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As the Commercial Real Estate Industry Slows, Discount Retailers Will Hold Strong


Inflation Changes Spending Habits 

As the Fed continues to work to reign in the effects of inflation across the economy, we are seeing immediate effects in not only the investment markets and construction industry but also in the behavior of consumers that retailers serve. Higher levels of inflation are driving up costs, in production and delivery of goods, reducing the overall amount that retailers can comfortably charge for their goods, and at the same time that retailers are trying to adjust to these difficulties, they are also having to contend with the wants and needs of consumers.


We are seeing shoppers adjust their spending in very nuanced and specific ways at this time. Customers aren’t completely reigning in all purchasing like we have seen during major recessions, and are instead currently reducing their spending on ‘highly-discretionary’ items, as CNBC explored shortly after the June rate hike.   


Many consumers are returning to the office, and in-person social engagements, which is likely leading to these shifts in what they are prioritizing. Apparel is seeing a lift in purchasing, with many shoppers needing to refresh their wardrobe for renewed social interaction. 


Similarly, consumers continue to spend on certain experientially-focused aspects of retail, and we are seeing that those who can afford to go out more, are doing so. Movies, bars, concerts, travel, and many other experiences that consumers missed out on during the lockdowns and hardest points of the pandemic are seeing strongly renewed interest. 


Specialty Retailers See Renewed Interest

In these market conditions, specialty stores are also booming, due to a variety of factors. From offering consumers saving-based solutions to operating in a low competition market, many specialty retailers across the country are seeing an influx of shoppers.  


For many consumers, purchasing a new or used vehicle is not an option right now. With a high sticker price and escalating interest rates, long-term loans and leases are not nearly as enticing as they once were. Many of these shoppers are instead looking to maintain their existing vehicles in their current condition, a desire that O’Reilly Auto Parts has been quick to help with. By offering a wide range of parts and materials for automobile maintenance to an increasing customer base, O’Reilly stands to not only offset the increased costs of inflation but also increase earnings. This continued success is then amplified by and leads to their continued expansion, with new locations being established throughout the country. 


In the realm of sporting goods retailers, Dick’s Sporting Goods has been seeing an increased count of customers, less because of their competitive deals for shoppers, and more because of a lack of true competition. With the void left by the closure of Sports Authorities throughout the country, and similar sporting goods retailers failing in the aftermath, Dick’s was able to see an underserved and underutilized market, and provided consumers with a shopping experience that met their specific needs. 


Discount Retail Benefits

While consumers are making these shifts in their spending habits, the continued rise of inflation and the rocky market does mean that they have to cut their spending somewhere.  The recession caused by the Covid-19 pandemic led many consumers to adopt more conscious spending approaches, and even when the economy looked to be bouncing back, consumers did not immediately change their deal-hunting behavior. 


This deal-seeking behavior has created a difficult situation for many middle market grocers and big box stores, as they will take considerable losses when discounting merchandise and reducing inventory, just as Target forecasted when trying to adjust to the downturn in the market. In these same conditions, the discount retailers these companies are trying to compete with, have been doing exceedingly well and have increased their earnings.  


The Market Prefers Discount Retail in Current Conditions

Discount retailers like Dollar General and Dollar Tree, have a history of success during recessions and inflationary environments, due to more consumers seeking deals and value. As their existing customer base is increased by consumers hunting for deals, they stand to do very well in a potential recession. 


The stocks of these retailers are performing well as a result. Because they see an increase in consumer spending during these time periods, they retain their existing customer base and also gain new customers who are looking to conserve money, discount retailers are typically considered to be strong recommendations for investors in the current market, and for a potential recession.





As a Partner at SimonCRE, Jeff Carpenter is responsible for sourcing opportunities in both ground up development and through the acquisition of value add assets. Jeff has successfully completed projects across the country and has been an integral part of the exponential growth SimonCRE has experienced since he joined.


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