Retail Discretionary Spending Could Plummet as Much as 50%

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Retail Discretionary Spending Could Plummet as Much as 50%

By Jamie Grill-Goodman - 04/10/2020

Significant business interruptions brought on by the coronavirus is upending U.S. retail discretionary spending, which is projected to decline by 40%- 50% in the first half of 2020.

This prediction comes from Fitch Ratings, which also expects a slow rate of improvement through the summer from a current 80%-90% decline in sales, and only if stores start to open mid-May or early June. Sales decline is expected to continue into 2021 and to dip 8%-10% from 2019 levels.

However there is a light at the end of the tunnel. Fitch states “revenue trends could improve exiting 2021, given the typical four to six quarter duration of a consumer downturn, resulting in 2022 being a growth year.

Yet Fitch already downgraded a number of department store and specialty retailers last week with Macy’s, Tapestry, Capri, and Dillard’s being lowered to non-investment grade.

“We anticipate many retailers in our coverage universe can weather the current challenges, given good market positions and sufficient liquidity stemming from operating and cash flow preservation initiatives, potentially emerging in stronger positions over time as weaker competitors go out of business,” Fitch said.

Notable exceptions, Fitch said, include J.C. Penney, given its expectation that “material cash burn in 2020 will significantly challenge its liquidity position with the potential for a debt restructuring in 2021 should our forecasts come to fruition.”

"Store-based retailers are in for a long and difficult journey.”
Steve Rowen, managing partner, RSR

Additionally, Fitch predicts GNC could default in the coming months and that both J. Crew and Land’s End may be “challenged in addressing sizable maturities due 2021, increasing default risk including via a distressed debt exchange.”

“J. Crew’s plan to monetize its Madewell business through an IPO could be difficult to execute in the near term given equity market volatility,” Fitch noted. “Protracted weakness in sales and capital market conditions could also make it difficult for Tailored Brands, Ascena and Party City to address 2022 maturities.

Consumers Shifting Shopping Habits

Roughly half of consumers (49%) have spent less money because of the pandemic, with 22% of this group stating they’ve made a significant decrease in spending, Blue Yonder found when it surveyed over 1,000 U.S. consumers between March 18-19, 2020, to uncover how COVID-19 and the current economic slowdown has impacted spending habits.

Of the respondents who are spending less overall, more than half (59%) are spending less on retail specifically because they are avoiding going out in public and cannot purchase things in-person. While the survey found 57% of consumers said they are doing more shopping online as opposed to in-store because of COVID-19, together this data seems to indicate the real strength that brick-and-mortar retail lends to discretionary spending.  

However, retailers who are digitally-focused still have an opportunity to engage with online shoppers and increase conversions. Retail Systems Research (RSR) found the majority of shoppers will either not shop in-store at all or will only do so if “absolutely necessary,” when it conducted a survey of nearly 1,200 shoppers. Ninety-three percent said they expect to shop online either more (60%) or at the same level (33%) as they did before the outbreak. Retailers should be aware, the top three things respondents felt would make shopping online more difficult during the crisis: unavailable inventory; no free shipping option; and a slow website.

The results of our consumer survey clearly indicate that even at a time when the vast majority of U.S. inhabitants are not infected with coronavirus, their sense of responsibility to stop the unwitting spread of the disease is keeping them at home – causing their shopping behaviors to be drastically affected,” said Steve Rowen, managing partner, RSR. “With most experts predicting the effects of this outbreak to continue for several months, it can clearly be expected that the online shopping trends exposed in this research will only increase in the days and weeks to come. As a result, store-based retailers are in for a long and difficult journey.”

 Total U.S. CPG online sales jumped 41.7% for the one-week period ending 4/4/20 vs. the same week last year, according to Nielsen Total U.S. dollar sales data, with food jumping 79.8% and baby care down 5.7%. Total U.S. CPG in-store sales were up  15.8% for the one-week period. Interesting to note, lip cosmetics (-62.4%), sunscreen (60.3%), and footcare inserts and insoles (-59.3%) saw some of the largest declines, all likely due to more consumers staying indoors.