Six Key Retail Trends for Bankers

If you've been a banker for a few years, you've probably learned that it's more difficult to lend to a retail business, so you don't proactively focus on this segment. You might still be reeling from that experience where you had to tell a long-time customer that you could only give them half of the line of credit that they applied for. 

Unfortunately, that experience may have led you to shy away from one of the largest industry segments in the US. With more knowledge about the top trends impacting these businesses, you can successfully serve and grow this segment of your banking portfolio. 

The retail landscape

While there are large players in retail, it’s primarily composed of small businesses with an average of 7 employees that produce annual revenue of $2.6 million. Among small retailers, especially, physical locations are no longer the norm. The shopping experience has moved entirely online for some stores.

If your portfolio already includes a number of brick-and-mortar retailers, it might be time to look for prospects in the online space. There are plenty of retailers that operate solely online, affording them lower overhead costs and helping them circumvent the high barriers to entry that brick-and-mortars face.

Either way, revenue across the retail sector has been increasing at a 5.2% rate and is expected to grow 3.4% annually by 2028. Currently, the sector experiences low revenue volatility and above average growth.

Retail businesses offer ample opportunity to build strong deposit balances and fee income from payments. 47% of small businesses and 41% of middle market companies have actively shopped for new deposit accounts over the prior six months. Harnessing this growth, however, takes an understanding of the key trends impacting the broader retail sector. 

1. Consumers are still spending, and opting for costlier products 

Comparing year-to-date spending in 2019 and 2023, this year’s total retail spending has exceeded pre-pandemic levels. In the face of high interest rates and housing prices, an increasing number of consumers believe that home ownership is out of reach and are, in turn, spending more on smaller-ticket purchases. Prices are up in retail, and even with higher labor and inventory costs, profit is generally rising across the retail sector. 

As a banker, consider asking these questions during talks with potential retail customers: 

1. How is strong consumer spending impacting your revenue and overall profitability?   
2. How do you gauge your ideal customers' preferences?
3. Have you have raised your prices? If so, how has your pricing strategy worked?

2. Consumers want to shop online, and they’re using social media to find new products

Many physical retailers have websites, allowing customers to conveniently shop from home. Retailers with an online presence have found an increasing percentage of revenue coming from online sales using credit card payments. During last year's holiday shopping season, 33% of purchases were made online, and 81% of retailers reported that they plan to expand the number of digital channels that they sell on. 

Here are questions you can ask: 

1. What percentage of your sales are made online?
2. Do you plan to make any enhancements to your eCommerce platform this year? If so, how?
3. Can you explain any digital marketing strategies you have in place for your business?  
4. How do you track and analyze online sales to make decisions about inventory and pricing?

3. Customers shopping in person place higher value on experiences

To entice consumers to shop at their brick-and-mortar stores instead of online, retailers often focus on providing unique, branded experiences for in-person shoppers. They might offer special in-store deals or involve their patrons in an activity. Some examples include wine tastings at a wine shop or hosting space for local businesspeople to network at a coffee shop.

In addition to creating memorable in-person experiences, many retailers also implement customer loyalty programs as a key strategy to encourage repeat visits and build lasting relationships with their patrons. These programs often offer rewards, discounts, or exclusive perks to shoppers who frequently visit the brick-and-mortar stores, thereby incentivizing customer loyalty and fostering a sense of belonging within the brand's community. 

Some questions you might ask: 

1. Do you offer any special incentives to keep customers coming to your physical locations?
2. What do your customers have in common and are you leveraging those similarities to promote community-based experiences?
3. Do you have a loyalty program so that you can assess how many new customer relationships you might be building to increase your revenue?

4. Subscription and membership packages are gaining ground 

Though this is more common with food and beverage stores and health and beauty goods, it's extending to home goods, fashion and apparel and pet food and services. Subscriptions are effective in lifting sales and keeping members more engaged in terms of frequency and variety in their purchases.

As brands increasingly offer subscription packages, they can make better forecasts for revenue and profit growth, setting them up for success. Even for business models that don’t support straightforward subscription packages, automatic replenishment options or curated assortments of repeat purchases are a way to establish a more predictable stream of cash flow.

A conversation about this trend might include these questions:

1. What value could you see in offering your customers a subscription service? If 5% of your customers tried a subscription, how would that impact your business? 
2. How do you encourage steady, ongoing revenue if not through subscriptions?

5. Consumers are increasingly health-conscious 

Many of the leading food and beverage retailers are rushing to stock more fresh, local, organic, gluten-free products. This increases the cost of goods sold and a growing array of products requires more rigor in their inventory management.

You might inquire about the following:

1. How do you plan to keep costs and profit in check while catering to health-conscious consumers?
2. How has demand for health-conscious goods impacted your supplier relationships and payment practices?

6. Consumers are starting their holiday shopping earlier 

In 2022, 46% of holiday shopping started before November and this season is expected to follow that trend or start even earlier. As inflation has hurt consumers' ability to save for holiday shopping, consumers are expected to take advantage of the many physical store and online sales occurring prior to November.

The availability of BNPL, coupled with the certainty of installment payments, may also be contributing to more holiday shopping occurring before November, as 21% of consumers report that they would consider using a BNPL option to stretch their holiday shopping budget. Be aware that the consumer is responsible for payment on the BNPL plan, but a retailer should be cautious and ensure that they comply with FTC regulations regarding unfair or deceptive practices.

Consider asking: 

1. With holiday shopping beginning earlier, how are you building inventory and how will that impact your cash flow? 
2. With holiday sales often requiring increased staff, have you found new ways to attract and retain employees?