Customer Footfall Analysis
February 12, 2025
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The retail industry has been financially struggling for a significant amount of time now. This struggle has been exacerbated by multiple factors. However, post 2022, a new and important macroeconomic variable has changed which has further accelerated the financial troubles which are being faced by the retail industry.
For the past decade or so, the Fed and other central banks across the world have followed an expansionary monetary policy. This meant that credit was easy and inexpensive to obtain. This expansionary policy saw its peak during the 2019 covid crisis. As a result of excessive expansion during that period, central banks have witnessed runaway inflation in many parts of the world. Hence, in order to overcome this inflation, the Fed has raised interest rates significantly.
These increased interest rates have impacted almost all sectors of the economy. The retail sector has been no different. There has been a significant negative impact of rising interest rates on the retail sector. The details of these negative effects have been listed below:
The cost of all these loans is tied to the interest rates set by the central bank. Hence, if a central bank raises the interest rate, the amount of money from the consumer’s salary which is allocated towards these loans increases considerably.
Now, since their salary is fixed and an increasing amount of money is going towards servicing of these loans, these consumers have a lower disposable income. A lower disposable income translates to lower sales for retailers. This is one of the reasons that retail companies around the world are struggling financially.
The higher interest rates have started incentivizing people to save and invest larger amounts of money. This is in stark contrast with the earlier philosophy of borrowing and spending more money since credit was cheap. Increased consumer savings also mean that fewer people are actually purchasing retail products.
If consumers have not been directly impacted by these events, they know of people who have been impacted. There is a general pessimism about how the economic scenario is likely to play out in the future. This is the reason why many consumers have started deferring their purchases. The end result is that the sales in the retail sector are taking a hit.
However, since the financials of these retailers are already under increased pressure, they are not able to do so. This is creating a situation wherein the margins of the retailers are increasingly coming under a lot of pressure.
Also, as mentioned above, the margins in the retail sector are also under pressure. This means that the retailers do not have the cash flow required to make timely repayments for these loans which are being undertaken. Lenders are also aware of this situation. This is the reason that the number of lenders who are willing to lend have also been reduced.
It is evident from the above-mentioned points that the rising interest rates have exacerbated the already dire situation in the retail industry. At the present moment, the retail industry is running out of options to weather this storm.
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