Retailers may want to buckle up as the consumer may be changing course—again.
Just as retailers have readjusted their buying needs, the consumer might be pulling back even further on their discretionary purchases in favor of needs-based purchasing.
The possible shift in consumer behavior isn’t a new one for retailers. They already learned their lesson the hard way last year after overbuying on stock only to find out that the consumer had shifted their mindset. The later-than-expected arrival of goods at stores resulted in a mad race to exit their excess inventory levels through promotions that lasted for several quarters, which hurt retail margins.
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Retailers for the most part have been fairly conservative in their buying for the spring and summer selling seasons. And they’re finally getting a bit of a boost in margins now that transportation costs have finally started to ease up, even though in some cases shipping remains a bit higher than pre-pandemic levels.
So, what’s next for retail?
The Adobe Digital Price Index—based on the latest online inflation data tracked by Adobe Analytics—indicates that online prices in May 2023 fell 2.3 percent year-over-year. That represents a significant drop since the start of the COVID-19 pandemic, as well as the ninth consecutive month of year-over-year price decreases for 11 of 18 categories tracked by the Index. Among the categories that saw price decreases are furniture/bedding, and sporting goods.
Seven categories saw price increases, including apparel and groceries, which were also on the category list that saw higher prices in April. Apparel prices in May rose 6.38 percent year-over-year, while groceries rose 8.2 percent year-over-year, although that increase reflected an inflation slowdown from April’s 9.3 percent year-over-year gain.
Data on Tuesday from the Consumer Price Index (CPI) for May indicated that inflation rose 0.3 percent for the month, and was up 4.0 percent from year-ago levels, reflecting a smaller spike from the 4.9 percent rise in April. May’s 4.0 percent uptick also represented the smallest 12-month increase since March 2021. On a seasonally adjusted basis, CPI was up 0.1 percent in May, after rising 0.4 percent in April.
While inflation continued to show signs of cooling, indices for food and apparel were up 4.0 percent and 3.5 percent, respectively, year-over-year on an unadjusted basis. That corresponds with the price increases reflected in Adobe’s online inflation report.
Lower shipping costs, for one, gave retailers breathing room to pass these savings to customers. And U.S. interest rate increases aimed at curbing inflation is starting to pay off.
Economists at Wells Fargo noted that May’s more modest inflation gain favorably compared to year-ago surges in energy and food prices, with gasoline prices now down 5.6 percent.
“We expect a more noticeable deceleration in core prices in the coming months,” economists Sarah House and Michael Pugliese wrote in a research note published Tuesday. The pointed out that “core goods inflation has shown signs of easing amid normalizing supply chains and moderating demand.”
With core CPI still growing at a 3-3.5 percent annualized rate, they don’t expect the Fed to cut interest rate cuts before next year. They think there’s a better chance for a pause in June—the Federal Open Market Committee will announce on Wednesday its target for short-term interest rates, currently at 5-5.25 percent—followed by a final rate hike this year.
A 1,000-consumer study from Jefferies shows people are increasingly concerned about their household finances and spending in the next year, suggesting shoppers will purchase what they need versus what they want.
The study, released on Friday, indicated that 72 percent of respondents are “very concerned” or “somewhat concerned” about their current financial position. Twenty-one percent said they’re not sure they can pay down credit card debt anytime soon
“We view this negatively for future spending intentions, particularly given the potential for an increase in consumer defaults and further pressure on consumer spending ahead,” the report read, adding that “discretionary categories such as apparel, footwear and home furnishings could see continue pressure going forward,” with 35-40 percent indicated plans to spend less in these areas. Another 50 percent of respondents said they plan to dine out less often and patronize cheaper businesses.
Plus, most people, or 87 percent, said they are somewhat likely to trade down to less expensive options, such as private label. Jefferies analysts cautioned there could be company-specific risk connected to the trading down, depending on the nature of product categories, pricing ladders, channel exposure and private label’s share. Among the companies in their equity coverage area, Walmart was the top pick in the discount and specialty retail channel, and Tapestry made the grade among the fashion brands.
When there’s declining real wages because salary increases aren’t keeping up with spiking inflation, it’s no surprise that consumers are getting careful with spending. How it all shakes out for retail won’t be known until much later this year. But there might be a nugget of good news for retailers, even though they still have to fine-tune their balancing act on how much inventory to order and where opening price points should start.
The general thinking has long been that individual wage growth is a proxy for income, and ultimately an indication of a consumer’s propensity to open their purse strings. UBS Global Wealth Management’s chief economist Paul Donovan suggests that the wage-growth metric is becoming “less useful as societies age,” particularly either as pension or investment income becomes proportionately more important or because world labor force participation is rising.
In a Friday blog post, Donovan noted that consumer spending power is really about what’s happening at the household level. “While an individual may face declining real wages, a household with more members working could have increasing real household income. This means that consumer spending power is not necessarily as bad as headline real wages imply,” he concluded.
