Sep 12, 2022
Many retailers saw dollar sales slow and profit margins drop over the first six months of the year as consumers reduced their spending on discretionary goods and stuck to the basics. Some companies have responded to this situation by cutting back on dollar investments in technology, store remodels and other capital expenditures. Others, however, have increased their spending guided by the historical lesson that investments made during tough times lead to market share gains against rivals who held off doing the same until spending rebounds.
A report issued at the end of last month by the Federal Reserve Bank of St. Louis forecasts that better economic times are ahead in the near future as inflation tails off and the job market remains relatively stable.
It cites the Federal Reserve Bank of Philadelphia’s recently published “Survey of Professional Forecasters” (SPF), which projects that the Consumer Price Index (CPI) inflation rate will fall from 7.5 percent overall in 2022 to 3.2 percent next year and 2.5 percent in 2024. The same survey found that the Federal Open Market Committee’s preferred means of measuring inflation, the personal consumption expenditures price index, will go from 5.8 percent this year to 2.8 percent in 2023 and 2.3 percent in 2024.
The SPF consensus expects real gross domestic product growth in the second half of 2022 and the first half of 2023 in the 1.25 percent range. Further gains are expected in the back half of 2023 and into 2024.
CNBC reports that among top-tier retailers, Amazon.com, Best Buy, Home Depot and Target are boosting their capital spending in the double digits, with only Gap and Lowe’s cutting back.
“There is definitely concern and awareness about costs, but there is a prioritization happening,” Thomas O’Connor, vice president of supply chain-consumer retail research at Gartner, told CNBC. “A lesson has been taken from the aftermath of the financial crisis.”
A Gartner study that tracked capital expenditures during the 2007 to 2009 economic downturn found that 60 companies that increased their investments during the two-year period saw their earnings double between 2009 and 2015. Those that failed to invest saw little change in their profit picture in the years that followed.
DISCUSSION QUESTIONS: Should retailers currently struggling with sales and profits seek to increase or decrease their capital expenditures at this time? In what areas is expanded CapEx spending most needed at retail?
“Advances in technology are making it critical for businesses to invest in foundational system upgrades if they hope to stay relevant going forward.”