From stock levels to financing: How interest rate hikes impact retail

d a drop in consumer demand and spending, there’s a number of other areas where retailers are being impacted by rising rates.  Founder and CEO of the Retail Doctor Group, Brian Walker told Inside Retail that an increase in interest rates tends to slow down sales, cash flow, productivity and profitability across different retail sectors. He believes this can have a negative effect on staff morale and attitude to work – as they are burdened with higher cost of living, and poorer purchasing power – and create a more difficult environment for the leadership team. This can be exacerbated further if staff cuts are implemented as a way of dealing with higher costs, and reduced spending.   Partner at accounting firm Pitcher Partners Mark Harrison believes rising interest rates can also make it harder for retailers to obtain finance, as businesses are assessed as having a lower capacity to borrow funds. The cost of stock is also likely to increase, and changes to store fit outs might take longer, as construction firms navigate staff and skills shortages. All this – on top of challenges related to a highly competitive rental market, and an increased cost of borrowing – can lead to greater stress placed on staff and management which, in turn, can have a detrimental effect on wellbeing.  Harrison added that there might be more staff turnover, as people chase a higher wage elsewhere. “Rising interest rates and mortgage repayments create the need for increasing household income, which potentially drives more people into the labour market,” Harrison said. Stratified effect According to Harrison, retailers need to be more efficient in how they manage stock and inventory as the cost of money becomes higher. He added that stock turns need to be maximised, and excess stock holdings minimised, in this economic environment.  Meanwhile, Walker noted that the luxury sector has performed relatively well throughout this current economic cycle. He added that the grocery sector is likely to be less affected compared to mid-market retail – which often includes brands specialising in fashion, general merchandise and speciality retail – as customers make substitutions and opt for home-brand products. “By and large, I think it’s a bit stratified [and] there’s a demographic profile that emerges as a consequence of available disposable income,” he said. “The manner in which we interpret the media perspective might also vary [according to] demographic.” Eroding buffer Walker anticipates that the effect of interest rate rises will peak around March or April. He expects future rate rises before overall deflation in the retail market occurs. After which, Walker hopes that the retail market will stabilise. “I think this next quarter is the one to watch out for,” he said. “When we look at sales numbers, we saw quite a lot of money in the economy through the Covid-19 window. “There was a buffer, but we’re getting to the fine point of that buffer eroding now.” Walker added that mid-market retailers without a strong point of difference – and with excess stock and high overheads – could be in for a “torrid time.” Harrison said that there’s a significant risk of retail store closures throughout this period. He added that there were several considerations for retailers to consider as they prepare for the end of the lag effect. This might include, but is not limited to, endeavouring to clear excess stock, buying in lower quantities to reduce inventory investment and discussing potential opportunities to fix interest rates for core debts. “Challenging times in retail are upon us and the emphasis for retail business owners needs to be on building better relationships with [their] customer,” Harrison said. “Use the tools available to properly understand what they want and deliver the experience they need, but don’t sacrifice yourself by taking unsustainable cuts to margins.”