Gas, Taxes and Hurricanes: The Impact on the Retail Sector in Early 2013

The first few months of 2013 have been less than ideal for stakeholders in the retail sector. Retail numbers for the year have been relatively flat across the board thus far. While it's nearly impossible to predict how the rest of 2013 will fair, the first quarter has been more difficult for retailers than the same period last year, and according to a survey recently released by Capital Business Credit, retailers and suppliers offer very mixed reviews regarding how the spring season will perform.

The survey found that 50 percent of importers of retail goods are experiencing an increase in orders this spring as compared to last year, while 50 percent are experiencing a decrease or no change from the previous year. Economic factors that are concerning retailers in 2013 include an increase in the payroll tax, gas prices, and delayed tax refunds.

These three factors will have an impact on retail performance in the coming weeks and months, with the exception of the high-end players whose performance is tied to consumers who are impacted by stock market fluctuations and other business-oriented-performance indicators.

The increase in payroll tax has affected paychecks, and, consequently, discretionary spending. For many consumers, a decrease in their paychecks will make them think twice before they get in line at the cash register. Delayed tax returns have also had an impact and will affect spending on bigger-ticket items, such as furniture, home furnishings and electronics.

In fact, 48 percent of importers worry that their business is facing a negative impact due to the increased tax in 2013. This will force retailers to continue to use sales and promotions to move merchandise, which will likely cut into margins all around the sector.

In the northeast, the delay in disbursement of both insurance claims and FEMA grants and loans puts a strain on people in the states hardest hit by Superstorm Sandy. Further compounding the situation, more people are making early withdrawals or loans from their retirement plans, 401Ks, IRAs and other investments. This dip into retirement accounts will make consumers more cautious about any discretionary spending. If they do not receive aid in a timely fashion to repay these loans, they will face subsequent tax penalties. However, once the FEMA money starts to flow, there should be a pickup in spending as a large number of people will need to replace possessions lost in the storm.

Supplier and manufacturers are still playing catch-up from the storm, as many retailers did not accept all the orders that were intended for shipping at the end of the 2012.

Rising gas prices also are a cause for concern. While it's typical to see gas prices slowly climb in the first half of the year, in 2013 they are rising faster than in the past. According to USA Today, some cities are seeing gas prices as high as $5.20 per gallon. When choosing between buying non-essential items and filling up the gas tank, it is a safe assumption that a majority of consumers will choose the indispensable fuel.

What does this all mean for retailers and their suppliers?

We can expect to see retailers continuing to incentivize consumers to shop by offering discounts and promotions. What's more, retail marketing may continue to be focused on what they believe consumers need, not what they want. This is evident in Target's marketing push for "The Everyday Collection. Retailers will continue to be cautious with overstocking shelves and keeping price points aligned with what they believe customers will tolerate.

For suppliers, this means taking the lessons from the 2008-09 downturn and applying them today. This includes being cautious about producing too many goods and keeping balance sheets lean. Savvy suppliers understand that it's just as important to maintain good relationships with their vendors as it is with their customers. Being able to obtain terms or reduced deposit requirements from overseas vendors is a key to liquidity for many importers.

While it may seem like the cards are once again stacked against the retail sector, it's important to remember that not all economic indicators look bad. When asked what the full 2013 calendar will look like, CBC survey respondents agreed that 2013 would be as strong, or slightly better than 2012.

However, there is no crystal ball to determine what the rest of the year will bring. Ultimately retailers and suppliers have adjusted to an economy of uncertainty and will find ways to maintain their businesses and perhaps even grow as the year continues.

Charles Sharf is executive vice president and New York factoring portfolio manager at Capital Business Credit, one of the largest non-bank lenders that specialize in domestic and international factoring for the apparel sector.

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