The Candid Voice in Retail Technology: Objective Insights, Pragmatic Advice

Tax Refund Reductions Hurt Retail Sales: What’s Next?

false

Do we have a long-term retail sales problem in the US? Ultimately, no one is really sure. There seems to be some consensus that lower tax refunds are a big contributor to what appear to be dampening retail sales. What’s less clear is whether or not spending will rebound in the second half of the year. And that’s a bigger problem.

I actually thought CBS News had the best take on the slowing of retail sales, which is to say, avoiding warnings about the “retail apocalypse” and not much surety around what’s going to happen over the rest of the year. It’s easy to understand why, once you get your head past the click bait of seemingly dire news.

As American consumers, we’ve all been there. We know we’re overpaying on our withholding tax, and generally plan some kind of big ticket expenditure when the refund comes in. UBS estimated in that same CBS News article, that the average refund in the US is equivalent to around three weeks’ pay. That’s real money, and will pay for a piece of furniture, down payment on a car, new music system or TV. And most of us don’t think about the fact that week by week, we’re bringing home a bit more money. We just assume that pot of gold will be there at the end of the year.

This year it wasn’t. And added to that, by most measures the economy is slowing down a bit. Gas prices inexplicably go up and down like a yo-yo. That doesn’t help. Everyone seems to be employed doing something, but you’ve read from more learned sources than me that wage growth is pretty stagnant. We have a looming trade war that is already having an impact on various sectors outside of retail, with no clear boundaries in sight.

But the big problem for most US retailers is clear: how much should they buy in anticipation of the holiday season? We are fairly certain that Amazon will do another “Prime Day” this year, and savvy consumers will start their holiday shopping early and grab whatever bargains are interesting. That’s going to distort demand curves even more.

And we haven’t even started talking about the impact of Brexit on the retail industry. It seems that sooner or later Britain is going to go it alone. Parliament can’t decide how they’re going to exit the EU, and the EU is growing cranky, but we could indeed be looking at an explosion of new taxes and red tape on anything going into and out of Britain.

China has its own troubles, with a spending slowdown as well. The manufacturing sector appears to be picking up but Hong Kong (for one city) just had its first retail sales drop in two years.

These are all words around impending doom and gloom, but of course, the opposite could happen. The economy in the US could normalize, and spending could pick up, as observed by Goldman Sachs. Brexit could magically go away or the EU and Britain could find some magical solution that allows everyone to thrive in a post-Brexit world.

And that goes back to the original crux of the question: how much should retailers buy in anticipation of the holiday season in the US, Britain and EU?

Here’s what I think. I think for retailers, excluding food, whatever you were going to buy, buy less. Worst case, we end up with lower inventories and no real need to run manic promotions. We could have lower unit sales and higher gross margin dollars. Why would this be so bad?

The last time we had this kind of “opportunity” was just past the Great Recession. There was a serious pent-up demand, what I called “frugality fatigue.” People really do like to shop. So we hoped and actually exhorted retailers to hold their buys in check. They did not. And we went back into an even greater holiday promotional extravaganza than before: the age of “Thanksgiving Door Busters,” stores open for the entire Black Friday weekend, and seeing their profits slip away in a haze of overtime payments and HVAC costs.

Our data continues to tell us consumers are more price sensitive than ever. And they are. It used to be that Amazon was the ultimate price check. People like me actually price check against Amazon now, and generally find price parity across the board. I just bought a suitcase from Nordstrom Rack (online) that was less expensive than the same item on Amazon. Who knew?

We trained consumers to wait for the best price. Now it’s time, I think, to return to an age of product innovation that makes price a bit less relevant. That doesn’t mean you can charge $1,500 for a phone. You can charge it. I’m not sure anyone is going to buy one. It does mean that it’s time to change our industry emphasis.

We spend a lot of time in the industry talking about the Customer Experience (CX for you cool kids). The best customer experience is finding something that you just have to have, and not having to go through hoops to get it. I mean, seriously, the CX is a means to an end - and the end is buying something a shopper wants or needs. Last year, I really wanted an InstantPot. I had to scrounge a little to find one before Christmas, but I did. This year, they seem really easy to find. Hopefully, retailers cut their buys.

This is the long way round back to the original point: buy less. Anything could happen, but the worst thing that could happen is fewer promotions and less inventory at the end of the holiday season. We live in somewhat unpredictable times. Let’s not make promotions the most predictable thing.

 

You must be a member and logged in to view comments

Articles & Opinions April 9, 2019
Authors
Related Research
Privacy Policy

This website uses tracking technologies to learn how our visitors interact with our site so that we can improve our services and provide visitors with valuable content. By continuing to use this site, you are agreeing to our privacy policy.