A lot of pent-up demand coupled with a popular ‘revenge spending’ trend, has brightened the prospects of a shiny Christmas for the retailers this year.
Much unlike 2020, when the global economies were reeling under recessionary trends amidst lockdowns and movement restrictions, this year has brought much relief with vaccinations gaining momentum and governments allowing relaxations for businesses and festivals. The shoppers’ confidence is back.
Historically, the forbearance of the retail segment and the consumer spending have fuelled economies to survive the worst of the financial turbulences.
The story of the US retailers is no different. The sentiment reflected on the stock performances of the top US retailers – Walmart, Amazon, Kroger, Home Depot, Costco and Target – gaining up to 60% in the past one year – is a testimony to the revival.
Retailers have started piling up festive inventories for toys, electronics, automotive, clothing & garment, consumer items and home-essentials.
1. Retail a real bellwether?
As an indicator of the broader economy, retail sales reflect the underlying stress or buoyancy in a variety of sectors. US retailers comprise about a dozen different groups and each have their share in the overall retail sales. The largest among them is motor vehicle & parts dealers with around 20% of total retail sales, followed by Food & beverages (13%), General merchandise (12.5%), Non-store retailers (9.2%), Health & personal care (6%), Clothing & clothing accessories (5%), Miscellaneous retail (2.3%), Furniture (2%), Electronics & appliances (2%) and Sporting goods, hobby, book & music (1.7%). In a pandemic, a robust retail business is the right prescription of revival in the economy. National Retail Federation data shows retail is the largest private sector employer providing more than one in four US jobs or employing over 52 million Americans through 4.2 million retail outlets. This works out to a GDP impact of USD 3.4 trillion or nearly 15% in the USD 23-trillion US economy.
2. Post-covid demand booster
In the first seven months of 2021, US imports of toys and games have jumped by 50% over the comparable period last year. The year-end holidays account for the majority share in toy and merchandise sales in the US. The holidays will also prompt consumers to add some fresh pairs to their wardrobes, thereby giving a new lease of life to the budget retailers such as Ross Stores and large format stores Target, Amazon and Walmart. Companies’ quarterly numbers have indicated steady growth in sales with improved profitability. The last quarter of the year will see further accelerated sales thanks to optimism around vaccinations and receding impact of the pandemic.
3. Cost challenges
In their rush to meet the order requirements, companies are placing advance orders to ensure timely deliveries. This has pushed up the import shipments in the first seven months of 2021 – reportedly more than twice as much from the same period in 2019. The prevailing global container shortage has fuelled the demand for air cargo, with freights shooting through the roof to as high as $ 1.5 million for a charter flight versus $ 0.5 million in a normal year. This adds up to the fact that retailers are anticipating a robust festive demand after a COVID-19-prompted hiatus.
4. Who will lead the show?
The six retailers with annual sales of over USD 100 billion will lead the show. If investor sentiment is anything to go by, then Target (share prices up 61% in the past one year), Walgreen Boots (35%), Costco (33%), Home Depot (23%), Kroger (21%) will be the big bet. Largest retailers by sales, Walmart and Amazon have yielded modest returns in the past one year with 4% and 13% respectively. As per the August 2021 US retail sales reports, which showed a recovery of 0.7% versus 1.8% fall in July, the key contributors for the recovery is non-store retail, followed by furniture, general merchandise and food & beverages. The investors have their eyes on the right picks.
5. Santa’s bag of surprises!
The surprise factor doesn’t go away. First, a new and virulent variant of coronavirus may stymie the recovery and demand estimations. Second, there are production delays due to global shortage of semiconductors and other inputs, which may push back the recovery in the retail offtake. Also, the astronomical rise in the freight and container costs may make the recovery unsustainable. Companies may find margins getting squeezed. Notably, the US retail sales growth of 0.7% reported for August 2021, may not sustain in spite of the demand. The month-on-month retail sales growth trajectory has been uneven. From a flat growth reported in April 2021, retail sales dropped by 1.7% in May, followed by a surprise growth of 0.7% in June. But in July 2021, again the retail sales growth fell by 1.8% followed by a recovery in August. While there is a caution for sure, the demand indications and investor sentiment surely point to a robust growth through the festive months, may Santa bring happy surprises this Christmas!