Retail sales plummeted 16.4% in April from March, the largest decline on record for the series, which started in January 1967, and the second month in a row of record monthly declines. Sales dropped 21.6% from one year ago, also a record decline for the series. We have never seen such an extraordinary cessation in activity. The economy officially entered a COVID ice age in March; temperatures receded further in April. There will be a bounce when states move to slowly reopen in May, but we need to be cautious not to get too caught up in the size of sales gains. Double nothing is still nothing.
Declines were broad-based in April, with losses in every category, except for spending at online retailers, mostly Amazon. Big-box discounters such as Target and Walmart appeared to fare better but also suffered declines following a surge in March. Even grocery stores and pharmacies saw a drop in spending; hoarding ahead of the lockdowns pulled some spending into early March. The blow to building materials and garden stores was more significant than credit card receipts had suggested. People hoping to do home improvements and plant flowers while they were off work appeared to rethink those plans as their incomes fell. The initial estimate of payroll employment losses in April topped 20 million. Those numbers appear to have understated by a significant margin - as many as 10 million jobs - the actual losses during the month. We also saw a record surge in April in the number of people forced to scale back their hours. Even some salaried workers were forced to accept shorter work weeks and pay cuts.
The largest declines in retail sales during the month were concentrated in nonessentials. Niche clothing retailers were particularly hard-hit with sales off nearly 80% during the month and almost 90% below 2019 levels. Next up: electronics, furniture, sporting goods stores, restaurants and bars. The drop in spending at restaurants and bars (the overwhelming majority of which were still shuttered or offering curbside and delivery meals) was smaller primarily because activity had already dropped sharply during March. The pullback in travel, tourism and dining out started in late February and early March before schools were closed and states enacted shelter-in-place warnings. Even the few states that did not enact shelter-in-place rules saw record-breaking drops in spending.
Those losses in retail sales do not include the much larger categories of spending on sports, arts and entertainment. That drop in spending will show up in the personal consumption expenditure (PCE) data for April, which comes out on May 29.
Nearly all retailers will have to rethink their business models to deal with social distancing. Most restaurants can’t break even unless they run at 75% capacity; that is contingent upon peak sales and heavy crowds who often run large bar bills, Thursday to Saturday. Add in the many small kitchens, which will need to be reconfigured to limit contagion among food preparers and it is not surprising how many restaurants are reluctant to take on the small business Payroll Protection Plan (PPP) loans. The only model for restaurants that may work is those that have large and dispersed outdoor seating; but those too still represent a risk to many servers and food prep workers who have to prepare and serve the food from small indoor kitchens.
The loss in spending triggered by COVID-19 has dramatically accelerated the shift from stores and malls to online shopping. Look for a surge in retail bankruptcies and a complete shift in the model for retail to emerge from COVID-19. Clothing stores, traditional department stores and malls are all working to figure out how to maintain social distancing and disinfect public areas. Most capital outlays for the year have already been cancelled, with the exception of investments in online applications. Retailers with experience in China are already bracing for the worst, as few customers have been willing to return to public spaces. Everything from dressing rooms to the clothes that are tried on will need to be disinfected between customers. Stores that sell makeup and beauty products have a particularly large hurdle to overcome; they are looking to restructure with curbside pickup and online applications that demonstrate virtually how a shade of blush or eye shadow looks on individual customers.
Many retailers are referring this to the lost year in retail. Sadly, they may be correct. It will take years, not months, for some industries to recoup what they lost to COVID-19, a reality that Congress needs to acknowledge if members hope to recoup the losses from COVID-19 in any reasonable time frame.
Copyright © 2020 Diane Swonk – All rights reserved. The information provided herein is believed to be obtained from sources deemed to be accurate, timely and reliable. However, no assurance is given in that respect. The reader should not rely on this information in making economic, financial, investment or any other decisions. This communication does not constitute an offer or solicitation, or solicitation of any offer to buy or sell any security, investment or other product. Likewise, this communication serves to provide certain opinions on current market conditions, economic policy or trends and is not a recommendation to engage in, or refrain from engaging, in a particular course of action.