Consumers Adjust Shopping Habits To New Normal

Since the COVID-19 pandemic began three years ago, the government has poured a staggering $10 trillion into the economy in a bid to keep Americans afloat until the crisis waned. Despite naysayers expecting the retail industry would flounder, it soared.

“We’re talking about $5 trillion through stimulus and another $5 trillion through monetary policy,” says Mark Mathews, VP of Research Development and Industry Analysis at the National Retail Federation. “That’s a huge amount of money coming into the economy. And while everyone was expecting retail to struggle, what we saw was the opposite.”

According to NRF research, retail sales grew by more than 7% in 2020, by 14% in 2021, and by another 7% last year. Sales lost ground in November and December of last year but then quickly rebounded in January with a 3% uptick, despite inflation continuing to increase over the same period. January’s CPI numbers logged a 0.5% increase over the prior month, higher than experts predicted, and led the 12-month inflation rate to clock in at 6.4%.

“There has definitely been a degree of tightening in terms of spending over the last three months,” Mathews says. “But while we’ve seen consumer expenditures drop, that was reversed in January, when we actually saw a big swing back upwards in terms of retail sales that grew well above the rate of inflation. The hope was that inflation was falling down and spending was slowing down, but January painted a picture of a consumer that is still continuing to spend.”

And while much of that growth can be attributed to the influx of stimulus funds doled out to consumers over the course of the pandemic, it’s also due in part to a transition from services spending to goods spending. Pre-COVID, Americans allocated about 31% of their spending on goods, but that number peaked during the pandemic to nearly 36%, an increase of $600 billion. The figure has retreated somewhat since then, but it wasn’t immediate, says Mathews.

“We’re about halfway back to pre-pandemic levels, but we’ve noticed that the consumer has also begun to spend on services,” he says. “But rather than pull money away from what they’re spending on goods, they’ve expanded their wallet because they have access to more funds. It depends on who you talk to, but Americans probably put away $2.5 to 3 trillion in excess savings during the pandemic and have spent about half of that. In other words, they’ve got somewhere north of $1 trillion left in excess savings—and they’re burning through that fast.”

CONSUMERS ‘MAY CHANGE THEIR APPROACH’ AS INFLATION TICKS UP

“Consumers have bought a lot of decorative throw pillows and a lot of sweatpants since COVID,” says David Silverman of Fitch Ratings. “They haven’t been going to Taylor Swift concerts and getting massages—so we’re seeing that reversion in spending.”

But the most recent retail sales numbers appear to have spooked investors, throwing the stock market into what one analyst called “a bit of a frenzy” and suggesting the Fed may have to continue to raise rates to rein in consumer enthusiasm. Oxford Economics has previously told GlobeSt.com that their analysts expect the central bank to boost the federal funds target range by 25 basis points at both the March and May meetings, and says that “the risk, given the economic and inflation data released since the last meeting, is that the Fed raises rates further.”

And as inflation continues to drag on spending power and household savings dwindle, experts say consumers have become more cautious shoppers.

“The impacts of long-lasting inflation will start to wear on consumers, and retailers will likely see consumers spend differently,” says Isaac Krakovsky, EY Americas Retail Leader. “Consumers will continue to spend despite the recession but may change their approach.”

To wit: Morning Consult’s state of retail report for the first half of 2023 shows that in January, 63% of U.S. adults reported shopping at discount stores to save money. That’s down from a high of 70% of last fall, but still significant, analysts say. Nearly three-quarters say they’re looking for deals and coupons, while 70% are shopping less overall. And according to EY’s latest Future Consumer Index, 56% of consumers say they plan to reappraise how they spend their time on the things they value most.

“Consumers are more discerning about where and how they spend their money, knowing their dollar is worth less,” Krakovsky says. “They are prioritizing retailers that can provide the product they want when they want it, and that cater to their unique wants, needs and preferences.”

Kakovsky also predicts customers will opt for private labels as inflation continues to squeeze spending, noting that “the taboo of private label has disappeared, and since Gen Z and millennials are influencing purchasing decisions, retailers are seeing an uptick in private label purchases.”

NRF’s Mathews agrees, noting that “consumers are trading down” and buying cheaper versions of the same products to shopping at stores more focused on prices. They also appear to be spending a bit less in certain areas of services like entertainment to focus on essentials like groceries, gas and energy. As inflation continues to pummel those categories, experts say consumers will likely “trade away from more discretionary spending.

“Consumers are doing what you expect them to do when the cost of milk rises and your budget is compromised: you look to buy cheaper milk,” Mathews says. But he warns against looking at all consumers as an amorphous whole, noting that American consumers are “incredibly stratified” at this point.

For his part, Silverman says the pressure on discretionary categories is falling on retail segments that performed “exceptionally well” over the past few years.

“The context of recent performance is important to note,” he says. “We anticipated some of the softness in goods volume sales even before inflation became a real topic. We have always thought the consumer would shift back to pre-pandemic levels. But the underlying fundamentals of consumers are incredibly strong.”

That’s in part because wages in many industries are growing faster than inflation. For those consumers, inflation just simply isn’t hitting them quite as hard as you might expect.

“High-income households were pretty much unaffected by the pandemic and the challenges of inflation,” Mathews says. “We’ll probably see more impact in the middle in terms of trading down. And people at the lower end of the equation frankly are already buying at the cheapest price point.”

For those categories of consumers, buy now/pay later strategies may also assume a greater role in spending decisions, according to EY’s Krakovsky. Over the holidays, consumers were thinking ahead and purchasing products over the course of the year to avoid large bills at the end of the year. (For example, 41% of consumers purchased non-electronic gifts ahead of time.) That trend may continue this year, he says.

Retailers are already responding en masse to the trend of mid- to lower-income households paring down, a development that echoed through the earnings calls of many major big box players in March.

“Elevated inflation continues to impact our low- to moderate-income customer,” said Adam M. Orvos, chief financial officer at Ross Stores, on a call with analysts. The discounter said it expects sales to be flat for its fiscal year ending in January 2023. Similarly, Macy’s predicts its comparable sales will be down by between 2 to 4 percent this year, with CEO Jeff Gennette saying “discretionary spending will be under pressure across income tiers.” And Home Depot CEO Ted Decker said when the company last reported earnings that it expects a “moderation” in home improvement demand.

“Attempting to predict with precision the swings in macroeconomic conditions and their effect on consumer behavior is challenging,” Walmart chief financial officer John Rainey told analysts on the company’s recent earnings call. “As such, our guidance reflects a cautious outlook on the macro environment.”

Tightening wallets may ultimately lead fewer consumers to spend at digital brands, analysts say. E-commerce retailers also tend to be trusted less than brands with a brick-and-mortar presence (77% versus 93%), according to Morning Consult research. Gen Z has the lowest trust of online brands of all generations surveyed, and lower-income shoppers also tend to trust those retailers.

“While inflation’s impact on retailers in 2022 was uneven, the overall drop in purchasing consideration among consumers is alarming,” says Claire Tassin, retail & e-commerce analyst at Morning Consult. “A key theme across the industry for 2023 is refocusing on loyalty and retention, but online-only brands have a much steeper hill to climb, given overall lower trust among consumers.”

CONSUMERS REMAIN HEALTHY — BUT A SLOWDOWN LOOMS

“We continue to view the consumer as quite healthy from historical levels,” Silverman says. “They’re maybe slightly less healthy than they were a year or so ago, but they are moving from A plus to A.”

But while it may take time for spending to soften, analysts say cooling job and wage growth will likely drag on consumer spending. In a research note, Oxford Economics said that while excess savings will provide a “fillip to growth,” most households will soon deplete their cash reserves.

“No one is exactly sure how long the consumer can continue to spend,” Mathews says. 