Retailers combat global economic headwinds

The trend: There are ample reasons for retailers to feel confident given that the unemployment rate is near record low levels, workers’ wages are rising, and corporate profit margins are approaching record highs.

• Yet, at the same time, they’re facing a swirl of economic headwinds from Russia’s invasion of Ukraine, continued supply chain bottlenecks, and rising inflation that’s limiting consumers’ buying power.

More on this: Economies around the world are struggling to fight back against the array of challenges before them.

• China’s zero-tolerance strategy for combating COVID-19 has dampened consumer spending and clogged up supply chains due to shuttered factories, per The Wall Street Journal.
• Russia’s invasion and the European Union’s corresponding sanctions have resulted in production halts and components shortages for a number of suppliers and manufacturers, per Bloomberg.
• Sri Lankan garment manufacturers are struggling to meet production targets due to fuel shortages, power cuts, and rising costs as the island nation deals with its worst financial crisis in decades, per The Business of Fashion.

The risk of recession: The range of global challenges, along with the US Federal Reserve’s attempts to combat rising inflation in the US, is increasing the risk of recession. 28% of economists surveyed by the Wall Street Journal expect the US to be in recession some time in the next 12 months, a marked jump from 18% in January, and 13% a year ago.

• While there are a host of issues before Levi’s—including many of its garments being manufactured in Sri Lanka—the company remains optimistic. It isn’t seeing order cancellations by retailers, which is a strong indicator that retailers don’t expect demand to slow, said CFO Harmit Singh on Yahoo Finance Presents.
• General Mills CEO Jeff Harmening said demand will continue to be greater than pre-pandemic levels for quite a while, during the company’s recent earnings call.
• Petco CEO Ron Coughlin sees his industry as “resilient to inflation,” because pet owners need to provide food and care to their charges regardless of rising costs.

Why it matters: Regardless of whether the US falls into a recession, an economic slowdown is likely.

• Retailers have a number of levers they can use to continue to engage shoppers in a challenging environment, including enabling consumers to purchase items in bulk, providing coupons or other price incentives, and/or private label or value brands or labels.
• The specific approach is less important than the objective—ensuring consumers don’t abandon the retailer for another less expensive merchant.