Trouble for Retailers May Be on the Horizon

Deloitte is out with a new study to prepare retailers, titled “The next consumer recession: Preparing now.”

The report takes an in-depth look at our two most recent recessions, the dot-com bust and the Great Recession, to see what led up to each, how they affected the consumer economy and how the next one might impact consumer businesses, most especially retailers.

One finding stood out among all the rest, which should come to no surprise to our followers: We have been reporting on store shutdowns, profit losses and the decline of customer counts. Top line, according to Deloitte, is that American retailers are in the weakest position since 1999 to withstand another recessionary downturn.

Deloitte analyzed the financial performance of 100 U.S. retailers, taking into account sales growth, profitability and efficiency over the past 20 years. Measuring the return on assets (ROAs), it found that from 1999 to 2012, retail performance rose during bull market periods and declined during bear markets. 2012 marked a turning point, when ROAs declined from 9.3% in fiscal year 2012 to 6.1% in fiscal year 2017.  

Deloitte’s analysis identified slower revenue growth, compressed margins, increased SG&A expenses and slower turnover of inventory levels as the main contributors to the weakening ROAs. 

It points to the fact that retailers have already cut costs to the bone and, for the most part, not invested in new strategies for growth, including the rise of e-commerce, the rapid entrance of new competitors more in tune with the cultural and economic climate, and the rise of discount players serving the 80% of U.S. households since the last downturn, according to the report.

In 2019, weakened retailers are facing a weak middle-class consumer base and the potential for a rapid withdrawal of the affluent heavy spenders if they feel the least threatened in their economic status. Deloitte says it could add up to perfect storm at retail this year. Not good.