2019 business outlook: Retail industry
Healthy retail spending offset by tariffs, labor costs
THE REAL ECONOMY |
As economic momentum carries over into next year, the driving forces in the retail sector include consumer spending, tariffs and labor. Spending should remain strong well into 2019, allowing for healthy top-line performance for most retailers. However, managing costs will become a strategic focus for middle market retail companies as they face higher costs.
All signs point to unemployment remaining at historic lows and wages continuing to rise, creating challenges for retailers trying to closely manage costs against the backdrop of uncertainty with respect to tariff rates in 2019. There is no guarantee that tariffs will not still increase in 2019 if a compromise is not met within the 90-day window set by the administration. If tariffs do increase, retailers will pass some of the additional expense through to customers in the form of price increases; however, a portion of the additional costs will inevitably be absorbed throughout their supply chains.
Labor costs have traditionally been one area to scrutinize when managing the bottom line amid tightening margins. During 2018, many middle market retailers kept their staffing levels consistent throughout the year, rather than slimming down in slower periods, fearing they wouldn’t be able to staff up fully in time for the holiday season. Even so, many retailers—as well as fulfillment centers and delivery companies—entered the season understaffed. The shortage of workers throughout the supply chain, in many cases, had a negative impact on the overall customer experience, and likely resulted in lost sales, or even worse, lost customers. With the continued shortage of qualified workers, we expect a similar approach to staffing by retailers in 2019; as a result, managing labor costs is one lever that will be very difficult to pull.
In 2018, research from the RSM US Middle Market Business Index indicated that middle market companies were slow to make capital expenditures. Their inability to squeeze savings out of labor costs, coupled with economic uncertainty stemming from the ongoing trade spat with China and other external factors, likely means they will remain hesitant to invest in 2019. However, finding a balance between managing costs and investing in a digital strategy that will satisfy tech-savvy consumers will be critical for middle market retailers in the coming year.
In the middle market, many retailers have been investing in omnichannel strategies to try to keep up with bigbox competitors for some time. The most successful companies have realized that upgrading technology is a continuous process, not a one-time investment. Having a sophisticated website with real-time inventory and a loyalty program that tracks customers throughout their digital shopping experience was considered fairly advanced not too long ago. However, during the 2018 holiday shopping season, consumers showed a preference for purchases made on mobile devices versus desktop computers. A mobile friendly customer experience requires different technology. Middle market retailers that commit to a long-term strategy of investment in their digital experience throughout the supply chain will be the ones destined to succeed.
See more of RSM's 2019 business outlooks
Economic narratives for 2019 include continued trade tensions, more interest rate hikes and declining unemployment and wage growth.