Tax Reform Provides a Rare Short-Term Opportunity for Retailers, CPGs

As a result of the Tax Cuts and Jobs Act, which went into effect at the beginning of this year, a slew of marquee American businesses, like Home Depot, FedEx, Walmart and Disney, among many others, found themselves with new cash on hand and were prompted to reward their employees. Some companies paid their employees in the form of bonuses, some with wage hikes and others with a bump in their 401K. It's estimated that this windfall will be $1.7 billion, which will trickle down as discretionary spending in the American economy, providing a short-term economic boon for consumers and businesses alike.

What Tax Reform Means for Retail

Although some workers are seeing wage increases, the majority of employees benefiting from this sudden influx of cash are hourly workers receiving bonuses. Low income earners are generally not accustomed to receiving bonuses, and tend to have spending habits that mirror the health of the economy. Given that wages are strong and employment is high, all signs point to an effective increase in discretionary spend.

This increase could present a short-term opportunity for retailers and CPGs that stumbled out of the gate in 2017 with soft earnings in the first quarter. However, another slow start in 2018 isn't entirely out of the question. Despite a strong holiday season, last year was a tough year for retail, which, as an industry, shed more than 100,000 jobs. While the death of retail isn't a new story, the bigger news was the slowed sales for many large CPGs, even as consumers continued to strengthen and increase their discretionary spending.

While the $1.7 billion of new immediate cash in consumers’ pockets does create an opportunity for retailers and CPGs to increase their sales, this window of opportunity is small, perhaps no longer than a few months. As such, retailers and CPGs need to focus on short-term strategies to capitalize on this economic opportunity.

Before changing their marketing or merchandising strategies, however, companies need to evaluate whether they can actually take advantage of the situation according the the following three factors.

Your Relationship With Low-Income Earners

The bonuses resulting from the tax cuts primarily benefit hourly and low-income workers. If a company’s core demographic of consumers aren't made up of this group, this isn't the right opportunity. But even if this group does fit within a company’s core consumer base, organizations should evaluate the trends within this demographic to fully evaluate their relationship with these customers.

Mundane vs. Splurge Items

Because this opportunity is short term, the product sales cycle must be taken into consideration. Mundane products (e.g., cleaning supplies) have longer lead times, whereas splurge items (e.g., a new set of speakers for your home entertainment system) have a shorter lead time. Companies must determine if their product offering includes shorter lead time splurge items that can appeal to the demographic. If so, they must prioritize these items in their marketing and point-of-sale efforts.

Has This Happened Before?

Ideally, retailers would be able to rely on past experiences to analyze customer behavior during a similar situation. But a stimulus during a growing economy is unprecedented. Additionally, it's rare that the consumer finds new cash in their pocket immediately.

While there aren’t many instances that will be useful, retailers should look back at the 2001 tax cuts, in which Americans received tax rebates, in the form of a $300-$600 check from the federal government. Even though it’s not an apples-to-apples comparison because the U.S. was in a recession in 2001, it can offer perspective on how consumers might interact with a company with an unexpected inflow of funds. Businesses should review their data from that time period to see if they’re able to glean any insights into consumer behavior that may be applied today.

The takeaway for retailers and CPGs is to act quickly, but strategically. While it may seem appealing for all retailers to attempt to take advantage of this increase in discretionary spending dollars, the influx of cash into consumers’ pockets presents an opportunity only for those companies offering products with short lead times and which already have a strong customer base among low-income earners. These companies should adjust their marketing dollars and campaigns accordingly, while retailers that don’t fit this bill should continue to focus on their core offering.

Andrew Duguay is a senior economist at Prevedere, a cloud-based business intelligence solutions provider that delivers forecast accuracy by harnessing the predictive power of global economic data.