Despite Strong Headwinds, Retail Continues To Adapt And Survive

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What a difference a year makes!  At the beginning of 2022, most commentators viewed the retail sector of the U.S. economy as a stabilizing, growing force, bolstered by generally strengthening core economic fundamentals.  As we enter 2023, some of those core fundamentals are faltering, and retail is experiencing changes it has not seen in years (or even decades).  The question now is – will retail be able to sustain its growth and resilience in the face of these challenges?  We think it will.

Developments in 2022

2022 was somewhat of a rollercoaster year for the retail sector in the U.S.  Although the year started with rises in COVID-19 due to the Omicron variant, thanks to large segments of the country being vaccinated and boosted, and better management of the virus and its impacts, the economy was able to remain open and operating and steer clear of resurgent recording-breaking hospitalizations and deaths.   

In addition, many of the core fundamentals for a robust retail economy remained strong.  Heading into 2022, the stock markets remained near all-time highs.  Interest rates were low.  Capital was plentiful and freely available.  The Federal Reserve was proactive in its bond purchase program.  Consumer confidence was also at reasonably high levels.  Unemployment was improving (and relatively low).  In addition, retail sales and performance were strong coming out of the 2021 holiday period – a harbinger of positive future performance.

The general economy, and the retail segment, continued to chug along at a good pace through the first quarter. 

Unfortunately, however, various factors, including world events, began to impact the economy in negative ways halfway through the first quarter of 2022.  This impact was mostly manifested through the Russian invasion of Ukraine.  Following the invasion, substantial sanctions were levied on Russian interests, which led to significant increases in gas prices throughout the world.  Gas prices in the United States skyrocketed, and consumer prices on most all other goods increased as well.

Although gas prices stabilized somewhat over time, they are still much higher than they were in 2021.  In spite of stabilizing gas prices, the U.S. experienced the worst inflation it has seen in the past 30 years in the latter half of 2022.  In addition to the war in the Ukraine, rises in inflation were also attributable to the zero COVID policy in China, which created significant supply chain issues.  To combat inflation, the Federal Reserve instituted various rounds of interest rate increases (7 in total in 2022), to slow the economy.  The stock markets waivered, had volatile swings, and are off of their all-time highs (although they are still doing reasonably well compared to long-term investment comparisons).  Many believe the combination of inflation, rising interest rates and other forces have the potential to lead to higher unemployment and a recession.  These factors will also likely have (as we have already seen) a negative impact on consumer confidence. 

With these spiraling issues impacting the economy, many wonder how retail will fare.

Strong Retail Performance

Despite fears and talk of the economy falling into a recession for almost 3 quarters of 2022 and the Federal Reserve continuing to raise interest rates, the retail sector did not succumb to negative influences.  Instead, according to a recent Orion Investment Real Estate article, “consumers appear[ed] to be resorting to some retail therapy.”  In fact, even before the holiday season, according to the Orion Investment Real Estate article, “[r]etail sales rose by 1.3% in October and were 8.3% higher than last year’s levels.”

Retail success continued into the holiday season.  A number of sources issued positive predictions for retail performance during the 2022 holiday season, which is often a good indicator of upcoming retail industry performance for the ensuing year.  According to a recent CoStar.com article, “Thanksgiving [2022] weekend [was] anticipated to draw a record number of shoppers, and sales for the overall holiday season [were] forecast to rise….  Consumers [were] expected to keep spending despite the economic headwinds of record inflation and potential recession….”  The CoStar.com article quoted National Retail Federation President and CEO Matthew Shay, who expected to “see robust store traffic with a record number of shoppers taking advantage of value pricing.”  Significant holiday season growth was forecasted in terms of both overall sales and foot traffic.  CoStar.com also quoted Naveen Jaggi, President of JLL’s Retail Advisory Services, who stated “[t]o me, in light of the fact that we’ve been dealing with recessionary talk for the better part of almost three quarters now, that’s quite remarkable, which goes to show one thing: The U.S. consumer time and time again shows they’re massively resilient and will continue to spend.  They may shift spending, but they continue to spend.”  Other commentators had similar predictions. 

It seems that the forecasts were accurate.  As of the writing of this article, numerous authorities are reporting major increases in the numbers of shoppers and greater spending this past holiday season.  According to a recent Forbes.com article, “[c]onsumers were back in stores on Black Friday as shopper visits increased by 2.9% compared to last year.  The foot traffic to non-indoor mall locations, including lifestyle centers, open-air malls, neighborhood centers, and stand-alones, increased by 4.7%.”  In addition, GlobeSt.com recently reported that “U.S. retail sales increased 7.6% year-over-year for the period running November 1 through December 24 [2022], excluding automotive.”  Furthermore, according to Mastercard Spending Pulse (which measures in-store and online retail sales across all forms of payment), “in-store sales increased by 6.8% year-over-year while online sales ticked by 10.6%.”  These numbers are impressive, especially while encountering gloomy macroeconomic factors, and bode well for retailers’ prospects as they likely face the same continuing challenges in 2023. 

Looking Forward and Trends

Many ask how the retail sector has been able to withstand, survive, and even thrive following so many hits to the core fundamentals of the economy, and, moreover, will the retail sector continue its success in 2023?

No one can completely answer the question or be sure of an answer.  However, over the years, we have found that retail has been flexible, able to adapt, and change and morph in ways to enable itself to succeed. 

Currently, retail seems to still be benefitting from the after-effects of the pandemic – consumers are still tired of being couped up at home, there is a general pent up desire to get out and spend, and a need for social interaction.  Shopping addresses and satisfies those issues. 

In addition, we see at least 3 major trends in retail, that are helping retail manage changes in the overall economy.  Traditional retail media or digitally born retailers are emerging as physical stores, tenant mixes and diversity are changing, and new store formats are taking form.

According to a recent Placer.ai article, “[r]etail media networks, long a staple of the digital world, are becoming an increasingly important part of the brick-and-mortar environment….”  This sentiment is echoed by a recent ICSC.com article, where they find brands like “Warby Parker, Allbirds, Untuckit, Blue Nile” and others (including Amazon concepts) finding homes in physical locations.

As to tenant diversity, in its Retail Trends Forecast, Placer.ai, noted that shopping centers were “embracing new tenant types… [f]rom gyms to co-working spaces to medical practices….”  The thought is that “[t]hese tenants … increase opportunities for retailers by generating new off-peak traffic and reducing competition between retail tenants.  Non-retail tenants also allow shopping center visitors to have a more holistic, immersive experience which extends visit durations and gives consumers more reasons to frequent a shopping center.” 

Retailers are also adapting to e-commerce and fewer demands on the need for large amounts of on-site inventory by reducing the amount of space they need.  As a result, retailers are taking less square footage in shopping centers and some are looking for (and landlords are permitting them to locate) so-called shop-in-shop locations within larger stores.

These (and other) shifts in retail strategies are simply some examples of evolving trends created by necessity and changing dynamics and reflect the flexibility that retail is famous for when confronted with threats to its ongoing success.

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The economy constantly changes, and time and time again retail finds itself in a threatened position.  However, as we have said before, consumers will always have a need to shop, eat, and experience retail services.  In addition, history has also shown us that retail evolves to meet the changing times and remain a first-class asset.

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