The Iran war could soon mean higher prices on store shelves for consumers.
Iran’s effective closure of the Strait of Hormuz passage has significantly disrupted the global supply chain, affecting goods from fertilizers to metals to gas and fuel. The passage is a critical point, funneling tens of millions of barrels of oil daily along with other exports as one of the world’s most important shipping routes.
And the tensions with the strait are showing no signs of changing. On Thursday, Iran’s new supreme leader, Mojtaba Khamenei, said the closure should be continued as a “tool to pressure the enemy” in his first public statement since being appointed. Defense Secretary Pete Hegseth on Friday downplayed concerns about the strait, saying at a Pentagon press briefing, “We have been dealing with it, and don’t need to worry about it.”
Though it’s still early to determine what the exact impact on retail may be, Coresight Research President Max Kahn said the disruption to the global supply chain may already be pushing the industry near its limits.
“Retailers have become much better at building flexibility in their supply chains, and that got accelerated a lot last year with tariffs,” Kahn told CNBC. “The bigger worry is if this continues to last.”
Prices at the grocery store may be hit first, Kahn said, since food items tend to have less flexible supply chains, while apparel retailers can likely afford to slow production and bulk it up again later without disrupting inventory.
As retailers navigate the geopolitical landscape, Kahn said they’ll likely be facing two factors: input cost pressure and demand pressure.
“Retailers are going to have to play that,” he said. “One of the reasons how retail stayed resilient in 2022 and 2023 was they were able to raise prices, and that raising of prices sort of offset some weakening in units, so our sense would be that that could be very similar this time around.”
Retail hasn’t just been affected by shipping changes, either. Shipments of garments for Zara owner Inditex, along with other clothing retailers, were stranded last week as flights in the Middle East were canceled, according to Reuters.
Kahn said retailers’ potential struggles could have broader economic implications, too. Though companies have learned to be somewhat adaptable to the changing macroeconomic environment over the past few years, he noted that the overall growth for retail has been “so-so,” and while the industry continues to navigate the war, that uncertainty will also begin to affect GDP growth.
Still, as the chaos persists, Kahn said he expects value retailers like Walmart and Kroger and dollar stores like Dollar General and Dollar Tree to have an easier time because shoppers will be looking for more value-priced items.
In addition to impacting the global supply chain, consumer confidence is already taking a hit from the war. Though Wednesday’s consumer price index came in as expected, industry experts have said higher gas prices will likely affect discretionary spending as consumers pull back to cover costs at the pump, affecting the retailers that may already be reeling from supply chain impacts.
In a Sunday note, Wolfe Research analysts wrote that discretionary-heavy retailers are likely to be among the largest losers from the war.
“Retailers with a bigger discretionary mix, like Five Below and Target, also face headwinds as consumer confidence comes under pressure and they mix down,” they wrote.
Still, some retailers may have other factors helping them out of the war fallout. Retailers that appeal to higher-income consumers or who have specialty offerings, like Costco, may be able to escape the squeeze.
“Costco should benefit as their price leadership on gas becomes more important, and consumers are more willing to wait 20+ minutes for gas,” the analysts added.
UBS analysts wrote in a Monday note that the war is adding uncertainty to an already weakened consumer dealing with the changing macroenvironment and the K-shaped economy, where those at the high end continue to do well while lower-income consumers struggle.
“The rise in oil prices should add a meaningful burden to household budgets and intensify strains already visible across the consumer landscape,” they wrote.
While some retailers like Ulta and Costco have historically seen same store sales increase alongside oil inflation, companies that serve lower-income shoppers like Ollie’s Bargain Outlet and Dollar General are likely to see sales decrease as consumers face budget restraints, the UBS analysts said.
“All in, the rise in oil prices could create a layered and persistent drag on consumer health,” they wrote. “It increases fixed household expenditures, puts upward pressure on grocery prices, reshapes retail traffic patterns and introduces operational challenges for retailers across multiple segments.”
