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Welcome to a new week. For many brands and retailers, it’s a slower time in earnings season and professional events are mostly on hold amid the busy holiday shopping season. But it’s a critical week for the economy that will say a lot about how we are finishing 2022, and prospects for 2023. Three areas that are of particular interest for the consumer economy are set to see new data released: Inflation, interest rates and retail sales (aka consumer demand). Here’s a look at what the past week’s data may tell us about what we're about to see this week, and the schedule:
Prelude: Last week’s data
All eyes are on inflation, the Fed’s efforts to bring it down and what those could mean for the overall growth trajectory of the economy. Heading into this week’s release of the Consumer Price Index for November, last week offered a mixed picture of inflation.
The Producer Price Index, which measures wholesale prices before they reach retail, rose 0.3% in November, equaling the monthly increases for September and October. This came in higher than expected, according to CNBC. So, it was taken by Wall Street as a potential sign that the cooling of inflation observed in October may not be as sticky as thought. However, the index’s annual increase continued to cool off to 7.4% – well below the March peak of 11.7%. That indicates there may still be room for a slowdown of the sort observed in last month’s CPI. Note that the Producer Price Index tends to be more forward looking, so the CPI and PPI is not an exact comparison.
The Digital Price Index from Adobe showed a big decline as it entered firmly into deflation with the steepest year-over-year drop in 31 months of 1.9%. While this was driven by holiday discounts in areas like electronics, toys and sporting goods, Adobe noted that cooling of prices and pet products could be an indicator of more slowing in the sorts of broader categories that apply widely across the economy in the Consumer Price Index.
Consumer sentiment ticked back up to start December, the University of Michigan reported. The 4% gain was enough to pull back decreases observed in November, but remains low by historical standards. “Throughout the survey, concerns over high prices—which remain high relative to just prior to this current inflationary episode—have eased modestly,” UMich Survey of Consumers Joanne Hsu reported. Year-ahead expectations for inflation, which are followed by the Federal Reserve, also fell from 4.9% to 4.6%, which is the lowest reading in 16 months.
Consumer Price Index:The widely-watched inflation rate for November came down to 7.7% in November, which was its first time below 8% in months. So the question will be whether that cooling can continue this month. Keep in mind that comparisons are starting to lap the period in 2021 when inflation began to rise, meaning we are beginning to view annual rates not from a low baseline, but from one of elevated inflation. A look at the two-year rate increase might tell a story of still-elevated inflation, as it did last month. (Dec. 13, 8:30 a.m.)
Fed rate decision: The Federal Reserve’s Open Markets Committee will deliver its latest verdict on whether and by how much to raise interest rates. Fed Chair Jerome Powell has already indicated that another rate hike is in the works, but the question here is whether the increase will be lower than the series of 0.75% jumps over the last four meetings. Powell has said the committee may be open to slowing the pace, but it will depend on data like this week’s Consumer Price Index. Whatever the number, look for Powell to continue discussing how long the central bank will have to keep hiking interest rates, which could bring a more sustained period of hikes to cool demand that can do just as much to slow the economy cumulatively as a high single meeting hike. (Dec. 14, 2 p.m.)
US retail sales: A snapshot of early holiday season results and consumer demand as a whole arrives when the US Commerce Department reports retail sales for November. This will include sales for the Black Friday-Cyber Monday period, so should provide some indication of how much lift these shopping days delivered this year. Two competing forces will be present: Continuing inflation that is driving prices of essentials up, and heavy discounting for holiday sales that are pushing prices of discretionary items down. But categories beyond core retail could continue to have an impact. Bank of America Research forecasts a decline of 0.9% in headline retail sales, driven by a decline in new auto purchases. (Dec. 15, 8:30 a.m.)
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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.