Retailers Face Headwinds In 2023 As Consumer Spending Slows

The retail industry may be facing the most challenging year since the pandemic, as consumer spending begins to slow in 2023 and other factors, like rising interest rates, increased wages, and the higher cost of goods, continue to plague companies. Consumers continue to be squeezed by higher living costs, making them more cautious and surgical with purchasing decisions, resulting in less discretionary spending.

Month-over-month sales for March

Retail sales for March were down 1% compared to February, reflecting a slow-down in consumer spending as expected. Nonstore sales, however, were higher than last month’s — this primarily includes e-commerce, digital sales through social media, and catalogs. Consumers pulled back spending across many categories, with the most significant declines in discount stores (minus 3.2%), department stores (minus 2.5%), and home improvement (minus 2.1%).

Nonstore sales nearly doubled from pre-pandemic levels as more consumers shifted to online purchasing and took advantage of hybrid shopping models like a curbside pickup. Nonstore sales were 16.5% of total retail sales compared to 11.6% in 2019. Most categories analyzed were higher than pre-pandemic levels, with the exception of electronics and appliance stores.

Year-over-year retail sales

Compared to last year (unadjusted), retail sales for March were up 3.1%, and fiscal year-to-date sales were up 4.5% relative to the same period in 2022. However, neither month-over-month nor year-over-year take into account inflationary prices. Retail sales variance in March was down across most categories compared to February, further showing that consumers are spending less than last year and less than the previous month.

Consumers paying higher prices

Inflation slowed compared to last month, with the consumer price index (CPI) up 0.1% in March after increasing 0.4% in February. However, inflation for the year remains high. For the 12 months ending in March 2023, the all-items index increased by 5%. Shelter and food were up for the year by 8.2% and 8.5%, respectively, while energies fell by 6.4%. Apparel prices were up 3.3% for the year ending March.

Higher prices across many commodities (especially in the non-discretionary spending categories like shelter and food) impact consumers’ ability to spend on discretionary products like fashion goods. Additionally, the Federal Reserve’s continuing interest rate hikes going into 2023 impact consumers relying on revolving credit card balances to make ends meet.

The higher interest rates affect variable mortgages and the cost of obtaining new mortgages. Consumers have already started to be cautious about spending in March. The month-over-month sales decline from February to March showed a drop across many categories, including fashion goods, apparel, furniture, electronics, and home improvement.

Retailers are getting strapped

The Federal Reserve recently set its benchmark rate, which determines borrowing costs across the U.S. economy, at 4.75 percent to 5 percent, a level not seen since 2006, with another quarter-percentage-point increase expected in May. Many retailers could pay off the debt incurred due to pandemic financing in 2022 or 2023. However, the cost of securing future loans is increasing with higher interest rates. Retailers must face decisions in the near future on how to fund a growing business if interest rates and product costs are higher. Additionally, wages rose 8.9% through the end of 2021 and were 7% higher in February than last year. The largest operating expense for retailers is currently the labor to run the business.

Retailers face strong headwinds

Retailers in 2023 will be faced with difficult decisions. Since consumers are already paying higher prices for goods and services, further price increases to offset higher interest rates, increased compensation, and the higher costs of goods do not seem feasible. In the future, companies will have to make tough choices regarding expansion plans, workforce and organizational structures, inventory procurement, and investments in technology.