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“What’s working for — and against — retailers heading into the holidays?” by Daphne Howland via Retail Dive

“What’s working for — and against — retailers heading into the holidays?” by Daphne Howland via Retail Dive

This shopping season isn’t likely to be like last year, or the year before, or the year before that, experts say.

Holiday shoppers in Boston’s Downtown Crossing shopping district. This season retailers will be contending with yet another new set of challenges. Holiday Shopping – Downtown Crossing” by Massachusetts Office Of Travel & Tourism is licensed under CC BY-ND 2.0

As the summer winds down, retailers are preparing for the all-important back-to-school and holiday shopping seasons. So far in 2023, despite inflation, economic uncertainty and a prioritization of spending on experiences over goods, consumers have come through pretty well for the industry. Yet, even with the first half of the year over, it’s hard to know what’s ahead.

That’s in part because recent holidays aren’t providing many clues, according to Meghann Martindale, head of retail research at Madison Marquette.

During the height of the pandemic in 2020, people stuck at home spent mostly on goods; the 2021 holiday season helped launch a year of splurging, including refreshing closets; and, in 2022, despite inflation, holiday shoppers were by and large still in the mood to spend. But this holiday isn’t likely to be like last year, or the year before, or the year before that, she said by phone.

“Last year, consumers were still kind of in the high of ‘Great, everything’s back to normal. We’re just going to spend like we don’t care,’” she said. “I don’t know that consumers will be as bullish this year.”

As the season approaches, these are some of the forces that are working both for and against retailers.

First, the good news

Inflation is down

In 2022, holiday spending rose nearly 7% year over year, but much of that was due to inflation, according to GlobalData. While this year prices have been declining at least somewhat in many categories, the cost of gas, groceries and other essentials shrank many households’ discretionary spending budgets throughout much of the first half. June’s inflation rate hit 3%, the lowest in more than two years, according to the U.S. Bureau of Labor Statistics. That was moderate enough to push up unit volume, and not just spending, in some segments.

“Consumer concern about inflation hit its lowest point since Morning Consult began tracking last year: 47% of Americans said they’re very concerned about inflation, versus 64% a year ago,” Morning Consult retail and e-commerce analyst Claire Tassin said in emailed comments last month.

Consumer sentiment is up

Even more recently, consumer confidence, which had been in the doldrums, in July rose to the highest level in two years, according to the Conference Board Consumer Confidence Index.

The University of Michigan Survey of Consumers also found that consumer sentiment rose for the second straight month “soaring 11% above June and reaching its most favorable reading since October 2021,” according to a report from Director Joanne Hsu.

The elevated sentiment could be because of good economic news in real terms. Employment remains strong, and real wages are up, now even beating inflation, according to Telsey Advisory Group analysts Dana Telsey and Joseph Feldman. Morgan Stanley analysts last week went so far as to credit “Bidenomics,” specifically White House infrastructure and manufacturing policies, for spurring GDP growth and lessening the chance of a recession.

“With a few months to go until the holiday season, the forecast is hazy, but hopeful,” Sherry Smith, general manager of global enterprise at performance marketing technology company Criteo, said by email. “Despite economic challenges, consumers will continue to make the most of every moment this holiday season, which includes getting a head start on their holiday shopping.”

A UPS strike averted

The Retail Industry Leaders Association in late July warned that an impending strike by unionized UPS workers would be “kryptonite” to supply chains just ahead of the holiday season. But a few days later, a tentative agreement was reached.

Ratification isn’t guaranteed, as Teamsters locals and rank-and-file members must approve the deal. Regardless, “it’s important for retailers and other businesses affected to recognize the ongoing nature of volatility in the supply chain space and take the necessary actions to improve their ability to sense and manage change,” Inna Kuznetsova, CEO of supply chain planning and optimization firm ToolsGroup, said by email.

Consumers want to ‘return to normal’

Top searches related to Labor Day — involving outdoor activities, patio furniture, electronics, home improvement and beer — indicate a “desire to return to normalcy” and provide an opening for retailers to re-engage with customers, according to Isaac Gerber, data and analytics lead at Captify.

That’s spilling into end-of-year shopping as well, Gerber said by email. 

“We’re seeing early indications of a strong holiday shopping season,” Gerber said. “Interest in holiday deals is already starting to build, with mid-year interest already 450% higher than the same time last year. While many things can happen in the next few months, we’re optimistic about this return to normal for retailers who count on a boost to sales during the holiday season.”

And some of the challenges

Consumers are keen to find deals

While lower inflation means more discretionary spending in consumers’ pockets, there’s some downside for retailers, Martindale said. Margins will be under pressure on two fronts — many retailers still have surpluses of inventory that will require markdowns, and consumers are expecting price tags to shrink.

Matt Pavich, senior director of strategy and innovation at Revionics, an Aptos company specializing in AI-driven pricing optimization, also said that shoppers will be on the hunt for good prices during the back-to-school period.

“In recent years, consumers have learned to navigate numerous additional channels and purchasing options while also bearing the brunt of inflation,” Pavich said by email. “As such, consumers are more savvy than ever and will definitely be looking for deals during the … season. Retailers need to be aware of this and offer great products at great value across all channels while considering some less traditional retailers as competitive threats. There is no doubt that the competitive landscape is more sophisticated and challenging than in the past and retailers need to bring their A game.”

Some retailers at risk as student loan forgiveness ends

U.S. consumers are already carrying nearly a trillion dollars in credit card debt, a record, which alone might hamper some household spending at the holidays, according to Martindale.

After the Supreme Court struck down President Biden’s student debt forgiveness program, millions of household budgets will each be out hundreds of dollars more per month, according to number-crunching from consumer data firm Earnest Analytics. That translates to a burden of 3.4% to 8.4% per month on consumer budgets, with middle-income earners impacted the most, according to Telsey Advisory Group analysts.

Those with higher market share among these borrowers — including Peloton, Ikea, Ashley, HomeGoods, Wayfair, Lowe’s, and most apparel and department stores — will especially feel the pinch as their customers divert funds to their loans, per Earnest’s report. Old Navy had the highest share at 14%, while Nordstrom’s full-price business had the lowest share at 8%.

Telsey analysts see American Eagle Outfitters, Best Buy, The Children’s Place, Dick’s Sporting Goods, Foot Locker, Gap Inc., Hibbett, Joann, Kohl’s, Macy’s, Signet Jewelers, Stitch Fix, Target, Under Armour, Victoria’s Secret and Williams-Sonoma as most at risk, and Dollar General, Dollar Tree, off-price conglomerate TJX Cos. and Walmart least at risk.

But apparel retailers will be hurt the most, according to UBS analysts, who called the end of student loan forgiveness “a big problem.” They identify American Eagle, Crocs, Foot Locker, Canada Goose, Gap Inc., Nordstrom, Nike, Under Armour and Victoria’s Secret as among the brands vulnerable to the consequences.

The ‘anti-woke mob’ is still out there

Extremist groups’ success in riling up some people around Pride month ruined many retailers’ attempts to celebrate the LGBTQ+ community, particularly Target, once an outspoken ally. The retailer, which offered some of the most extensive Pride merchandising in retail, still hasn’t commented since being forced to alter its Pride displays in some stores after protestors confronted store workers, wrecked signage, destroyed merchandise and spread falsehoods about the assortment.

The holiday season offers retailers no protection from the people and groups — mostly right-wing pundits, politicians and hate groups rallying against “wokeness” — that are fomenting such behavior, according to Alison Taylor, executive director of the Ethical Systems program at New York University’s Stern School of Business. Retailers will only invite counter-backlash, often from some of their best customers, if their response seems meant to appease extremists.

“Even if you have clarity over your long-term position, it’s clear these boycotts and campaigns can do serious short-term financial damage,” she said by email. “And handling them badly can make the damage much worse, so panicked over-correction is a bad move!”


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