Fitch Ratings has revised its outlook for the U.S. retail and consumer products sectors, downgrading it to Deteriorating from Neutral for 2025. This decision is driven largely by anticipated spending impacts from newly imposed tariffs, a moderation in consumer sentiment, and rising retail costs. Although many retailers and consumer product companies under Fitch’s ratings have some cushion for stability, those exposed to discretionary categories may see rating challenges.
Companies with limited rating headroom, particularly those facing operational difficulties and specific financial decisions—like mergers and acquisitions—are at heightened risk. The decline in consumer sentiment is expected to have a noticeable impact on retail sales, particularly within the discretionary sectors such as apparel, home goods, and electronics. The introduction of new tariffs is set to raise consumer prices, potentially leading to decreased retail volumes.
While some cost increases may be absorbed by retailers and manufacturers, this approach may negatively affect profit margins. Typically, higher-rated retailers and manufacturers are better positioned to manage short-term fluctuations, thanks to their strong vendor and consumer relationships, robust cash reserves, and diverse strategic options for navigating challenges and future investments. In contrast, weaker companies, already facing issues with market share and operational difficulties, could struggle further, potentially consolidating market share among the stronger competitors.
Consumer spending remained resilient through 2024, bolstered by low unemployment and some wage growth, despite significant inflation. However, persistent inflation and dwindling savings are jeopardizing consumer health, particularly for middle- and lower-income households. Fitch anticipates that consumer purchasing power will further decline as consumer sentiment continues to falter and interest rates remain high.
By 2025, Fitch predicts that retail sales (excluding automotive and gas) and consumer products revenue could be flat to slightly negative, particularly within discretionary items, while staples may perform better. This is a significant shift from Fitch’s earlier predictions for modest growth in these categories. The tariffs, affecting many products manufactured overseas, will widen tariff exposure in the retail market, though food retail may be less impacted due to higher domestic sourcing.
While value-oriented retailers might gain competitively due to lower prices, they may also see volume declines in discretionary categories, particularly among lower-income consumers. In the long run, some retailers might find opportunities for growth through effective operations and market adjustments, although most of Fitch’s focus remains on U.S. markets. A few companies with significant international operations may experience reduced impacts from tariff enforcement.