The Great Reset has finally begun in earnest, with Federal Reserve Chairman Jerome Powell instituting a series of rapidly rising interest rates since March 2022, leaving many wondering if we are in for a Cat 5 storm, or more gentle trade winds sailing us toward a soft landing. The whisper of recession became louder in June, as the markets fell to bear territory, and several economists now predict a 50% chance that the U.S. will slip into recession in 2024, if not sooner. Despite these prognostications, many in the retail industry do not view this as a hinderance to getting deals done. In fact, there is a general consensus, that although the current inflationary environment may in all likelihood extend through the end of 2022, it is a welcome return to normal market conditions that rise and fall, despite any current consumer pain.
Many now understand how inflation is affecting their daily lives and lightening their wallets. Everything from fuel to food and energy has surged during the first half of 2022, forcing consumers to make increasingly hard choices to maintain their lifestyles and remain economically viable. U.S. Bureau of Labor Statistics, May Consumer Price Index reports that the all-items index has risen 8.6% year-over-year, with the food index increasing 10.1% for the 12-months ending May 2022. This is the first increase of 10%, or more since the period ending March 1981. Protein essentials like meat, poultry, fish and eggs have risen 14.2%, sending an increasing number of consumers to the local food bank to supplement decreasing trips to the grocery store. The cost of transporting food has been impacted by fuel costs, rising 50% this past year.
The Fed is tinkering with economic tools available, to remove some excess liquidity from the markets, and rebalance the sensitive levers of supply and demand. Most Americans remain anxious as to what can be expected in the second half of 2022 into 2023, and beyond. Consumer demand remains strong, but shows initial signs of softening, and unemployment remains historically low, impacted by a lower labor market participation level. Recently, some companies are beginning to analyze their headcount and adjust employee levels in anticipation of a coming recession. Yet, despite all, most retail experts don’t forecast doom and gloom. 2022 ICSC Las Vegas attendees were notably upbeat, and for many this was the first face-to-face event in three years. Although still down in attendance from pre-pandemic levels, the event enjoyed a bounce and many conference exhibitors and attendees were back and ready to do business. Those brokers interviewed by the media did acknowledge ongoing business challenges, but most were encouraged by opportunities in the sector and activity level. Klaus Schwab, the Executive Chairman of the World Economic Forum stated in his book, Covid 19: The Great Reset that “When devastating things happen, creativity and ingenuity often thrive.” Schwab rightly saw a great reset underway that has been changing the landscape of retail. Let’s dig deeper.
The Ebbs and Flows of Market Cycles
We sat down with two leading industry experts to delve into why a number of retail professionals remain confident. Secretary of the Treasury Janet Yellen expects inflation to remain high through the end of the year, with the hope that it will eventually head downward. So how do thought leaders in retail view the current situation, and what will it take for the industry to succeed post COVID-19?
Rick Chichester has four decades industry executive-level leadership experience that lends an informed and comprehensive view of retail from all sides. He currently serves as a Managing Member and Board Advisor at MTN Retail Advisors and is an Executive Director of X Team Retail Advisors. John Cumbelich of John Cumbelich & Associates leads his San Francisco Bay Area firm providing commercial real estate services to Fortune 500 retailers and select owners and developers of retail commercial properties.
Cumbelich describes himself as a “glass half full” optimist. He offers, “We’ve seen zero slow down with no dip in end-user demand or activity. I believe that the industry has expected the ramp-up of rate increases for quite some time, so this news is most likely not catching anyone flat footed. Whether the markets are expanding or contracting, there’s still plenty of opportunity in the brokerage space. I will take this market condition any day over our pandemic-mandated shutdown. That was a serious problem, this however, is the normal rise and fall of the markets.” Retail brokers are working with business owners to “right size” their space and many are opting for a smaller footprint. Cumbelich confirms, “There are business opportunities out there for the retailer, dining brand—or the owner and investor, and the broker. Movement is a good thing for the industry, we like movement.” Cumbelich believes that the fundamentals underpinning the economy remain solid and although rates have risen, they are still historically low.
Chichester agreed with his colleague, for the most part. “I agree with John, especially in terms of consumer demand. However, I do feel that retail is going to moderate and change. There is a buying trend migrating from goods to services.” Chichester believes that more expensive purchases like autos and large home appliances will experience a slowdown. However, he believes services are going to continue to expand, perhaps at a slightly slower pace.” Americans can start to chart their futures as the pandemic moves to the endemic phase. Late April, Dr. Anthony Fauci, chief medical adviser to President Biden, said during an interview with PBS NewsHour, that the U.S. is no longer in the COVID-19 pandemic phase, despite the global threat the virus still poses. This new endemic phase will continue to see changes to shopping behaviors that COVID-19 begun, and retailers will need to pay close attention.
McKinsey’s 2022 Consumer Pulse survey findings indicated that Americans are changing their shopping behaviors—and are expected to continue this shift. They report that consumer confidence has decreased with many consumers moving away from branded merchandise to lower priced private labels or channels. Grocery stores continue to do well, while retail apparel sales have declined.
The refocus of buying habits from consumer goods towards services may negatively impact large retailer sales volumes, but it can be argued that this shift may not impact the larger economy. Disputing this assumption, Q2 retail earnings disappointed investors, with Walmart and Target missing the mark. Ongoing inventory problems contributed to an oversupply of pandemic-level stock. Early June, Target announced that it plans to markdown excess inventory on some merchandise to correct the gaffe. Bucking the trend, one large retailer made notable gains in their third financial quarter. Costco announced a 16.9% increase in May comparable sales year-over-year, driven largely by their sale of fuel and increased gasoline prices.
The Global Supply Chain and The Unexpected Consequence of Extreme Efficiency
During a recent press conference at the Port of Los Angeles, President Biden expressed his frustration and anger that only nine ocean carriers, and three main shipping alliances, control key trade lanes. Each enjoy immunity from U.S. antitrust laws, and have increased their shipping fees upwards of 1,000% during the pandemic, without recourse. This news may have come as a surprise to most Americans, unaware of the shipping cartel controlling the flow of internationally manufactured goods to North America. Logistical hiccups resulting from continued lockdowns in key Chinese manufacturing hubs, along with spiraling cost-per-container have cast a harsh glare on the downside of globalization.
Cumbelich offers, “I think that one of the underreported dynamics affecting retail and dining businesses is the nation’s reliance on a global supply chain. U.S. manufacturers, and businesses are beginning to insure themselves from disruption by increasing domestic supplies and resources to mitigate globalization’s control over business, and this is a healthy process. Businesses will have to learn to moderate their reliance on the global supply chain as we continue to deal with the fallout from the pandemic.” McKinsey’s Taking the Pulse of the US Consumer report finds that companies are starting to create more local redundancy in the supply chain and focusing on the products that consumer’s want. They cite analytics as crucial for retailers to maintain a handle on product mix and inventory.
Chichester adds, “I had an interesting conversation recently with a large grocer about the global supply chain’s adoption of Just-In-Time (JIT) inventory management. Just-in-Time inventory management is a system to align raw material suppliers with manufacturers to deliver materials as production is scheduled to begin. Chichester continues, “Efficiency was so fine-tuned that any disruption caused geometric ripples across the entire system, magnifying supply chain issues. The grocer plans to keep globalization components, but will create some redundancies by regionalizing portions of their operations to protect against future disruptions.”
Geopolitics is likely to be a continuous factor that world leaders will need to manage. Chichester illustrates China’s zero-tolerance mandated shutdowns, the Ukrainian war’s impact on wheat commodities, and Europe’s dependance on Russian oil and gas as examples of global disruptors that will necessitate contingencies to manage a more volatile world.
Inflationary Psychology and Appetite For Risk
Despite these threats, Chichester believes that the underlying fundamentals of the U.S. economy are strong, and cites retail as a lead indicator of its strength. Chichester explains, “The most comprehensive and available data resources available are generated by consumer behavior at the time of purchase. Three-quarters of our economy is based on the consumer Chichester explains, “All eyes are upon how much they spend, and what they are buying. Are they purchasing needs or wants?” The acceleration in the consumer spending habits of Americans can be explained in part by the phenomenon of inflationary psychology. Inflationary psychology is a mindset that leads consumers to spend more quickly in the belief that prices are rising. This internalized pressure will drive a consumer to spend money immediately to buy a product, if they believe that the price will increase soon.
Another factor influencing the consumer is their appetite for risk versus tolerance. There is evidence that inflation is dulling consumer’s appetite for risk, leading them to pull back on expenditures and manage budgets more tightly.
The Calm After The Storm
Still, Cumbelich and Chichester suggest that there is a silver lining surrounding the storm clouds ahead. Cumbelich maintains that this is a cyclical cooling off and not a recession resulting from structural issues in the economy. “The market has to lower demand so that supply can catch up, that’s the issue. I think the sooner we can get there, the better.” Chichester suggests “The long and short of it is that we are going to go through some difficult challenges, but if these are handled correctly, the economy will be okay and the nation will be wiser for the experience.” He maintains that the economy needed to go through this cleansing process, after decades of monetary manipulation, which was unhealthy. He explains, “The government must allow the capital markets to rebalance themselves. We must also reexamine the science of supply chain management. If we do those things as we should, we will sail into the calm, after the storm.”