A perfect storm may be brewing...
MarketWatch recently reported that retail sales declined by 0.2% in April, the second such decline in three months with consumer spending in the first quarter being the weakest in twelve months. If that is not enough, retail is taking another potential blow from the new 25% tariff increases on roughly $40 billion in retail goods imported from China, including consumer goods, shoes and apparel, furniture, sporting goods, handbags and luggage. According to a UBS analysis, the tariff increases could negatively impact 12,000 retail stores in one year on top of an already 5.3% year-over-year store count contraction from the first quarter.
To counteract the tariff increases, the retailers that will be affected have limited options, none of which are appealing in a declining retail environment - absorb the costs or pass them off to consumers. With price declines on top of the continuously hammering Amazon effect, retailers are already running on razor-thin margins to remain competitive. According to aBank of America analysis, the tariff increases could compress margins for some retailers by as much as 39%. Alternatively, a 2.3% price increase could offset the tariff increases, but with the first quarter showing mixed retail spending, consumers could be starting to hold on to their wallets.
There is no doubt that survivors of the continuous retail turmoil will emerge with stronger market share, smaller footprints and effective scalability. However, it appears rougher waters are in the more immediate future with no insight into how long it could last.