Tariff impact will be the headwind for retail in 2026, says top retail analyst Dana Telsey

Key Concepts

• Consumer Sentiment: A measure of how optimistic or pessimistic consumers are about the overall state of the economy and their personal financial situation.
• K-Shaped Economy: An economic recovery where different segments of the population or economy recover at vastly different rates. In this context, it refers to a widening gap between high-income and low-to-middle-income consumers.
• Newness and Differentiation: In retail, this refers to offering novel products and unique selling propositions to attract consumers.
• Inventories: The stock of goods that a company has on hand, ready for sale.
• Tariff Impact: The effect of taxes imposed on imported goods, which can increase costs for businesses.
• Promotions: Discounts or special offers used by retailers to encourage sales.
• Value Pricing: Offering products at a price that consumers perceive as fair and beneficial, often a combination of brand and price.
• Off-Price Retailers: Retailers that sell branded merchandise at significantly lower prices than traditional retailers, often by sourcing overstocked or past-season items.

Consumer Confidence and Economic Disparities

The University of Michigan consumer confidence numbers, released three weeks before Black Friday, are not encouraging, indicating a general lack of optimism. This sentiment is particularly concerning for the lower to middle-income consumer. The current economic landscape is described as a "K-shaped economy," which is widening the gap between different income groups. While the upper middle and luxury consumer segments are showing resilience and continuing to spend on "newness and differentiation," there is a clear need for improvement in the spending power of the lower to middle-income demographic.

Inventory Management and Holiday Season Outlook

Despite the uncertain consumer sentiment, overall inventory levels for companies appear to be in good shape. Some companies have strategically brought in inventory earlier to mitigate potential "tariff impacts," which are expected to be a headwind in the first half of 2026 due to higher costs.

Regarding the holiday season, which has one fewer shopping day this year, there is no indication of promotions "going off the rails." Even with Black Friday approaching and Amazon Prime Day in October having been solid but not exceptional, retailers are not seeing an aggressive increase in promotional activity. This suggests a more measured approach to sales events.

The Definition and Winners of "Value"

The concept of "value" is crucial, especially for the lower-income consumer who is focusing on necessities and seeking value pricing. "Value" is defined by a combination of brand and price.

The primary beneficiaries and destinations for consumers seeking value are identified as:

• Off-price retailers: These retailers are well-positioned to capture consumers looking for branded goods at lower prices.
• Walmart: A large-scale retailer known for its everyday low prices.
• Costco: A membership-based warehouse club offering bulk items at competitive prices.

The strength of these "value players" is further evidenced by the performance of retail real estate landlords, such as Simon and Tanger, who continue to see strong leasing activity from these types of businesses.

Key Arguments and Perspectives

• Dana Telsey's Perspective: Telsey emphasizes the bifurcated nature of consumer spending, with the luxury segment remaining strong while the lower to middle-income segment is struggling. She highlights the need for an improvement in the latter's spending capacity. She also points out that while inventory levels are generally good, managing margins against rising costs due to tariffs will be a challenge in the near future.
• Evidence for Value Retailers: The continued strength in leasing for retail real estate landlords from off-price retailers, Walmart, and Costco serves as concrete evidence of their success in attracting consumers seeking value.
• Lack of Aggressive Promotions: The absence of widespread, aggressive promotions leading up to Black Friday suggests that retailers are not facing overwhelming inventory issues that necessitate drastic markdowns, or they are adopting a more strategic promotional approach.

Notable Statements

• "When you see numbers hitting the lows on consumer sentiment, there's nothing to rave about." - Dana Telsey
• "The K-shaped economy that we have is only widening at the edges." - Dana Telsey
• "Value. It is brand and price." - Dana Telsey
• "The off prices are who constitute value along with the Walmarts of the world and the Costco of the world that constitute value." - Dana Telsey

Conclusion

The retail landscape is characterized by a significant divergence in consumer spending power. While the luxury market shows resilience, the broader consumer sentiment is subdued, particularly impacting lower to middle-income households. Companies are managing inventory effectively, but future cost pressures from tariffs loom. In this environment, "value" – defined by the combination of brand and price – is the key differentiator. Off-price retailers, Walmart, and Costco are well-positioned to benefit as consumers prioritize these options for their essential purchases and seek the best perceived return on their spending. The holiday season is expected to be more measured in terms of promotions, reflecting a cautious consumer and a strategic approach by retailers.