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How Can Retailers Overcome the Challenges of Discerning Consumers in 2024?
The past year saw consumers proving their mettle. The resilient consumer was a major talking point as leading retail executives and analysts lauded the consistently robust shopper. The triumph of this narrative was mirrored in the S&P 500 Consumer Discretionary index, which saw an impressive surge of over 40%. This was a noticeable leap, dramatically outdoing the 24% gain of the broader S&P 500 since the year’s onset.
However, consumer spending habits in America are shifting amid ongoing inflation, according to recent earnings calls and industry data. The traditionally robust “buy now” consumer attitude is being replaced by a more thoughtful “consider before purchasing” approach. This trend is evident in big-box stores where customers are cutting back on expenses, prioritizing essential items, and delaying nonessential purchases. Retail shoppers are not completely closing their wallets, but they’re becoming more judicious about their spending.
Executives from various companies, including Target and Home Depot, have noted a more discerning consumer, a trend illustrated by a 4% decrease in Target’s net sales compared to the same period last year. Recent data from the Commerce Department reflects this shift as well, with a 0.1% drop in retail sales in October, the first decrease since March. However, not all sectors are equally impacted, as health and personal care stores report a 1.1% increase in sales. As a result of this shift, Home Depot has turned its attention to a more technology-focused form of inventory management.
Ultimately, emerging insights from industry veterans hint at a consumer market that is becoming significantly more discerning. This development could potentially cast ominous shadows over the coming year’s economic forecast.
Walmart’s CFO, John David Rainey, expressed his concern over the increasingly selective consumers during a recent discussion on Yahoo Finance Live. “There’s some stress on the consumer. The consumer is being discerning, maybe choiceful.”
Lending further weight to this trend, Elsie Peng, a Goldman Sachs analyst, noted a rise in credit card delinquencies, “a trend that’s weighing heavily on households that are already debt-burdened.” She wrote, “Higher interest costs and resumed student loan payments are likely to keep delinquency rates elevated in early 2024, especially for low-income households.”
Harmit Singh, Levi’s CFO, also observed a strain on the less affluent consumers while discussing the retailer’s Q3 earnings results. To counter this, Levi’s lowered prices to boost the attractiveness of its products and its value proposition.
“They’re being a lot more discretionary … we reduced prices to make our products and our price value equation a lot more attractive.”
Harmit Singh, Levi’s CFO, via Yahoo Finance
As we roll into the new year, the increasingly discerning consumers may become a challenging factor for those businesses that outperformed this year. UBS analyst Jay Sole expressed concerns about the weakening consumer sentiment and its potential impact on retailers and their valuations. “What we found is that consumers are really feeling cautious. They’re worried about things like having to repay student loans, and as a result, they’re thinking that they’re going to pull back on spending on discretionary items like apparel, footwear, and accessories.”
Despite the challenges, companies might be able to perform well if they surpass the lowered expectations in these uncertain economic conditions. However, as prudent shopping and careful budgeting become the new norm, their long-term effect on the economy remains to be seen.
Discussion Questions
Given the changing consumer habits toward more discerning spending, how can retailers adapt their value propositions to appeal to these new consumer preferences, and what strategic shifts might be necessary to ensure resilience in the face of possible economic uncertainties? In light of the recent financial anxiety among consumers, what strategic role can retail executives, industry policymakers, and educators play in promoting responsible consumption patterns and financial literacy for shoppers? With the focus shifting to cautious spending and the value equation becoming a primary factor in consumer purchasing decisions, how can advancements in inventory management technology help retail businesses anticipate and meet the changing needs of their customers effectively? What potential challenges could arise in this transition and how could they be addressed?
Poll
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Gene Detroyer
Professor, International Business, Guizhou University of Finance & Economics and University of Sanya, China.
Dick Seesel
Principal, Retailing In Focus LLC
For retailers, the first rule in mitigating the risks posed by more considered consumerism is to have a strong, differentiated brand and ‘must have’ products. The slowing in expenditure is not coming about just because of a decline in household incomes – an influence though that is – but also because of psychological factors: as such, many consumers will still be able to afford products that they really want. Strong brands that promote lifestyle values that consumers recognise and buy into will be the ones best placed to do well.
A second rule will be to engage with consumers far more. The days when retailers could simply put products on shelves and expect them to sell have gone. Retailers that create interesting environments that stimulate consumers and give them a reason to visit their stores will be the ones that secure the most footfall.
A third rule is that retailers will need to adapt their business models to a slower growth environment. Some will need fewer physical stores than they used to, others may need to rationalize their product offer, others may need to rationalize operations to reduce costs. Retailers that do not review and change their business propositions will be the ones most at risk of failure.
Neil, The retailers should read rule number three over and over. I am quite sure that if you add up the growth forecasts of all retailers for 2024, their cumulation would far exceed the projected growth for the market as a whole.
Very true, Gene. That’s the problem with slower growth – not everyone can prosper. So 2024 will be see more polarized performance with many losers as well as some winners!
I think, yes, we’re mixing two different shifts here, short-term and long-term: the former being a temporary decline in real incomes due to high inflation, and the longer-term increase in real incomes (anxiety notwithstanding)
The reaction of retailers/manufacturers to the former should have been fairly simple: moderate your price increases – i.e. be part of the solution rather than the problem – if for no other reason than not being perceived as a gouger. Of course this meant sacrificing margin, and likely (some) profit, and I think most of us have an opinion as to which side of the choice most companies came down on.
Longer term, tho, the issue won’t be one of sacrifice, it will continue to be the age old one: how to best serve growing markets. And, as always, those with the best value proposition – better …or at least cheaper – will be best positioned
If this is the new normal, then retailers are in for turbulent times. If minimalism and value become the key components of decision making, then there are a lot of stores and brands out there that will have difficulty staying open. I am confident that many retailers are hoping this is simply a passing fad that will go away.
This is my last 2023 post so here is to a better 2024 for all of us. See you in the comments section in the new year!
Retailers always have the power to increase customer engagement, conversion rates, and even the sheer number of fans of their brand. But it’s not by reviving the word “choiceful” from the 1500s. It’s by understanding customers and shopping behavior as well as possible.
Yes, consumer debt is funding purchases and most retailers have seen a boost to their top lines from this. And the spending spree that started when people started shopping more after the pandemic? Nobody expected that to last forever. So, of course shoppers are being more “discerning” (actually a word!) when they shop. But don’t forget that shoppers have a lot more ways to research options, especially with AI behind searches and info-gathering throughout the customer journey.
The call to action for retailers: know your customers, and stop using vague words like “discerning” to describe them. I bet you have better data you could use for understanding what each shopper really wants, or at least you should.
Are we really witnessing a new kind of shopper? Or are we seeing the predictable results of an economic cycle, combined with greater ease of information and price search? It’s dangerous to paint consumers with such a broad brush.
Consumer sentiment seems to be on an uptick, holiday spending was healthy, and other economic indicators — especially falling interest rates — could point this conversation in a completely different direction twelve months from now. Keep an eye on Target, where discretionary spending for apparel and soft home have historic peaks and valleys, to see if the “discerning shopper” is a real phenomenon.
Consumer sentiment lags consumer action. Despite record job creation, the largest increases in wages in more than 30 years, and low unemployment, the public still has a mindset that the economy is weak. Holiday retail sales would suggest that shoppers are back in the game, even if they don’t think so.
Back in the 70s and 80s, it didn’t take long for the consumer to readjust to spending even though annual inflation exceeded 10% for several years, reaching 14% and experiencing a recession.
If Walmart and Target are offering cautionary notes, it’s definitely time to listen. We have a robust employment profile…but…we also have diminishing savings…and…rising debt levels…and…rising delinquency rates…and…the ongoing effects of inflation, both financial and emotional. OY. That’s a really rough combination of variables to factor into demand planning for 2024. I think this means ongoing pressure on the supply chain, because smart retailers are going to plan and buy conservatively and then pressure the supply chain to respond to both fast and slow sellers. We are already reading about the impending layoffs coming in 2024. Which will further dent demand. Which will put additional pressure on prices, margins, and the supply chain.
Hats off to Neil Saunders for his three rules. Perfectly said. I’ll add a fourth. Brands and retailers simply must offer some level of differentiation and distinction. (Maybe that’s Rule #2.) Otherwise the magnetic pull of race-to-the-bottom pricing games will create havoc on margins and inventories. That will be achieved through both tech and good old-fashioned creativity. But…differentiate or die. 2024 will not look kindly on the status quo.
It’s always a combination of short- and long-term factors that influence customer spending, and purchase decisions varies by retail segment.
During this economic period, most middle of the road and upscale retailers would do well to serve customers and earn their confidence over the long haul by doing three things:
1) Show them where and how to find value through signage, marketing and in store merchandising. Customers will be led if they are shown.
2) Create partnerships & programs with vendors to create additional savings, through temporary cost reductions or in pack sizing. Customers will appreciate honest advocacy.
3) Stay true to the retailer brand, who they have been, and don’t waffle or suddenly seem different. Customers don’t trust shaky or disingenuous operators.
The importance of navigating the trend of conscious consumers is growing. A growing number of consumers, especially Millennials, are concerned about sustainability. It’s important to avoid bad PR on this topic.
In 2009, I wrote a seven-page editorial in Drug Store News titled “The Seven Sins of Sku Rationalization” exposed the common misconception, which I blame on sku rationalization consultants, that all retailers should stock the same assortment of products when economies turn south, i.e. only the best-selling brands and commodities at the lowest prices. That’s brilliant. Not.
Consumers from certain income brackets are not affected by current economic variables, so they still seek upscale products, even in suspect economies.
Like in 2008-2011, I predict that retailers will seek out sku rationalization consultants to reduce their assortments by focusing on fewer premium and upscale brands, despite the fact that those are the most profitable brands, and the ones that might help differentiate them from the discount retailer across the street.
Employees and especially management are your most important assets, so taking care of them should be your top priority.
Consumers and brands benefit from personalization. Customer experience that is tailored to the customer’s needs leads to the expansion of new customers and repeat business. It is essential that consumers feel heard.
New scheduling platforms will enable advanced retailers to allow customers to book dedicated time with staff, similar to Apple stores.
Strategic decisions need to be based on customer data. Db
Inventory management technology can help retailers anticipate and meet changing customer needs by enabling precise demand forecasting, reducing stockouts and overstock situations.
Sales forecasting and subsequent inventory management has been a long-term user of AI-type technology therefore improvements in speed and granularity can enable AI and machine learning to better analyse past sales data and predict future trends, helping retailers stock products that customers value.
Real-time inventory tracking continues to aid product availability, enhancing customer satisfaction. Furthermore, integrating inventory data with CRM systems can facilitate personalized marketing, aligning promotions with individual customer preferences and also the specific location of the inventory relative to the target customers.