Despite the temporary store closures at the onset of the COVID-19 global health emergency in 2020, retail chains in the United States have proven to be surprisingly strong during the pandemic. Though the pandemic has since receded, the retail industry is now facing challenges brought about by the astronomically high inflation rate in the country, which has already resulted in a drop in consumer confidence, causing a pullback in discretionary spending.
Many investors and economists are predicting a recession if the economy continues to slow down ― a scenario that might result in a new wave of store closings and bankruptcies, consequentially causing a major downturn for the industry.
Which retail chains will be the most vulnerable to a recession?
Citing credit agencies, CNN reported that the following retail chains won’t likely survive a recession:
Bed Bath & Beyond
Rite Aid
Party City
Tuesday Morning
Jo-Ann
All these five retail chains reportedly have an elevated risk of bankruptcy and will be most exposed if economic conditions worsen, as they are currently struggling with higher costs, excess inventory, and financially-strapped customers. Like these retailers, companies that sell mostly discretionary goods, cater to middle and lower-income consumers, and have weak balance sheets will be most vulnerable if a recession occurs.
The abovementioned consumers’ pullback in discretionary spending is one of the reasons why retailers’ inventories are overstuffed and companies are resorting to promotions in an attempt to create demand. While this is an effective way to clear inventories, promotions reduce their profits, hurting their business.
“We believe many will turn to aggressive discounting to solve their inventory problem, which is likely to spark a ‘race to the bottom,’” Morgan Stanley analysts said in a report last week. “This dynamic will weigh heavily on margins and fuel [an] earnings slowdown.”
Current retail sales
While there’s a threat of a recession if the economy continues to deteriorate, CNN reported that current retail sales still remain above pre-pandemic levels and more companies have actually announced openings than closings this year. Interestingly, retail bankruptcies have also been at their lowest level in more than a decade.
Though 2023 is expected to be a challenging year for the retail industry, analysts said the upcoming year won’t be as dreadful as before the pandemic because many companies are now in better financial shape following previous restructurings that included the closures of their weakest stores.