Why 2023 Will Remain Slow in the North American Consumer & Retail Sector


In Q1 2023, a series of macroeconomic headwinds, including inflation, rising interest rates, recent bank runs, geopolitical risks, labor shortages, and increasing raw material costs, continued to weigh on the consumer and retail sector’s growth. According to the US Labor Department, the consumer price index rose 0.1% in March due to lower energy costs and flat food prices. The department’s data showed that while inflation is still well above the target of the Federal Reserve (Fed), it is at least showing continuing signs of deceleration.

According to the University of Michigan, consumer sentiment has declined by 5.4% in March, to 63.4 from 67.0 in February. The university also suggested that although the recent bank runs had a limited impact on consumer sentiment, there are multiple signs that consumers are increasingly expecting a recession. Together, these factors are driving uncertainty in consumers’ purchasing behavior and, ultimately, hurting the sector’s performance.

According to the US Census Bureau’s seasonally adjusted data, retail and food services sales grew by 5.4% Y-o-Y to USD2,090.3 billion in Q1 2023, from USD1,983.2 billion in Q1 2022. The upside was primarily driven by key segments such as healthcare and personal care, general merchandise, food and beverages, and clothing and clothing accessories, and partially offset by a decrease in the electronics and appliance stores segment.

However, US retail sales fell 1.0% on an M-o-M basis to USD691.7 billion in March, as consumers cut back on purchases of motor vehicles and other big-ticket items. The dip suggested that the economy was losing steam at the end of the first quarter because of higher interest rates. The drop in sales coincided with the expiration of the Supplemental Nutrition Assistance Program (SNAP), which was authorized by the US Congress to help low-income people and families during the COVID-19 pandemic. Morgan Stanley estimated that the expiration of the SNAP hurt the sector’s income by about USD4.0 billion on a non-annualized basis.

(1) Y-o-Y Change (%) in US Retail Sales

Source: U.S. Census Bureau

According to the US Bureau of Labor Statistics, the unemployment rate in the US declined slightly to 3.5% in March 2023, compared with 3.6% in February 2023. The number of unemployed people declined by 236,000 over the same period to 5.8 million, as the number of jobs surged due to improving performance across the leisure and hospitality, government, professional and business services, and healthcare sectors. However, the number of unemployed people in the retail sector increased by 15,000, primarily due to job losses across building material and garden equipment and supplies dealers, as well as furniture, home furnishings, electronics, and appliance retailers. This persistent labor market tightness has raised speculations of a further interest rate hike by the Fed in May 2023.

M&A Activity

M&A activity in the consumer and retail sector in the Americas (North America, the Caribbean, and Latin America) declined by 34.0% in Q1 2023 to USD30.8 billion, compared with USD46.7 billion in Q4 2022. The decline was attributed to a significant dip in M&A activity in the retail and consumer staples segments.

The uncertainty related to a potential recession has significantly slowed down M&A activity in the consumer and retail sector. Interest rate hikes, market volatility, and declining consumer confidence are leading to gaps in valuation, which are impeding deals. A decline in retail sales, persistent inflation, and rising interest rates weighed on consumer sentiment and M&A activities in March 2023. We believe that M&A activity in the consumer and retail sector will continue to be subdued until the end of 2023, primarily due to rising interest rates and a struggling global economy.

(2) M&A Deal Value (USD billion)

Source: Refinitiv Deals Intelligence


As on April 13, 2023, nine companies in the US retail sector had filed for bankruptcy. This reflected a significant uptick in the number of bankruptcies filed from the lowest-ever bankruptcies witnessed in 2022.

Traditionally, the retail sector faces several problems including shifts in consumer behavior, an abundance of physical stores, and high levels of debt. These problems paused during the pandemic, as consumer spending surged driven by the US government’s stimulus package to retailers. However, as the pandemic recedes, these problems are resurfacing. As per Fitch Ratings, the default rate among junk-rated US retailers may reach 12.0% by the end of this year, compared with a near-bottom low of 0.2% in 2022. US retail firms have USD67.0 billion outstanding in high-yield bonds, and defaulters will likely account for about USD8.0 billion of that amount. With inflation and borrowing costs soaring, savings accounts shrinking, and consumers shifting away from discretionary purchases, we believe more retailers will likely file for bankruptcy protection in the coming months.

(3) Number of Bankruptcies in US Retail Sector (2010 – YTD 2023)

Source: S&P Global Press Releases*

Capital Market Activity

As macroeconomic factors begin to change in 2023, potential investors can become increasingly interested in debt capital markets. In Q1 2023, there was an increase in issuance in the US leveraged loan and high-yield bond markets, primarily because

  1. Many issuers wanted to lock in rates due to concerns that interest rates will continue to rise in the short term.
  2. Issuers wanted to leverage the positive market sentiment based on the occasional optimistic market and economic reports.

The value of debt-raising activity in the Americas increased by 70.6% to USD38.9 billion in Q1 2023, compared with USD22.8 billion in Q4 2022, primarily driven by the consumer staples and discretionary segments.

On the other hand, banks have become increasingly cautious in committing to M&A and leveraged buyout (LBO) financing in 2023, following their inability to sell and offload debt from many high-profile LBOs in 2022. Although the Fed is working to contain systematic risk after the collapse of Silicon Valley Bank, Signature Bank, and Silvergate in March 2023, there are still some concerns related to the US debt market.

(4) DCM Quarterly Deal Volume (USD billion)

Source: Refinitiv Deals Intelligence

The value of equity-raising activities in the Americas decreased by 42.1% to USD3.3 billion in Q1 2023 vs. USD5.7 billion in Q4 2022. The decline was primarily due to a significant contraction in equity-raising activities in the consumer discretionary segment. The IPO market continued to be almost closed for the consumer and retail sector for the fifth quarter in a row and there was an overwhelming consensus that prospective IPO candidates have to wait until the market achieves stability for a sustained period. While capital market participants are trying to gauge the intensity of the potential economic recession, we believe the market will likely remain vulnerable and volatile as capital remains scarce and expensive in 2023.

(4) ECM Quarterly Deal Value (USD billion)

Source: Refinitiv Deals Intelligence

The Road Ahead

Since March 2022, the Fed has increased the interest rate by 475 basis points, from a near-zero level to the 4.75–5.00%. Players in the financial markets are anticipating another 25-basis-point increase at the Fed's policy meeting scheduled in the first week of May. While the threat of a recession may not be strong, it is going to be a slow year for the consumer and retail sector. The labor market is expected to cool down and retail sales are likely to remain weak. Retail and food service sales in the US are forecast to grow by only 0.5% in 2023, compared with 8.1% in 2022. If the Fed continues to increase the interest rate, prices of consumer goods will decrease further and should bring inflation closer to the Fed’s long-term target of 2%.

The expiration of SNAP benefits is expected to make lower-income group consumers more cautious about spending on discretionary items. This year will be especially tough for brands that rely on consumers’ discretionary spending; however, discount and value-focused retailers, such as Walmart and Dollar General, are expected to benefit.

Fitch expects consumer spending growth to slow down in 2023, as the Fed’s aggressive tightening cycle can increasingly weigh on job growth and consumer demand. As such, we believe consumer-oriented sub-sectors, such as retail and leisure / entertainment, could witness more defaults in 2023. Furthermore, we see some risk of the Fed adopting an aggressive-than-expected interest rate policy, possibly in response to sustained wage pressures or a reversal in the disinflationary trends in recent months, which pose risks to consumer spending in 2023.

The labor market is expected to considerably loosen up in the second quarter, as companies start responding to slowing demand due to increasing borrowing costs. Tightening credit conditions can make it harder for small businesses (such as restaurants and bars) and households to access funding. The continued inflationary pressure on the consumer and retail sector can gradually rebalance the supply and demand in the labor market and dampen wage and price pressures, and drive a limited increase in the unemployment rate.

While syndicated M&A and LBO activities have stalled, opportunistic M&A is expected to rise, backed by private equity firms with significant dry powder. Concerns over profitability and rising costs of debt will act as near-term headwinds for many companies. These firms are expected to remain opportunistic amid valuation resets in the public and private markets.

The debt market, which has started showing a positive trend, could again struggle in the near term, as economic headwinds will likely keep issuers on the sidelines. Investors are likely to be selective on pricing / valuation until the confidence in equity market valuations returns to the pre-pandemic level.

Amid the inflationary pressures and fears of a recession, M&A and capital market activities in the consumer and retail sector will depend on when the Fed stops interest rate hikes because when it does, we believe, it will drive stability and certainty, leading to an upswing in the sector.

*Due to a change in the Global Industry Classification Standard in March 2023, as well as a methodology change to exclude distributors, results starting with the April 2023 publication will not match prior publications.

Vivek Sharma
Vice President, Corporate and Investment Banking LoB Posts
Saurabh Aggarwal
Senior Manager, Corporate and Investment Banking LoB Posts
Gulzar Siraj
Senior Manager, Corporate and Investment Banking LoB Posts

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