Are you ready for the $100 tee shirt, the $300 pair of jeans, and $400 sneakers?
Last week, President Biden’s American Rescue Plan Act (ARP) reached for the stars, while many earthly retailers still worry about their future. One major concern is that the money-cake may not have icing in all the right places, potentially causing a short-term sugar-high, without correcting the systemic problems that plague the retail community.
The story of the American Rescue Plan legislation is reminiscent of another story about a young child who was given a Big Ben alarm clock, and a warning that time would be precious. The warning said that Big Ben should not be wound too tight or the clock would freeze, and time would stop. As is often the case with kids, on the very first day – the child overwound the clock, and time was frozen forever.
American retail now resides in a similar clock-like atmosphere. While truly appreciative for the stimulus funding (a definitive sugar-high), the philosophical question is raised as to whether the money is allocated where it can be most sustainable for the long-term health of the retail industry and consequently – for jobs in America.
Without question, COVID-19 has weakened retail, and is witnessed by simply taking a stroll down main street America. The federal number on retail jobs (especially pertaining to fashion) indicate a loss of 359,000 positions since last February, and that only tells part of the story. Small businesses are also significantly reduced in size and numbers, as the fashion business is getting ready to emerge from its winter of discontent. Retailers see several issues that are still on the table, and many of these problems are inflationary.
For those who buy fashion – the cost of product is skyrocketing.
#1 Data collected on imports indicates that 36% of all apparel and 61% of all footwear still comes from China. The Chinese yuan is surging against the US dollar and this decreases American buying power – which raises the cost of product.
#2 Former President Trump added tariffs to the equation, and China factories were pushed by buyers (and market conditions) to lower their prices in order to remain competitive in the difficult environment. Given China’s ability to keep their factories operating (while other countries have closed), demand has increased and these same factories are now inclined to raise their prices or sell to domestic China markets, which are rapidly expanding. Costs from China are going up.
#3 There is a huge global shipping container shortage and severe congestion has hit USA seaports. Freight rates to the USA (by sea and air from China) have skyrocketed. Sea rates are now more than 3 times higher than a year ago and some USA importers have even decided to use the more expensive air option – just to avoid congestion at the seaports. Cost of transportation is increasing.
#4 American credit markets (laden with risk and bankruptcies) have tightened up significantly, and retailers are being forced to make every dollar count – especially when financing inventory. There will be less discounting for the American consumer, forcing retail prices to rise.
#5 Consumers shopping online have been lulled to sleep by free delivery (which really isn’t free) and by easy returns (which really isn’t easy). These expenses are now bubbling to the surface – causing prices, once again, to rise.
#6 Several retailers were forced into bankruptcy during the COVID-19 lock-down and (good news) they have opened up again with new management and less debt. However (bad news), new owners see things differently and are demanding lengthy payment terms when purchasing goods. Some retailers are asking brands for net 90-day terms after receipt of goods, which is a very long time to float a loan. In addition, if product takes another 90 days to reach America (from date of order), that means that goods have to be carried (via credit) for up to 6 months. The credit crunch is both extraordinary and highly inflationary. Prices will go up.
On a more positive note, the American Rescue Plan (ARP) was very focused on the employee. Generous unemployment benefits and the extension of the Paycheck Protection Program (PPP) will accomplish a lot in the short term, but the longer concern is for employers who may not have enough funds to finance future inventory to stock their shelves. ARP funding, to some degree, takes this possibility into consideration, but if ARP had allocated more funding for credit risk insurance, that would have saved the day. The big worry for retailers is that they could run short of funding and be forced to close the business – which theoretically would mean that we saved the employee – but lost the job.
Overall, the American Rescue Plan Act is a staggering $1.9 trillion dollars, with much of it going directly into the pockets of the American people. However, digging deeper, there is only $61.25 billion that directly targets the retail community. If you pull out the $29 billion that was set aside for restaurants, that means that only $32.25 billion of the total $1.9 trillion is being used to directly assist one of the largest creators of jobs in America.
The $32.25 billion for retail is broken down as follows:
#1 The Paycheck Protection Program (PPP) gets an additional $7.25 billion (with 60% required for payroll)
#2 Underserved communities, especially for those businesses that are minority owned, will receive $15 billion in loan grants
#3 States will receive $10 billion to help their small business economies
The above cash injection is an incredibly huge shot in the arm (no pun intended), but if we match this amount to individuals who get $1,400 dropped into their checking accounts (and more with additional child support) – then, where is the longer-term money for a small business to fund new inventory? Surely, some of the small fashion retailers will get a grant, some may get a loan, but will the amounts they receive be sustainable for the long haul – especially with inflationary costs on an uptick?
It’s true that office life will eventually resume, schools will reopen, and restaurant lights will be turn on. Americans will become more active again, and will dress up to socialize. Retail sales will pick up on-line, and eventually shoppers will head back to the physical stores where fabrics can be felt by hand, and styles can be seen in all sizes and colors. The problem is that while all this is going on, inflation is baking into the retail pricing and consumers with new-found cash in their pockets will spend whatever they have – to get what they want. Prices will rise and, as the old adage could prove true once again: as prices go up, sales go down, and jobs get lost.
It is also really important to recognize that Government took a BIG, BOLD, and POPULAR stand to quickly assist the economy with ARP. The Biden Team may not have pressed all the buttons, but they certainly touched most of them. Time will tell if retail can extend this new sugar-high to make it last – before the funds dry up and the clock stops again.
And, by the way, the young child who over-wound his Big Ben Alarm clock was actually me. With tears in my eyes, I did aske my Aunt for a new clock – to replace the one I broke.
She said no – because I needed to learn a lesson.
“What lesson was that?” I asked.
“I gave you time” she said. “You broke it and now you own it”