Key economic factors affecting retail sales (Updates)
Since performance of economy has a profound impact on retail sales, it is important that the economy be in good health so that retail sales could be high. The US economy currently is passing through one of its worst times (Reuters, 2009). People have less disposable income to spend due to poor performance of economy. However, the economy has shown some signs of recovery recently (Benjamin, Cook, 2009). The balanced signs of the recovery of the economy is expected to show its effects very soon. Economic experts are also expecting a rebound of retail sales during the second half of 2009, as the economy recovers from shocks of recessions. But obtaining the same level of consumerism at retail sales as was before the depression of economy may still take even more time.
Competition in the retail business has traditionally been very high. At one hand, large retailers like Walmart and Walgreen capture a huge chunk of the market, but at the other, smaller retailers also had enormous impact over retail sales. The recent economic shocks have changed the dynamics of competition in retail business. Many large retailers have temporary halted their expansion plans into different geographic localities due to the slump in economy and reduced consumer confidence.
One of the key factors in affecting retail sales, consumer confidence has slumped to one of its lowest points in recent US history. Consumer confidence had fallen an all time low in February this year. But consumer confidence rebounded slightly in March (Rooney, 2009), where it rose from an index of 25. 3 to 26. But even with a slight growth, it is still hovering around the historic lows. This is mainly due to consumer’s fears about the economy, job market and their earnings. To large discount retailers like Wal-Mart, consumer confidence has not been much of a problem
The retail market size is huge in the US. This has been the driving force for the upward trend in retailing for decades. The retail market size is not going to be affected any time soon, but the retail dynamics have changed over the years. Online retailing is now a sizable portion of overall retail market. Giant retailers like Walmart and Walgreen have their own online retail interfaces. Over the past few months, retailers have been cautious about venturing into newer locations for store openings. This has resulted in a steady market size for retailers as a whole.
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High inflation usually drives retail sales down. This is mainly due to less disposable income of consumers as prices of commodities go up. Historically, inflation had been rising at a modest rate in US, but this was offset by the strong economic growth. But the trend has reversed recently. While economic growth is at one of its lowest points, the inflation rate has gone down. This is because the demand for products has gone down. When demand is low, prices tend to fall. The inflation rates in 2009 were 0. 03%, 0. 24%, and -0.38% for the months of January, February and March respectively. Had other factors affecting retail sales been positive, the low inflation could have resulted in higher retail sales. Interest rates Interest rates have a high bearing on almost all industries.
Lowering interest rates provide stimulus to businesses to expand or for entrepreneurs to start new businesses. The current US interest rate is 0. 25%, which is in fact very low as compared to interest rates prevailing when the economy was performing well. For instance, the interest rate in 2006 was 5.25% (BBC News, 2009), much lower than the current interest rate. While this may provide an incentive for retail industry to expand, but the overall deteriorating economic conditions due to global recession does not provide much of an incentive for retailers. Impact on financial health and valuation of Walmart and Walgreen
The retail industry as a whole saw a downward shift in sales amidst the financial crisis.
Walmart, however, showed signs of improvement. Walmart showed a gain of 0. 6% in March, as compared to a 6. 3% decline by its prime rival Target.
Wal-Mart expects even more gains over its 0. 6%. Walgreen also had a gain of 1. 5% in March compared to a decline of 1. 9% in February. Of the 35 major US retailers only 10 had a gain in March, indicating that the retail industry as a whole had a rough time. Unlike other major companies of the US, Wal-Mart valuation had a more steady outlook during the past months.
Walgreen’s financials had also been on the safer side during this time.
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