Modest And Cautious Retail Growth Expected In 2016
Compared to recent years, the retail sector appeared to have performed reasonably well in 2015 – as we predicted in our last Retail Forecast. The resurgence of retail can largely be attributed to the continued reduction in unemployment, the maintenance of low interest rates, low inflation, rising consumer confidence, reduction in fuel costs and the otherwise general improvement in the U.S. (and, arguably, global) economy. This resulted in more discretionary funds available to consumers and, therefore, more spending available for retail goods. In addition, many commentators felt that 2015 bolstered the core fundamentals of a solid retail recovery, rebound and growth. Now, the question exists -- are the roots of those core fundamentals deep enough to sustain more difficult economic times that may lie ahead?
The issues for retail in 2016 are quickly proving to be different from those of 2015. Although the 2015 holiday sales period numbers are not final as of the time of this writing, the initial figures appear to indicate that the season was positive, but seemingly not as positive (or as well-received) as 2015. Holiday sales figures are important, because they are often viewed as a barometer of how the retail sector is performing and/or will perform going into the next year. In addition, the first few weeks of 2016 experienced a significant weakening of the Chinese economy – the second largest economy in the world. The world stock markets, including the U.S. stock exchanges, lost significant value in just the first two to three weeks of 2016. In addition, although oil prices continue to decrease, many economists point to these significant reductions in oil as a major contributing factor (in addition to the Chinese economy) to the declining stock market woes. With continuing major swings in the global and U.S. economies, consumers may very well stay on the sidelines and remain conservative with their extra cash, thereby negatively impacting retail.
Holiday Sales and Sales Forecasts
A December 28, 2015 Retailing Today article reported that “according to the latest forecast of retail and e-commerce sales from eMarketer, [they] estimate that total U.S. retail sales hit $4.8 trillion in 2015 and will approach $5 trillion in value in 2016.” In addition, according to the article, “[r]etail sales in the United States grew 3.3% this year . . . and growth will pick up slightly next year to 3.5%.”
Apparently, the 2015 holiday sales period saw a late surge, in certain retail categories, that caused many to claim the season a reasonable success. December 28, 2015 articles in Bloomberg News and Retailing Today reported on the MasterCard Spending Pulse Report from MasterCard Advisors, analyzing early figures on the Black Friday through end of year retail sales period. According to Bloomberg News, “U.S. retail sales rose 7.9 percent between Black Friday and Christmas Eve, excluding autos and gas, with women’s apparel and furniture seeing the biggest gains.” According to a December 29, 2015 article in Investor’s Business Daily, excluding autos, U.S retail sales rose during the same period 6.3 percent, as compared to 5.5 percent the previous year.
Also according to Bloomberg News, “[f]or all of November and December, sales were up 4.6 percent – slightly better than expected.” The Report noted that e-commerce, furniture and women’s apparel all experienced double-digit gains (with e-commerce growing approximately 20% compared to the previous year).
According to Sarah Quinlan, Senior Vice President for Market Insights for MasterCard, the MasterCard Spending Pulse Report figures “indicate that customers are starting to feel more confident and buying big ticket items like new sofas. They’re also tapping the extra cash they’ve gained from cheap gas prices.” She added, “[t]his shows that consumers are feeling more confident that they are going to get that bonus or have a job a year from now.”
These sales figures support modest to more robust growth in retail towards the end of last year. However, some commentators are quick to point out that the more robust figures were in particular, limited categories and e-commerce, and, as a general matter, retail as an overall sector was and is likely to continue as a stable and more moderate performer.
Consumer Confidence
As of the end of 2015, consumer confidence was riding high. In fact, according to a December 29, 2015 article in Bloomberg Business, in December, consumer confidence had rebounded to a point that was higher than was originally forecast, likely because Americans grew more optimistic about the state of the economy and the job market.
According to Thomas Simons, a money-market economist at Jeffries Group LLC in New York, “[s]ome of the primary things boosting confidence are strong labor market conditions and perhaps more importantly, low gasoline prices. On the margin, it should increase consumers’ propensity to spend.”
The findings in the Bloomberg Business article were consistent with other sources. According to the article, “[t]he group’s report is in sync with the University of Michigan’s final reading for December. That gauge [The Reuters/University of Michigan Sentiment Gauge] climbed to 92.6, the highest since July.”
Since the beginning of 2016, however, the U.S. and global economies have experienced significant changes. These changes have negatively impacted stock markets, investments and consumers’ 401(k) plans and savings. It is unclear yet how these new developments have impacted consumer confidence.
Analysis and Trends
The information and results from 2015, including the apparent outcome of the holiday sales period, the increase in consumer confidence (albeit, potentially short-lived) and the overall improvement in the general economy all seem to bode well for retail in 2016. However, recent events starting with the very commencement of the new year have been mitigating against the potential for further progress in retail (as well as potentially other segments of the economy). As a result, the state of retail in 2016 is somewhat uncertain. The outlook, therefore, seems to be somewhat cautious, but modest progress.
As mentioned above, some of the issues that rose to the forefront at the beginning of 2016 and that significantly impact the global and U.S. economies are the declining Chinese economy, declining oil prices, and the resulting negative impacts on the global and U.S. stock markets. Notwithstanding the many positive forces in retail coming out of 2015, these negative impacts can have a powerful effect on retail. They can affect investment in retail development, retail job availability and, very importantly, consumer spending. If consumers have less discretionary income to spend (or they perceive that they have less), they will spend it on different things (or not spend it all). Therefore, U.S. retail performance over the course of 2016 is contingent upon developments in these global economic issues.
Apart from the issue of global economics, following the recovery from the “Great Recession” many commentators started to see new trends in retail starting to take root. In a December 21, 2015 Building Design and Construction article, Tim Blum, Executive Vice President of Retail Development of HSA Commercial Real Estate said “[a]s the economy improved, many consumer shopping habits stayed the same, and we’re now seeing that reflected in the tenant mix of retail centers across the country.” Consumers appear to be more cost-conscious and in tune with e-commerce retail options. As a result, we are seeing discount-oriented retailers flourish and more retailers that provide “omni-channel” services (i.e., an approach that seeks to provide the customer with a seamless shopping experience, whether the customer is shopping online, from a desktop, a mobile device, a telephone or in a bricks and mortar store). Experiential retailers, such as restaurants and fitness centers are also continuing to lease space.
This sentiment appears to be consistent with that of many others, as reported in a December 29, 2015 article in Shopping Center Investors. In that article, Garrick Brown, Vice President for Cushman & Wakefield, indicated that for 2016, “[t]he luxury and discount ends of the retail spectrum will again drive expansion, with grocery stores, restaurants and service related businesses with limited exposure to e-commerce such as fitness centers also continuing to see strong gains.” Grant Gary, President of Brokerage Services for The Woodmont Co. seemed to think along the same lines: “[r]estaurants, especially fast casual, grocery, fitness, fast fashion and discount apparel, will be the growth categories.” Faith Hope Consolo, Chairman of Douglas Elliman Real Estate’s Retail Group added, “[t]he major trends for 2016 will continue to be luxury retail, entertainment and food, with convenience tying it all together. Clearly, conventional retail has stepped up its game to compete with, and more importantly, complement, online retail.”
What these commentators and others seem to be finding is that even as retail is/was recovering, due to changes in consumer shopping habits (perhaps caused by the recession), the evolving nature of retail (maybe as a result of the growth of e-commerce and use of smart phones) and other reasons, much of the focus of retail has shifted to more luxury, discount and experience-oriented providers. Interestingly, in the event a retail recovery slows and reverts backwards, the types of retail offered may not need to change much, as these types of providers were basically the same as were performing during the recent recession.
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Coming out of 2015, it appeared that retail was still steady and solid. The fundamentals for continued retail growth are still in place. We are learning that consumer habits formed during the Great Recession and the success of e-commerce may have changed the structure of retail to a degree, the habits of consumers, and trends going forward. However, we are also learning that new major global economic developments may be working to destabilize the retail sector, thereby making the outlook somewhat uncertain. With this element of uncertainty, the forecast for retail is appropriately modest and cautious.