With new tax legislation, more of shoppers’ money will be going to retailers and less to the government in 2018, catalyzing the strongest retail sales growth since 2014. Retailers should still plan for old and new challenges in the coming quarters, which will offset some of the benefits of the new tax policy changes.
Kantar Consulting forecasts growth in 2018 of 4.3% for retail, excluding the automobile, fuel, and food service channels. Topline growth will be a half a percentage point stronger than 2017’s annual pace. Channel trends will be shaped by uneven tax benefits, higher inflation, and an ongoing shift in shoppers’ spending toward online, small-box retailers, and services. (KRiQ clients can access all the channel forecasts in this workbook.)
Brick-and-mortar will be led by the big-ticket homegoods channels, as well as luxury apparel and accessories retailers due to bigger tax savings among upper-income households. Online competition will erode many of these benefits for small-ticket apparel retailers. Consumables retailers will post stronger growth, but channel growth will be dampened by store closures at Sam’s Club and Walgreens.
The pickup in retail sales growth in 2018 is notably slower than growth in after-tax income. Shoppers will likely take a cautious stance toward spending most of the tax savings, initially using most of it to bulk up their savings and pay down debt.
Among the categories households will initially spend more on will be discretionary services, gasoline, and healthcare—areas which provide limited benefit to most of retail. Within core retail, some of the higher growth will come from price increases, rather than just stronger demand.
Despite these effects, most channels will see similar or stronger demand in 2018.
Low and middle-income families, which will benefit from the expanded child tax credit, will likely be able to absorb price increases on select fresh food categories, gasoline, and healthcare. This factor likely means stronger growth at big-box mass retailers and supermarkets, and in consumables brands. Meanwhile, low-income households without children will tend to see fewer tax savings, forcing some cutbacks or trading in to the small-box value channel as their income growth fails to keep up with higher prices.
All this points to another challenging year for retailers and suppliers, but with potentially more reward if they meet shoppers’ demands for price plus quality and convenience.
Doug Hermanson, Principal Economist