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Humans tend to like narratives to be clean. Our brains are stimulated by a smooth story that flows to a conclusion in a way that makes identifying takeaways possible. Yet real-world experiences often show a number of things happening at the same time. Sometimes they seem to fit together, while at other times they can be difficult to fit together.
Take a look at the narratives emerging from a flurry of new economic data and news this week in retail and ecommerce:
- Retail sales are increasing year-over-year, while showing a dip in month-over-month demand
- Inflation is rising, driving prices up and consumer sentiment down.
- Ecommerce continues to grow, but overall sales are moderating.
- In-store shopping is coming back, and spending is shifting from goods to services as pandemic restrictions are lifted.
Let's see how these play out in the numbers:
Retail sales fall
Retail sales for May 2022 decreased 0.3% month-over-month, the US Department of Commerce. Year-over-year, retail sales increased by 8.1% year-over-year.
The year-over-year increase shows that sales continue to rise against a wide timeline. However, the focus for the moment is on tracking inflation's impact on consumer spending in the current moment. As a result, many reports on the results are zeroing in on the month-over-month dip as a sign that demand is starting to fall as prices rise. Given that the retail sales data followed on the heels of last week’s report of the Consumer Price Index showed 40-year-high inflation, it makes sense. Add to this that it was the first monthly decrease in five months and that the decrease was unexpected to analysts, Reuters reported.
It’s also important to pay attention to where the increases in spending occurred.
According to a National Retail Federation calculation that excludes sales at automobile dealers, gas stations and restaurants to focus on core retail categories like apparel, beauty and home goods, May’s retail sales were unchanged from a month before, while rising 6.7% year-over-year. A few of the largest changes took place in furniture stores (up .9% month-over-month), grocery stores (up 1.2% month-over-month) and electronics stores (down 1.3% month-over-month).
“There have been swings across sectors that reflect the impact of both higher prices and supply chain disturbances, and higher interest rates are expected to curb spending going forward," NRF Chief Economist Jack Kleinhenz said, in a statement. “As inflation continues, consumers are looking for ways to stretch their dollars by saving less, tapping into savings accumulated during the pandemic and increasing their use of credit.”
This all proved to be a prelude to an announcement Wednesday afternoon by the Federal Reserve that it will raise its benchmark interest rate by 0.75%, the highest increase since 1994.
While the interest rates functionally make borrowing more expensive, the desired impact of the increase is to cool off the economy. In turn, that has impacts on other parts of the economic picture – notably, the demand that is reflected in retail spending. A decline in retail sales could be welcome news at the Fed, even if it’s not for brands and retailers.
It's unlikely to be the last move of this kind. In its note announcing the rate increase, the Fed said that additional action is likely.
Ecommerce and in-store: Different trajectories
MasterCard SpendingPulse data for May. (Courtesy photo)
Meanwhile, according to data from Mastercard SpendingPulse, total US retail sales excluding automotive increased 10.5% year-over-year in May, and 21.4% compared to the pre-pandemic month of May 2019.
The data showed that in-store sales were a key driver of this uptick, as they rose 13.7% compared to pre-pandemic levels. The SpendingPulse is based on aggregate spending data in the company’s payments network.
Ecommerce, meanwhile, had more modest year-over-year growth of 2.2%. On the Department of Commerce’s measure of ecommerce and other nonstores sales, sales were down 1% month over month seasonally adjusted, and rose 7% year-over-year.
Yet it can help to take a look at the bigger picture. MasterCard’s data showed ecommerce growth of 99.1% when compared to May of 2019. It’s another data point that reinforces how ecommerce spending is moderating, but on the whole rose dramatically over the last two years.
Ecommerce to reach $1 trillion in 2022
It’s against that backdrop that Insider Intelligence released results of a retail forecast showing that US ecommerce spending is on pace to cross the $1 trillion mark this year. Revising its forecast down slightly from Q1, total spending in ecommerce for 2022 is expected to be $1.05 trillion.
The Insider Intelligence forecast shows slowing growth. The current forecast expects a year-over-year increase of 9.4% over last year, with ecommerce share making up 15% of total US retail sales. That would be a slight increase from 14.6%, where it has been for the last two years.
This comes as Insider Intelligence is forecasting overall retail sales to rise $6.988 trillion, up from the $6.796 trillion in the Q1 forecast. That would bring 6.4% year-over-year growth. Again, however, the main driver is a macro force: Inflation and higher fuel prices are driving sales up.
Within this data, all of the narratives listed at the outset are represented. The points are beginning to connect. Inflation is starting to have an impact on retail sales, while in-person shopping appears to be ticking up as ecommerce sales flatten out following a period of historic growth. Even if they seem to conflict at times, all of the points can be true at the same time. To be sure, this is just one point of the story arc.There are plenty of questions going forward. For instance:
- How much further action will the Fed take?
- What will the on-the-ground impacts of the Fed’s actions look like?
- Will in-store sales continue to rise, or is this a correction period?
The answers will continue to shape the narrative.
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.