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Discounts drive growth in holiday spend, but profit challenges emerge

Data from Adobe, GlobalData and Bank of America offers a look at holiday results across US ecommerce and overall retail.

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Photo by Kostiantyn Li on Unsplash

As the calendar turns to a new year, brands and retailers are reviewing holiday season results.

Data released this week from Adobe, GlobalData and Bank of America shows solid consumer activity despite a tough economy, but offers some cause for concern among retailers. In all, the busiest shopping season offers a snapshot of a consumer economy facing inflation, and returning to experiences.

Let’s take a look:

Discounts drive ecommerce growth

US online sales grew 3.5% year-over-year for the 2022 holiday season, netting $211.7 billion from Nov. 1-Dec. 31, according to Adobe Analytics data.

Coupled with Cyber Week growth of 4% year-over-year, 38 days surpassed $3 billion in spend, which was on par with 2021, Adobe found. Whether shopping for a gift or themselves, people were particularly keen on Apple Airpods, Roku devices, air fryers and vacuums.

In particular, toys saw a huge spike in demand, as online sales in the hot holiday category grew 206% compared to October, with consumers clicking “buy” for Legos, Hot Wheels and Paw Patrol. Video game sales grew 115%, as Nintendo Switch consoles and the game God of War proved popular.

Adobe also noted strong growth in watches (+108%), baby toys (+101%), gift cards, cosmetics (+90%) and outdoor grills (+86%). Gift cards also proved popular, netting 98% growth.

But beyond individual products, it was discounts that drove sales this year. Toys were propelled to the top category by peak discounts of 34%, well above the 19% reported in 2021. Meanwhile, electronics price breaks reached 25%, up from 8% the prior year. The elevated discounts were consistent, as apparel, appliances and furniture were all well above last year’s levels, as well.

Consumers were eager for deals amid inflation, and retailers who faced an inventory glut as a result of supply chain imbalance earlier in the year were all too happy to oblige.

“At a time when consumers were dealing with elevated prices in areas such as food, gas, and rent, holiday discounts were strong enough to sustain discretionary spending through the entire season,” said Vivek Pandya, lead analyst, Adobe Digital Insights. “The big deals drew in consumers and drove volume, helping retailers who were challenged with oversupply issues, particularly in categories such as apparel, electronics, and toys.”

Problems beyond the headlines

Inflation was a driving factor in spending across the economy over the holiday season.

For US retailers across channels, holiday-related spend grew 6.73% over 2021, according to an analysis from GlobalData Managing Director Neil Saunders. Growth was equally notable across Thanksgiving, Cyber Week and Christmas.

There’s reason to find cheer here. This growth arrived amid a tough economy, and is the second report to come in line with the National Retail Federation’s forecast 6-8% growth. Moreover, Saunders said, the results came in a year with tough comparisons, as 2021 saw massive 12.84% growth in holiday spend.

But look closer at those two years, and challenges start to appear. In 2021, consumers had stimulus checks in hand, they were buying goods instead of traveling and they could see light at the end of the pandemic lockdown tunnel.

2022 was different. Consumers were facing high inflation, and they were feeling glum. GlobalData found that sentiment was at a 10-year low to begin the holiday season, and 52.7% of consumers had negative views about the economy by the end.

In the results, the difference was on view in order volume numbers. While spending increased, volumes were down 1.37% for the holiday season, GlobalData found. Majorities of consumers surveyed by the firm set budgets to limit spending, and sought out discounts. Another 47% spent less per person. They also bought for fewer people – 4.1 this year, compared to 5.8 last year.

Those bigger-ticket splurges and matching sets for the whole family are where retailers bring in the holiday hauls that sustain them all year. Combine the shopper caution with rising operational costs, and it made profits more difficult to attain.

“The combination of more muted volume demand, lower margins, and higher costs of fulfillment point to an environment where bottom lines have come under increasing pressure,” Saunders wrote. “In short, the holiday headline numbers look solid, but the underlying numbers are a lot more problematic.”

Going back out

It’s also worth considering the shift following reopening from COVID restrictions played a role.

Bank of America reported that per-household spending on holiday items via its cards was down 3.4% year-over-year, even as overall retail sales rose 1.2% for the season. This year, spending at restaurants and entertainment appears to have overtaken the demand for furniture and clothing, economists wrote.

“The disproportionate weakness of spending on holiday items, compared to total card spending, is consistent with the ongoing rotation of consumer spending back to services,” BofA economists Aditya Bhave and Shruti Mishra. “Indeed, the share of services in total card spending has been outpacing 2021 levels for the last several months, and even caught up to 2019 levels in late December.”

To these economists, it suggests that the pandemic’s impacts on household choices and the economy “continue to slowly fade.” That only seems poised to continue in 2023, even as inflation and interest rates will keep creating their own challenges.

Ecommerce trends to watch

Here are a few more ecommerce trends from the season, as noted by Adobe:

Mobile shopping: On Christmas Day, 61% of online sales came through smartphones. The record was the high point in a holiday season when 47% of sales were made via mobile shopping. “For years, retailers have struggled to move the needle on mobile shopping, and the strong growth this season shows that investments made in improving the experience are beginning to pay off,” Adobe wrote.

Marketing: Paid search was the biggest driver of sales across marketing channels, as 29% of online sales were attributed to this approach. Other drivers were direct web visits (19%), organic search (17%), affiliates/partners (16%), and email (15%). Revenue attributable to social media was 3% of total sales, but has grown 24% in share year-over-year.

Buy Now, Pay Later: The installment payments for the ecommece generation figured to continue to be an option this year, as people sought to stretch dollars. Adobe’s final tally showed mixed results: Orders were up 4% over 2021, while revenue was down 2% as the method is being used for smaller carts.

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