Photo: RetailWire
What inflation-era consumer behavior should we expect next?
Retail sales in February were up 17.6 percent year-over-year and 0.2 percent from January, according to the U.S. Census Bureau. January’s month-over-month gain was also revised upward to 4.9 percent.
The gains demonstrate continuing strength in consumer spending, although there are signs that inflation may be causing some to hold off purchases or trade down to less expensive alternatives.
Rising prices for food and fuel boosted the dollar sales gain in February, but unit sales are a different story. The NPD Group found that year-over-year apparel, footwear, sports equipment and toy unit sales fell between December 26 and March 5.
“Price sensitivity is starting to show up,” Marshal Cohen, NPD’s chief retail industry adviser, told The Wall Street Journal. “There is a threshold that consumers don’t want to go over.”
“With the highest levels in 40 years, there is no doubt continued increases in inflation are hitting household purchasing power and likely restraining spending,” Jack Kleinhenz, the National Retail Federation’s chief economist, said in a statement. “We shouldn’t be surprised by the slower pace of sales given that purchases had surged in January and the upward revisions made to those numbers. And the double-digit year-over-year increase was expected given that much of the economy was still in stay-at-home mode a year earlier.”
NRF earlier this week forecast retail sales, excluding autos, would increase this year between six and eight percent. The trade group expects inflation to remain higher than was previously expected and doesn’t see a “cool down” happening until some point next year when the Federal Reserve reaches its two percent rate target.
The side effects of Russia’s attack on Ukraine remains a wild card in forecasts and some, such as Joel Prakken, chief US Economist and co-head of US Economics, IHS Markit, expects the impact to be more negative than NRF.
Mr. Prakken, who participated on NRF’s “State of Retail and the Consumer” event on Tuesday, said his firm’s “initial analysis of the fallout from the Russian invasion of Ukraine … clearly implies [a] much higher increase, much higher gasoline prices, much higher food prices, slower economic growth, financial uncertainties, all of which have led us to trim about half a percentage point from our baseline forecast for U.S. growth measure fourth quarter to fourth quarter all the way down to 2.4.”
Discussion Questions
DISCUSSION QUESTIONS: What categories are most at risk to rising inflation? How do you expect retailers to respond to declining unit sales?
Poll
Loading …BrainTrust
Most affected categories will be higher-end products and discretionary purchases. People still have to eat and heat, and even go to the movies.
Totally agree on the discretionary, but not so sure on the higher end items taking a hit. It’s normally the middle tier that loses in these cases. The luxury market customers are often not as impacted, while middle income end up falling to low income.
That is why I refrained from using the tern “luxury items.” Luxury will suffer less. “Higher-priced” I define as somewhere in the middle.
Totally. It will be interesting to see how this converges with the mass merchant strategies on attracting and building national brands which fall into that “higher priced” tier within their stores, such as Reebok newly at Walmart and Big Lots.
Discretionary categories are certainly at risk, consumers are likely to put off what they can while household budgets are under pressure. The perfect storm of supply chain challenges doesn’t help with prices, but it might serve to help with inventory should demand drop because consumers are tempering their demand.
A number of things are likely to happen based on what we have seen over the past 15 years or so.
At the same time, retailers and manufacturers will need to seek opportunities to streamline overall operations further. Retailers and manufacturers will need to respond rapidly to changing consumer buying patterns. As is so often the case the companies that respond fastest to change will be the biggest winners.
The one behavior we can expect is that it will be different behavior than today and will continue to evolve as inflation and other disruptions cause consumers and retailers to shift their practices. One thing is certain – retailers who don’t consider this shift will lose out while others will profit from listening to their customers. Consumers won’t all do the same thing and every category is going to be impacted differently. The important thing is to build the processes, systems, and practices to react as consumers shift, so they can continue to find the best products at the best price through the right channels at all times.
Premium priced brands will be impacted the most by inflation as consumers trade down to private label or discount brands. While consumers will consciously reduce spending on discretionary merchandise and services, the demand for essential items is inelastic. However consumers will trade down to private label brands.
Restaurants also I feel tend to take a hit as consumers shift to eating at home to save. Clubs and dollar stores seek to benefit from this as well.
Higher gas prices mean less driving (for consumers), so rural areas might see a drop in frequency of store visits. Places where people have to make a day trip out of going to the nearest Walmart. On the other hand, this might push up online sales and deliveries. We should see further price-increase pressure on UPS, FedEx, and other last-mile delivery services as they rack up the miles running on $4-plus gas. Anything with a long-haul logistics trail will be impacted as well as services which will show up at POS. Even my pool guy has raised his price 6.4 percent to account for higher gas prices. If wages don’t keep up we may be in for a tough couple of years.
We have been living in a bubble of no/low interest for years. Now, as the Fed ratchets up rates, banks might actually start to paying interest again. Let’s see if consumers remember that savings should offer some protection from inflation. Or if they lean toward spending more, sooner than later, while last week’s paycheck is worth more than next week’s.
As inflation climbs, premium-tier grocery, beauty and apparel sales will decline as more shoppers become price-conscious. Unlike Q4 2021, cross-category luxury sales have made fewer headlines lately.
Conversely, retail giants, discounters, dollar stores and off-price retailers will win traffic as inflation erodes consumers’ purchasing power.
Expect more retailers to prioritize private labels, especially in high-frequency categories like grocery. Retailers will also emphasize deals and discounts to encourage shoppers to switch for better value.
Discretionary spending will defintely be affected, and I believe we will continue to see the growth and push we saw in private/house labels during the pandemic.
Consumers are already starting to shift where and what they buy in response to higher prices. Off-price has seen customer gains in apparel and Walmart has seen some gains in food. That said, responses are complex and multifaceted. It is not simply a matter of trading down. In food, for example, as people cut back on dining out to save money, premium brands can make gains as folks switch to having nice meals at home. In apparel, luxury brands continue to do well as consumers see them as a long-term investment. Retailers need to respond to shifts in behavior, but they should not do it in a knee-jerk way without understanding the shifts.
Inflation is a symptom of some larger issues, the main driver being freight and supply chain shortages which are likely to peak again with new international shut downs and continued rising oil prices. Home textiles is one category most at risk right now. Consumers are going back out, spending less time at home, while also considering the fact that shipping a comforter set is a large bulky item mainly full of air due to its fluff. Discretionary spending on things like this will likely be hit first.
As prices continue to rise in nearly every category, the average citizen has considerably less discretionary dollars than a year ago. Clearly, high-priced, premium brands will be impacted the most, while in-house and private label brands will see gains.
Happy days for TJX and Ross stores. Happy days for private label foods. Challenges for national brands.
Grocery has already shown price increases and we will start to see a significant shift in apparel and footwear. Comfort categories, performance brands, synthetic fabrics and petroleum based textiles will have a significant raw material price increase which will impact the end-consumer. Price of oil and gas, the Russian/Ukraine war impacting the tech gig economy, and overseas factories where COVID-19 still impacts factory workers will continue to disrupt the supply chain and tremendously impact cost of goods.
In the end, the consumer will either pay the price or stop shopping. They will spend less and become more frugal. Consumers will second guess getting in their car with increased gas prices and avoid the shopping mall and their favorite online stores. Groceries will be streamlined and consumers will look for deals more than ever.
The answer to which product categories are at most risk from rising inflation is that it depends on the economic segment of the consumer market we are referring to. Assuming we focus on the middle class, then most if not all of the discretionary spending and impulse shopping will be impacted. Consumers will have to evaluate their overall budget and think twice before buying that aspirational luxury item, upgrading to the latest iPhone, and trading their car in for the latest version.
The relentlessness of the inflationary pricing, the continued supply chain disruptions, rising gas prices, and the global impacts of the invasion in Ukraine will significantly affect middle-class spending behaviors. The opposites of the spectrum — the off-price and luxury retail segments — will continue to thrive and scale. Their operating models are built to withstand the economic upheaval and will continue to thrive while the middle is further compressed.
When faced with higher prices but fixed incomes (in the short term), typically many consumers adjust their consumption patterns and brand choices to maintain some balance in their monthly expenses and incomes. I would expect to see increases in private label shares and substitute main meal choices. Less red meat, more pancakes (pancake mixes and syrups are actually inferior goods in economics parlance), and less eating out.
Categories that require financing will be first hit by inflation – large appliances, furniture, and motor vehicles. The secondary hit will be based on increasing fuel prices to categories requiring long distance transportation or large package sizes. Rapid delivery and e-commerce across the board may also see an increase in shipping costs. Lastly, there is a bit of a hidden cost to the retail euphoria as retailers see higher spend, about 1 percent of retail growth can be attributed to inflation. Fundamentals are still high across the board including consumer sentiment, low unemployment, faster wage growth, and more discretionary income. U.S. consumers are spending more on goods as well, by about 6 percent according to insights from Cushman Wakefield.
Retailers will embed the new cost into prices, increase shipping costs, and reduce markdowns across the board. What this means is a slightly higher price at the store. For a $2 candy bar, a 7.5 percent hike will be barely noticeable, but it will add up in monthly budgets. It will be most noticeable for higher price items.
Interest rates are going to blossom, house prices will be a big issue. Mixed with the world-wide political strife, and very apprehensive consumers, there will be a lot of apprehension in the markets. We’ll still do business, but we will all work harder and thinner.
For the grocery specific segment, what happened in the 2008 economic crash provides a roadmap for what we’ll likely be seeing again.
For the customers who eat at good restaurants, they will now be making more food at home, buying quality food to cook at home to save money and still have a great experience. For the grocery customers who were eating better cuts of meat, quality produce and pricier center store items, they’ll be looking for more in-store deals and coupons and private label foods to keep the grocery bill in check. For grocery customers who don’t have much of budget to spend on food, watching for deals, clipping coupons, and understanding product value (nutrition value for the money) is key to keeping their family fed.
Grocers would be wise to educate customers, help them make good food choices for their budget and nutritional needs during tough times. Shoppers will stay loyal to grocers who are honest and who will take care of them.