Retailers Could Soon Face Declining Margins as Employee Wages Rise

New data analysis from FDRA shows that retailers could soon be struggling to balance margins due to the rise in retail wages. As unemployment remains unchanged from April at 3.6%, a low not seen since 1969, retailers are being forced to increase wages to retain a talented workforce in a competitive labor market.

Shoe store workers have particularly benefited from this increase in pay, with average weekly earnings up by 17.4% in April and reaching a seasonally adjusted record of $597.73/week in May, according to FDRA. But this is expected to lead to an inverse effect on the stores’ sales per dollar of labor; retail sales have not increased in line with wages. In fact, retailers are facing pressures to reduce prices while also paying severe duties on goods.

“Family footwear stores are price conscious and have more competition than ever before from online retailers, as well as growing channels like warehouse clubs and discount retailers,” said Gary Raines, chief economist at Red Sky Economics. “It’s hard to raise prices on mass-market products when you have high levels of competition, where the shopper will just go elsewhere for lower prices — and at a time when the shopper is still looking to see discount signs in the windows.”

The last time the footwear industry faced a similar spike in wages was in the summer of 2014. July saw average hourly earnings increase by 14% year over year, while sales per dollar of labor decreased by 13.6%.

However, the unemployment rate in July 2014 was almost double what it is today, at 6.2%. FDRA cautions that retailers could experience a similar or more severe decrease in margins, due to the prediction that the labor market will remain tight for the next few months. If combined with the implementation of higher tariffs on Chinese imports, this could also lead to stifled demand for product as the higher cost is passed onto consumers.

In the meantime, while retailers have little room to adjust prices, alternative strategies could involve investing more heavily in e-commerce or improving the store experience to encourage foot traffic. Raines also predicts that, despite the currently limited pool of qualified workers, wage pressure might still diminish later in the year.

“If economic growth slows over the second half of 2019, as we have long been forecasting, this retail wage pressure is likely to dissipate,” said Raines.

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