ANALYSIS
Consumers are cutting back on nongrocery spending
dramatically in 2020 , 2021 and 2022 , and by the end of 2021 , the two-year growth rate in retail sales was almost three times its pre-crisis average . Strong nominal sales growth in 2022 compounded those gains , with Coresight estimating that an additional $ 700 billion in retail spend was embedded in 2022 .
The pace of growth could slow in the months ahead , however , if consumers shift more of their spending away from goods and back to services . During the pandemic , the long-term trend toward spending on services was interrupted by restrictions on social distancing and fears of exposure to Covid-19 , and the bounce back in spending on services in 2022 was not sufficient to revert to the pre-pandemic
course .
This implies the bounce is still to come , Coresight said , and is one of the reasons the firm is predicting a lackluster next few months for retail sales growth . “ We characterize the mix of positives and negatives as a kind of consumer [ game of ] Chutes and Ladders ,” Coresight stated in its report . “ US consumers have been advancing on ‘ ladders ’ such as wage hikes and low unemployment , only to slide down due to factors such as interest-rate hikes and a slowing housing market .”
Two other ‘ ladders ’ mentioned in the report are the labor force participation rate – 63.6 percent as of July , up by 0.4 percentage points from the year prior – and average hourly wages , which experienced a 4.2 percent year-over-year increase , to $ 35.58 .
While those numbers suggest that consumers have more money to spend , the ‘ chutes ’, which also include depleted personal savings , paint a more negative picture .
We are likely to see drags on consumer spending in the near term .
How are consumers reacting ? Consumers have now consumed 70 percent of their excess pandemic-era savings , with those in the lowest-income quartile doing so faster than others , so it ’ s not surprising that lower- to middleincome consumers have been more affected than others by the shifts in the economic landscape .
“ High inflation in necessities has been hitting low- and moderate-income shoppers the most . However , different groups are feeling , or will feel , negative impacts from other factors ,” Coresight ’ s Mercer told Inside Retail .
“ Interest-rate rises are impacting those refinancing or obtaining new mortgages . Going forward , student loan repayments will impact college graduates , predominantly consumers aged in their late-20s , 30s and 40s ( largely Millennials ).”
Mercer noted that 30.2 percent of federal student debt is held by those aged 25-34 , and 38.6 percent is held by those aged 35-49 .
Meanwhile , housing market weakness has hit the ‘ wealth effect ’ for homeowners , limiting discretionary spending and hitting homeimprovement retailers particularly hard .
Rather than a complete popping of the retail balloon that expanded during the past three years , however , Coresight is predicting a gentle deflation .
“ We are likely to see drags on consumer spending in the near term from recent gasoline price rises and interest hikes , and from forthcoming student loan repayments capturing an average $ 200 per month per payee ,” Mercer said . “ However , from July 2024 , monthly federal student loan payments will be cut from 10 percent to 5 percent of qualifying income , easing the pressure from student debt .”
Inflation is now much lower than in the recent past , but it remains elevated in certain categories , such as personal care , home care and some food categories , and Mercer thinks these need to come down before the benefits will flow through to consumer behavior .
Coresight data shows that 52.2 percent of consumers who had observed inflation in June reported seeking out promotions and coupons for grocery shopping , and 41.6 percent reported switching to cheaper brands , with 38.6 percent buying fewer items .
In non-grocery categories , 48 percent of consumers who had observed inflation reported buying fewer items , compared with 45.2 percent who reported seeking out promotions and coupons .
While spending was up 29.7 percent in furniture and homewares , 22.1 percent in clothing and footwear and 70.1 percent in recreational goods and vehicles between January and May this year , compared with the same period in 2019 , much of that growth can be attributed to higher prices . Real year-onyear retail sales growth has fluctuated between positive and negative territory over the past 18 months .
Looking ahead With this mix of factors , Coresight is projecting lowsingle-digit nominal retail sales growth in the 2023 holiday quarter , thanks to the steady decline in inflation , a favorable holiday calendar and reduced retail inventories .
When it comes to surviving and thriving in the current economic environment , there is no singular path to success .
“ True long-term resilience is built on strong retail brands that maintain a connection and relevance to consumers ,” Mercer advised . “ Whether cutting prices , cutting costs ( and where cost-cuts materialize ), or neither best serves a retailer depends on its proposition and market position , and how those intersect with price cuts or cost cuts .”
September 2023 www . insideretail . us 31