions, such as inflation, rising food and fuel prices, threats of a recession and increased interest rates, while retailers are sitting with too much inventory on hand that does not align with changing trends and consumer behaviors.

Back in early 2021, the retail market appeared healthy as it was “buoyed by government stimulus and the rollout of vaccines,” Appel said. Consumers slowly returned to in-person shopping, and at that time, retailers posted improved year-over-year results across every category.

While retailers were still dealing with supply chain issues such as increased transportation costs and delayed shipments, inventories were tight and they experienced an increase in demand, reporting strong earnings driven by higher prices and improved margins, Appel noted.

Related Stories

“As flow from supply chains started to open back up and freight costs came down from pre-pandemic highs, retailers ramped up inventories, anticipating demand would increase. Inventories started to reach peak levels just as the economy began to soften. Then came inflation and threats of recession, and retailers got caught in ‘the perfect storm,’” Appel explained.

Market Mix

Fast forward to 2022, and consumer confidence hit an all-time low in June as prices on staple items such as food and fuel rose significantly, and consumers cut back on spending. Shoppers began changing their behaviors by switching channels and traded down by shopping value brands, which caused inventories that no longer met changing consumer needs to back up.

“In 2022, as life returned to a ‘new normal,’ consumers shifted their spending to special occasions, eating out and leisure travel. Sales of casual loungewear and other basic apparel, which had soared during the pandemic, dropped drastically, and were replaced with demand for apparel for events, parties, weddings and leisure travel,” Appel said. 

But as the world opened back up, consumers also cut back on spending in areas such as the home/DIY category, which had enjoyed a huge “Covid bump.” And now, the current climate is a mixed bag of   uncertainty and fear, resulting in warning signs that indicate a prolonged period of slowed spending.  

These warning signs include high levels of early holiday promotional activity, beginning as early as October, which may depress margins and earnings and force many retailers to cut back too much on spring receipts, Appel explained. “Retailers in general will see margin compression this holiday season, but well-managed, progressive retailers who have the products customers want at a great price and value, will have a successful holiday season.”

In recent earnings calls with analysts, Target, Walmart and Kohls said they had excess inventory and plan to move forward with aggressive markdowns to move through it as swiftly as possible. “Aggressive markdowns by Target and Walmart will send shockwaves through all of retail. And it is not only mass ‘big box’ retailers feeling the pain,” Appel said. According to recent reports, Nike also followed suit and told analysts that they too would pursue aggressive markdowns to quickly move through excess inventory.

As further proof of the slowdown at retail, Amazon announced another Prime Day in October, illustrative of an industry attempting to jumpstart Q4 seasonal spending. 

“Excessive promotional activity directly impacts earnings. Under non-inflationary times, retailers might be able to move through large amounts of excess inventory, but when you add inflation and recession into the mix, the markdowns may not be enough to entice the consumers to spend,” Appel said.

“So, the questions will be, how low are the retailers prepared to go, how aggressive will they have to be with the promotions, and what impact will it have on earnings? Can they move through the glut of inventory fast enough? Can consumers absorb all the promotions, and will they bite?” he said.

Words from the Wise

The Retail Practice of Getzler Henrich provides a range of operational and financial services tailored to aid brands and retailers in challenging times, including merchandising, procurement, inventory management, overhead and real estate solutions.

“We combine best-in-class financial advisory practices with real-world operational experience,” Appel said. “We have deep expertise in a wide range of merchandise categories across apparel, accessories, jewelry, electronics and home furnishings, in  channels from specialty to department stores, to off-price and e-commerce.”

As we enter a period of uncertainty in the market, Getzler Henrich advises that retailers  prioritize their inventory overstocks, so they see higher realizations and move through products that pose the greatest risks.

“With inventory oversupplies and out-of-season fashion products, smart retailers will aggressively move on fashion goods now, as they will get much less if they wait. With basics and home goods that are seasonless, the decision will be based on the company’s liquidity profile. Some who are not overleveraged may opt to pack and hold, but some will have to bite the bullet to free up cash to fund forward purchases,” Appel continued.

Appel emphasized that inventory management is crucial—and when taking inflation and changes in consumer preferences into account, how shoppers spend their disposable income needs to be factored into how retailers plan their assortments, pricing and promotional strategies.

Reiterating that “scarcity is not a bad thing” and inventory management is more important now than ever before for the industry,” investing in technology platforms that give retailers the data they need to make critical strategic decisions will pay off as companies navigate what looks to be another challenging year ahead for retailers,” Appel concluded.

From left: Michael Appel, Managing Director and Head of Getzler Henrich’s Retail Practice; Glenn McMahon, Managing Director in Getzler Henrich’s Retail Practice; Mark Samson, Managing Director in Getzler Henrich’s Retail Practice.