PERSPECTIVES

On April 5, the National Retail Federation, “the world’s largest retail trade association,” felt compelled to explain “Five Things To Know About Tariffs.” 

Among the first things they explain is who actually pays the tariff.

What is a tariff? 

• “Tariffs are a tax on goods imported into the United States and are paid for by the U.S. importer.”

• “When tariffs are enacted, retailers are forced to choose between raising their prices or relying on already slim profit margins to absorb the increased cost of inventory.”

• “Many small retailers are indirect importers and rely on other companies to import the products that they sell. These indirect importers [that is, small retailers] have even less ability to shift their supply chains to mitigate tariff costs.”

This sums up pretty well the challenges retailers are living with. But...

Honestly, we don't want to sound like alarmists. However…we are sounding an alarm!

As we all know, prices are rising, consumer confidence is falling, layoffs are rampant, and inflation, particularly with the impending tariffs, is likely to persist.  All of which could combine to drive the economy into a recession. Grim.

Savvy retail owners are starting now to draft new "game plans" for this new economic environment. We want you to be one of the savvy ones. 

For one example of how that can be done, consider the “torrent of adjustments” made by Starbucks' most recent new CEO Brian Niccol. (The company has had four CEO changes in the past five years.) 

Essentially, he has enacted the moves of a classic turnaround plan, one that matches cost-cutting tactics with strategic goals, both quantitative and qualitative. (All without a chainsaw.)

Seeing Beyond The Fog Of Uncertainty And Tumult

Periodically it’s more essential than normal for business owners to interrupt their routine and get a good look at their upcoming financial choices.

And this is one of those times!

Many very savvy people are quite concerned about the economy and consumer behavior right now.

• High debt maturing in both the real estate and the public sectors.

• The multiple international upheavals that continue to grow.

• And, certainly, the impending changes at the Presidential and Congressional level in the U.S

These issues are joined by others to make NOW a very important time for business owners to look ahead financially…maybe weekly for a while. 

Perhaps you saw that recent article* in The Wall Street Journal. As Ruth Simon reported, "The cost pressures squeezing small businesses – and their need to pass along those higher charges – help explain why inflation has been so stubborn."

• Over 80% of small business owners cited rising labor costs as the greatest impact on their cost of doing business.
   
• Two-thirds of owners identified the rising costs of Commercial Insurance, Goods/Inputs, and Employee Benefits (including health insurance) as most significant. (see chart**)

Maybe you noticed this (see "Retailers Lay Out a Downbeat Outlook"*) but the big national retail chains, despite better-than-expected quarterly earnings this week, still are looking at a year of low to no growth, citing reduced spending by lower income groups, the loss of covid relief money, the effects of inflation, etcetera.

• "This week, retail executives presented investors and analysts with downbeat outlooks for the first quarter and the year ahead, forecasting that sales growth, if any, will be much smaller than in years past."*
   
• "Ross Stores expects sales to be flat for its fiscal year; Kohl's expect its net sales to decline 2 to 4 percent; Macy's said its comparable sales would be down 2 to 4 percent; Best Buy expects same-store sales to fall 3 to 6 percent."

But, here is the key observation, and an important reminder:

• "To be sure, while there are worries about the outlook, the data so far don’t necessarily suggest that the economy is in or hurtling toward a downturn."  

How to reconcile this doom-and-gloom from the big national retailers with our still-strong economy, which is 70% driven by consumer spending? 
 

After months of doom-and-gloom headlines and hand-wringing about a recession in 2023, headlines last week (quietly) said this: "What Recession? Some Economists See Chances of a Growth Rebound." One economist, in fact, seemed a little chagrined to note "So far, the U.S. economy has proved unexpectedly resilient." *

• While economists, famed for not agreeing, still find other causes of concern and worry, this may mean that topics other than the economy can take over the "bad news makes news" coverage.
• And that, in turn, could buoy consumer confidence, and retail sales. 

Retailers must be mindful of all this as they make their business and buying decisions throughout the year. But the macro economy is simply interesting, but not significant. Your local economy is, of course, what really matters. 

In that context, every savvy owner uses these three steps.

Try as we might, it seems that there will be no avoiding a recession in 2023. How deep it is, and how prolonged, still remains to be seen. 

For retailers, it's not a matter of whether your business will be impacted, just how much. Alas, retail does not lend itself to being recession proof.

However, there are ways to make your business more recession resistant.

The place to start? First, find out what your Debt-to-Worth ratio is right now. That is the #1 measure of the financial strength of your business. It's a key indicator of your ability to weather an economic downturn.