Retailers reported lower YOY sales in Q2, which will slightly improve but continue to be soft in the rest of 2023 and 2024.
By Elisa Fernández-Arias
Key Takeaways:
- Retailers among least confident segments
- Retail sales down 3.3 percent YOY
- Decrease in retailers’ Q2 KBMI
Retailers reported a sharp drop in sentiment in Q2, according to NKBA’s recently released Q2 Kitchen & Bath Market Index (KBMI), a quarterly report that examines current/future kitchen and bath industry demand as well as issues and challenges facing industry professionals.
Retailers’ overall 54.9 rating is down from 67.5 in Q1, reflecting the slower growth reported across the industry. The rating was at its lowest level since the COVID-induced recession of 2020, which is in line with those from other segments surveyed — designers, builders and manufacturers.
However, retailers stand out because their drop of nearly 13 points is greater than the declines relayed by builders, designers and manufacturers. Additionally, retailers’ KBMI rating is lower than all segments’ average 56.1 KBMI rating. Even though retailers’ Q2 KBMI rating declined, it’s still an indication of growth as any rating above 50 indicates industry expansion.
The decrease in Q2’s KBMI rating is primarily due to the significant drop in retailers’ Current Conditions, 44.8, down from 67.1 in Q1. Other components were relatively flat, with Industry Health at 66.3 from 67.1 and Future Conditions at 69.5 from 69.6 — which indicates optimism about the future.
Sales and Foot Traffic Down, but Traffic High Quality
Consumers are price shopping online, often ordering directly from websites versus visiting stores in person, contributing to the retail segment’s low demand for kitchen and bath products. Retailers reported sales fell 3.3 percent year over year as foot traffic declined. Foot traffic was down an average 8 percent and represents further weakening, year over year, from the quarter-over-quarter decline of 5 percent reported in Q2 2022.
Higher prices for K&B products is a pain point for consumers, according to the report. This has cooled purchasing, contributing to the drop in sales. Retailers reported that the cost of many of these products increased year over year, and that these gains were in the low double digits – for example, mirrors, shower units, hardware, and cabinets all saw an 11 percent cost increase in Q2 compared with the previous year. Eventually, these increases were passed on to consumers.
However, there is a silver lining for retailers: existing store traffic is higher quality, according to the report, meaning that those customers who did shop were committed to making purchases. This may be due to the fact that not all consumers are impacted by high prices. While some are demanding lower-grade/lower-cost products, wealthier customers are unfazed. About 23 percent of retailers say that kitchen and bath customers shifted to lower quality and cost options quarter over quarter in Q2 2023 from Q1 2023; about 27 percent reported that on average consumers gravitated toward higher-end options.
Wealth, income and pricing trends are at the root of this divergence. Around 77 percent of retailers who cited customers downgrading blamed higher pricing and strained budgets. Additionally, nearly half of retail professionals who reported that more consumers were upgrading attributed their behavior to wealth and lifestyle improvements. However, one in five of these professionals said upgrades were due to first-choice products not being available.
More good news is that retailers’ inventories are more balanced: after several quarters of drawdown, 71 percent of retailers say inventory levels are now stable — so they are now more aligned with current demand.
Low, Slightly Improved Sales Expected for the Future
The retail segment expects sales to improve in the near future, rising by 2.3 percent in Q3. To some extent this optimism reflects a seasonal pickup that typically happens around the fall, as consumers travel less relative to summer months, according to the report. This rise in sales will partially offset the impact of lower sales earlier in the year, leading to flat to negative revenue growth for full-year 2023 — in contrast to the growth expected in the other segments.
Retailers expressed concern about what lies ahead in 2024. In the context of the cautious optimism felt across the K&B industry that there will be a rebound next year, retail professionals are the most cautious. About 62 percent expect flat or declining revenue next year, with only 38 percent calling for higher revenues.