Despite months of unease about the state of the economy, Americans remain willing to spend money on all sorts of goods. But they are making it clear that retailers must work harder than they have over the past two years to win their dollars.
Retail sales rose 1.3 percent in October, the Department of Commerce said on Wednesday. That was higher than expected and a promising reflection of consumer sentiment during the holiday shopping season, especially since the near-record-high inflation Americans have felt this year has moderated a bit.
But that spending was boosted by the earlier-than-usual holiday deals that enticed shoppers last month. For the first time, Amazon held a Prime Day in October, filling the site with discounts, in addition to its usual time in June. Target rolled out its Deal Days. And Kohl’s offered promotions on toys throughout the month. After last year’s holiday season, which featured few traditional doorbuster sales, many shoppers, it now seems, are looking for discounts before they buy.
“Broadly speaking, retailers could price products wherever they wanted to over the last two years and consumers would buy them,” said Mike Graziano, a senior analyst of consumer products at RSM US, an audit, tax and consulting firm. “Now consumers are looking for deals like they do over the holiday, and consumers are taking advantage of that, and October was a clear example of that.”
Holiday promotions were a significant driver of October retail sales, he said. Categories like online spending, furniture, and health and personal care all saw an increase in demand in October compared with September. Spending at clothing and sporting goods stores remained flat or declined, which could mean people are waiting until later in the season to make those purchases.
What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. It is typically expressed as the annual change in prices for everyday goods and services such as food, furniture, apparel, transportation and toys.
Target is an example of the importance discounts have played. The company’s sales rose in early October, coinciding with a round of holiday promotions. But demand tapered off when those deals went away, and October ended up its weakest month in the third quarter, the company said, after it reported earnings on Wednesday.
“Nearly all of the slowdown was driven by our discretionary categories — apparel, home and hard lines — as our guests became increasingly cautious in their spending in those categories at Target and the industry more broadly,” Michael Fiddelke, the company’s chief financial officer, said on a call with analysts.
Executives are expecting more of the same.
The National Retail Federation said this month that it expected holiday sales from November to December to increase 6 to 8 percent, which is below the pace of inflation. With Black Friday now a little over a week away, it is imperative for companies to quickly adjust to changes in shopper behavior.
This period is crucial, particularly for department stores and specialty apparel chains, which spend much of their energy preparing for the large number of sales they handle at the end of each year. On Thursday, Macy’s and Kohl’s will report earnings, which will give a glimpse into the department store chains’ relative financial health heading into the season.
Throughout much of the pandemic, when shoppers were spending freely and supply chain snarls were front of mind for retailers, discounts were offered infrequently. Last year, consumers had more money saved up and were spending it on refreshing their closets and upgrading their electronics after a year of being stuck at home.
The spending sprees ended this year, largely because of worries around inflation. And with shoppers being more discerning about how they spend, many retail executives have said they expect a return this year to the usual kind of holiday deals that were absent from many stores last year.
“Last year was just an unbelievable year for any retailer, but especially apparel,” said Zachary Warring, an equity analyst at CFRA. “Coming off of that, it’s going to be a tough quarter for retailers.”
Public perception will also play a role. Retailers that are associated with value and good prices or that already have a frequent and loyal shopper base will probably fare well in the coming months, Mr. Warring said. For those not perceived that way, the holiday season could be bumpier.
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For instance, Walmart, which has long performed well with lower-income shoppers, said on Tuesday, when announcing its robust third-quarter earnings, that people who earn more than $100,000 were increasingly shopping with them. The company has increased its full-year forecast for revenue and profit.
All this comes at a time when Americans at various income levels are looking for ways to save money, especially as trips to the grocery store and gas pump take a larger bite out of their wallet.
This could make days like Black Friday and those leading up to Christmas Day — known for having deeper discounts — even more relevant for shoppers.
“You could see this concentration of sales when you have these big pushes around promotions,” said Michelle Meyer, chief economist at Mastercard. “It’s like a fits and starts of spending in the holiday season based off of promotions.”
It’s a pattern retailers will have to be mindful of as they navigate the next few months.
“We’re going to watch it carefully throughout the holiday season,” Brian Cornell, Target’s chief executive, said on a call with analysts. “I do think it is a byproduct of a consumer who has been facing higher costs throughout the year and is working with their budget, shopping very carefully, looking for value and recognizing that they’ve got to start with core staples before they spend in discretionary categories.”