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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
On average, customers spend $59 more than the value of their gift card, Fiserv found.
In retail, sales are often measured in goods, whether they are purchased for ourselves or someone else. There are plenty of strategies that brands and retailers use to increase those sales, whether it is marketing, loyalty programs or how that item is presented.
In most cases, these are two different parts of the equation for retailers: The product that is bought and the strategies that lead to the purchase.
That’s what makes the gift card unique.
It is an item you can buy, with a section in the store all its own. Eventually, it leads to the purchase of other goods, so the gift card is leads to a direct sale. Yet it’s also a means to build a retail brand and create incentives that both introduce customers to a store and keep them coming back.
That’s a key takeaway from the 20th Annual U.S. Prepaid Consumer Insights Study from fintech and payments company Fiserv.
At this point, the gift card feels like a staple of the shopping experience. But it is only about 30 years old. In 1994, Blockbuster Video pioneered the sale of cards for gifted purchases directly as a means to combat fraud in paper gift certificates. Since then, they’ve proven to have a multitude of uses that stretch beyond the holidays.
Starbucks and Amazon gift cards are commonly distributed as prizes at team-building events and as pick-me-ups by friends showing they care. In 2022, 60% of consumers said they received a gift card from an employer, according to the Fiserv report. That was a big increase from 32% in 2019. People appreciate the gesture. The survey found that 85% of employees think that gift cards from an employer make for appropriate incentives.
For people looking to show generosity, gift cards can also be a means to stretch dollars. At a time of high inflation, people are looking for deals with their discretionary purchases. Gift card promotions that offer discounts and bonuses are proving particularly popular, the study found. Two-thirds of consumers said promotions can influence them to purchase more, while more than half of consumers took advantage of such an offer in 2022.
Yet the more difficult consumer environment is also having an impact on overall gift card sales. In 2022, the growth of gift card purchases slowed.
“Overall, 56% of U.S. consumers purchased more gift cards in 2022 compared to 2021,” said Tom Niedbalski, VP of gift solutions at Fiserv. “This was a decline from the 73% of consumers who said they bought more gift cards in 2021 than they did in 2020.”
Inflation and less discretionary income were the driving factors for consumers who said they bought fewer gift cards during 2022, as 35% of consumers said inflation was the reason they were purchasing fewer cards.
It's important for brands and retailers to understand why consumers buy gift cards. But it's just as crucial to understand where they can fit in retail strategy. Beyond sales, gift cards can help drive repeat customers, and extend a brand. These tools are particularly valuable at a time when retailers are focused on profitability in a tougher consumer environment.
Fiserv explained four areas in which gift cards are of particular value for brands.The following is directly quoted from Niedbalski:
Improving cash flow and revenue. Gift cards not only drive in-store and online traffic, there is an associated “lift,” or overspend, when a gift card is converted into a sale. On average, customers spend $59 more than the value of their gift card.
Repeat customers. Retailers use gift cards to foster loyalty and customer engagement, ultimately leading to repeat customers. One way we see this play out is through promotions associated with gift card sales. For example: a consumer who buys a $100 gift card for the holidays will receive a $20 bonus card that can be used after January 1 – creating a pre-holiday sale and post-holiday transaction in the New Year.
Branded currency. A gift card places a merchant’s brand directly into the consumer’s wallet, increasing brand awareness and ensuring the merchant’s brand is with the consumer when they are looking to buy.
Year-round marketing. The gift card has grown beyond the traditional holiday season. From birthdays and graduations to anniversaries and babies, gift cards are becoming the most popular way to recognize milestones – giving retailers opportunities to run additional promotions throughout the year.