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Throughout 2022, competing energies in retail have been building: A growing desire to get back out and shop following the lifting of COVID-19 precautions, and a need to pull back in the face of higher prices and tougher economy.
They've created a complicated consumer picture this year, as people have mostly continued spending and shifted toward wardrobe updates for in-person events and travel, even as inflation stayed high.
Yet the tension is set to come to a head as the holiday shopping season gets underway in earnest with the Thanksgiving weekend events of Black Friday and Cyber Monday.
So far, forecasts indicate both factors will be in play for peak season. The question is whether one will win out.
Going out, reining in
There is intent to get out and shop. After all, holiday shopping is something of a national pastime, and the chance to hit the stores may even feel like a return to normal for some after two pandemic years. A survey from the National Retail Federation and Prosper Insight & Analytics showed that 166.3 million people in the US are planning to shop from Black Friday to Cyber Monday. That’s eight million more people than last year, and the highest estimate since the survey began 2017.
“While there is much speculation about inflation’s impact on consumer behavior, our data tells us that this Thanksgiving holiday weekend will see robust store traffic with a record number of shoppers taking advantage of value pricing,” said NRF President and CEO Matthew Shay, in a statement.
Meanwhile, inflation remains at 40-year-highs, and pandemic-era savings are starting to be depleted. This is expected to take a toll on spending. About two-thirds of people surveyed by YouGov indicated that their holiday shopping will be impacted by inflation, according to data flagged by growth marketing firm Ecommerce Intelligence.
The data that we do have on retail's most important quarter so far is also conflicted, when viewed on the surface. US retail sales for October showed a bounce to grow 1.3% after Amazon, Walmart and Target held early holiday deal events. However, earnings reports from the same three retailers sounded warning bells about a consumer pullback for the fourth quarter.
One answer may lie in a nuance that lies deeper in these reports: Spending is continuing, but it is more tilted toward food, gas and essentials as prices continue to be elevated. While Walmart was lifted by groceries sales, spending on discretionary items like electronics and sporting goods and hobby items, as well as sales of general merchandise at Target and Walmart, are down markedly. That's not a good sign for holiday shopping, which is built around the kinds of nice-to-have gift items and bigger household purchases that leave retailers flush.
“Consumers have already started cutting back on non-essential shopping, and opting for the cheaper supermarkets,” said Ecommerce Intelligence Founder Ryan Turner. “Households are now saving more and borrowing less, painting quite a bleak picture for retailers this Christmas."
The pullback may also be less talked about in public forums, but digital tools can tell a story of how people are making things work, out of view. Using Google and its own analytical tools, Ecommerce Intelligence found that there is a 900% increase in people searching for “How to save money this Christmas.” To Turner, the massive increase shows that shoppers are “in a completely different landscape compared to Christmas 2021.”
This could change the look and feel of the season beyond the Black Friday kickoff, as well. Festive Christmas markets are just as subject to supply and demand as any part of the economy, and may have to scale back.
"The harsh truth is that with limited disposable income it is going to be hard for families to justify going to Christmas markets this year. There have already been some cancellations and I wouldn't be surprised to see the markets that do go ahead scaled down in size," Turner said. “Even vendors themselves are struggling to find the money to rent stalls. This might mean that vendors will have to increase the prices of products to meet rising energy and rental costs.”
However, this picture may prove conducive for online shopping, especially in an environment that is expected to be more “promotional” than ever, as many retail executives have said.
“Many online retailers are doubling down on deals and promotions in Q4 so online shoppers will be spoiled for choice in many markets,” Turner said. “Ecommerce will likely be the obvious place to get the biggest savings. We are expecting to see a period of almost non-stop sales starting just before Black Friday weekend, then running through to the end of the year – a lot of these sales will be online only.”
They may also turn to credit cards and digital options like Buy Now Pay Later (BNPL) to fund gift purchases. Some ecommerce sites are offering multiple different options to split payments into 2023, Turner said. In the YouGov survey, 47% of respondents who said inflation will impact their holiday spending indicated that BNPL solutions will be essential or at least nice to have.
Season of sacrifice
An appropriate way to view the season may be as one of sacrifice. That’s how shopping rewards app Shopkick framed it in a survey of over 10,000 American consumers between November 3 - November 7, 2022. According to the results, 60% of consumers are making holiday-specific sacrifices. When asked how they plan to hold back, the majority said they plan to reduce the overall number of gifts they purchase. Others are planning to curtail travel to see friends and family, holiday decorations or hosting holiday gatherings.
During a three-year period that has been marked by economic phenomena of all kinds, the holiday season could be the time when reopening more firmly transitions to austerity. The Shopkick survey found that 61% of consumers plan to keep their budget restricted even if inflation improves. Meanwhile 55% of consumers anticipate that economic challenges will worsen over the next three months.
“Increasing prices and inflation do not appear to be going away, and consumers are tightening their belts to cope,” said Brittany Billings, EVP of marketing and strategic markets at Shopkick, in a statement. “With consumers making trade-offs this year, it is more important than ever that brands and retailers stay on top of sales and discounts for deal days and beyond as price will be the driving force behind consumer’s decision-making this year.”
Given the cultural importance of the holidays, it's doubtful that seasonal pending will go away all together. But given thethe need to hold back may outweigh the want to spend. Brands and retailers must show that they're willing to give a little to meet that sacrifice, even if they could use a little help to make it through this most crucial quarter themselves.
Trending in Economy
The retailer's marketplace is expanding quickly.
When it comes to ecommerce growth, was the pandemic a blip or a new trendsetter?
As we move further from the height of COVID-related closures, it’s a question that will start to be answered through the lens of history.
So far, the narrative of ecommerce growth in the U.S. from 2019-2022 has gone like this: Ecommerce’s share of overall retail saw a huge spike at the height of the pandemic in 2020-21, when goods in general were in demand and online shopping was necessary to preserve health and safety. Experts looked out and saw a permanent exponential change in the penetration of ecommerce as a share of retail that would last beyond the pandemic. Then, in 2022, everyone went back to stores and the trendline came back to 2019 levels. Growth was no longer exponential. There was still growth, but it was not happening as fast as during the pandemic period.
With this in mind, it’s worth pointing out that 2023 is the first year that there likely won’t be a pandemic-influenced swing to influence ecommerce growth. It is also a year where demand has suffered challenges amid inflation and interest rate hikes.
So as we seek to determine the importance of ecommerce to overall retail, it’s worth it to continue taking a close look at what growth trends retailers are seeing now, whether ecommerce is remaining resilient amid consumer pullback and how retailers are preparing for the future.
The latest example arrived this week from Macy’s. It’s a fitting one for the times. Overall, Macy’s is seeing a slowdown as consumers pull back on discretionary purchases, with sales declining 7% in the first quarter versus the same quarter of 2022. Digital sales were down 8%.
Macy’s is particularly susceptible to the macroeconomic headwinds that many brands and retailers are facing, as spending among the middle-income consumers it counts as a primary customer base is particularly softening, said GlobalData Managing Director Neil Saunders.
But while ecommerce is slowing overall, the importance it gained to Macy’s business during the pandemic is remaining in place.
In 2019, ecommerce made up 25% of Macy’s revenue, CEO Jeff Gennette told analysts on the company’s earnings call. That jumped to a high of 44% in 2020. By 2022, digital reached 33% of sales after the pandemic boom. In the first quarter of 2023, it remained at 33%. So, while the trend line dipped after shoppers returned to stores, ecommerce share still settled in at a higher post-lockdown point than it was before the pandemic.
This came in a quarter in which traffic was “relatively good” across both online and in-store, Gennette said. It was “flattish” online, and slightly up in stores.
“We do expect that this is the reset year with the penetration between them,” Gennette said. “But we do expect more aggressive growth in digital in the future versus stores as we think about '24 and beyond. And that's going to be foisted by a lot of ideas and strategies.
Over the last year, the retailer has made investments in boosting ecommerce, even as shoppers returned to stores. In a bid to boost the assortment of goods available online, Macy’s launched a marketplace in September 2022 that welcomes goods from third-party sellers.
The marketplace had an “outstanding” first quarter, said Macy’s President Tony Spring, who is poised to succeed Gennette as CEO next year. Gross merchandise value increased over 50% when compared to the fourth quarter of 2022, while the average order value and units per order for marketplace customers was 50% above those not shopping at the marketplace.
Macy’s is continuing to build the marketplace even as it racks up sales. The retailer added 450 brands, ending the quarter with 950 brands.
This is helping to draw in new customers, as well as younger existing customers who are buying more items, resulting in increased basket size.
“We're very excited as to how marketplace is really attracting the Gen Z customer, particularly in categories where it was not economically feasible for us to carry in the past,” Gennette said.
In the end, Gennette said a strong digital and social presence is key to attracting younger consumers. That's a different type of shopper than other age groups.
“We know the younger customer starts first online,” Gennette said. That behavior will still be in place as the generation gets older, and gains more buying power in the process.
Going forward, Macy’s is seeking to expand the model to other retail banners in its portfolio. Bloomingdale’s will open a marketplace in the early fall.
The Macy’s ecommerce trajectory isn’t that different from the wider U.S. ecommerce narrative detailed above. With one quarter of 2023 data, there is evidence that ecommerce share settled out at a higher point after the pandemic than where it started before COVID arrived. There is flattening now, but the retailer is taking it not as a sign of a slowdown, or a signal to change course. Rather, it sees changing consumer behavior as a reason to build for the future.