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Consumer Cutting Back & Trading Down: Redux of Holiday 2018

Thomas Paulson
Nov 11, 2022
Consumer Cutting Back & Trading Down: Redux of Holiday 2018

Over the past few weeks, we have had several discussions with customers about what our data suggests about the consumer and holiday season and what they should expect in December and early 2023. We've consolidated our thoughts from these discussions below.

To frame this discussion, we saw consumer engagement moderate during the second half of October and it has remained at a slower pace since. We believe that Holiday 2018 offers the best parallel to the coming season. If history repeats, November/December retail sales will see a stepdown from October’s pace. We foresee early 2023 to be difficult due to restrictive monetary policy, which has a delayed transmission, still high inflation, the cessation of momentum in housing, and substantial corporate expense cutbacks and layoffs. All of these headwinds should remain through the 1H23. 2H23 should be better as these headwinds fade. Moreover, prior headwinds for retailers such as ocean and air freight and excess inventory will be in the rearview mirror allowing for some margin recovery.

  • Bank of America credit card data shows middle income consumers cutting down the most and that fits our theme that "hourglass" effect is going to be present this holiday season and into 1H23. In other words, the most affluent households will continue to spend, whereas middle-income households curtail spending trips and shift shopping to lower price retailers, including superstores, discount stores, warehouse clubs, and off-price. The article offers comments from Saks' CEO Marc Metrick, who noted that the ticket size growth at Saks has slowed by half and that the entry-level buyers have curtailed spending (visits) to the retailer. Both Coach and Michael Kors saw their department store retailer customers cut back or not place some orders that they had expected three months back (which we discuss more below). Other possible factors for the slowdown are surveys concluding that consumers are holding off and waiting for deeper discounts as well as well as abnormal weather conditions (warm weather in the North and storms in the Southeast).
  • The figure below from Bank of America demonstrates how spending has tapered off this year for lower-income households as we move away from last year’s stimulus checks. The squeeze out of discretionary spending by household under $50K in income also reflect the restrictive effects of inflation and consumer cash flows. Spending on "essentials" will be 22.4% of US household spending by the end of 2022 versus 19.6% in 2021 and 20.4% in 2019, with a much heavier tilt for lower-income households.

  • shows significant trade down in grocers to hard discounters – see grocery visitation trends for California below. For discretionary retailers and brands, the delta between Dillards and Kohl’s 3Q22 results (described in more details below) indicate that the less affluent (more representative of Kohl’s customer mix) have cut trips and reduced engagement. These two combined with the 3Q22 results and the 4Q22 outlook by Coach and Kors suggest that there has been little to no trade-down, just lower engagement. We will certainly know more over the next two weeks as most of the retail industry reports 3Q22 results.

  • While consumer electronics, soft home, and apparel are categories that have had a difficult 2022, these categories are still running at elevated baselines and it will likely be one to two more years for consumption to normalize. The table below shows where computers and tablets are in their journey. Importantly for consumer electronics retailers, computers are the majority of the consumer electronics category that is still running at an elevated baseline. Within this table we suggest that should consumer electronics return to the same level of nominal PCE that it was at the end of 2019, it would need to shrink by a further $71.7B (annualized), or by 19%. However, $54.6B of the $71.7B is in computers, tablets, and software, that segment has a more severe decline ahead of it at 22%.

  • Shift in demand from physical goods to experiences has been a large topic of ours this past year and it certainly makes the "read on the consumer" difficult. This past week, Disney and SeaWorld both reported record revenue at their theme parks. However, when we look more deeply into the data, we see that a lot of the recovery has happened for large categories, like foreign travel, hotels, and restaurants. While the services segment of PCE still has an entitled gap of 308 bps to recapture its pre-pandemic level, a lot of that gap is in segments that will be slower to normalize such as healthcare, housing, financial services, and education. That leaves the current level of "goods" consumption in a more comfortable place (as a percentage of PCE).

  • The impact of extra shopping days. This holiday has a Thanksgiving comparison issue. In other words, the period between Thanksgiving and Christmas in 2022 is one day longer compared to 2021 and four days longer than 2019. In the past, we have not seen consumers spend more just because of the extra days; it's typically the same spend spread over 30 days (the exception is the grocery category, which should be advantaged by the extra days; moreover, food & beverage should stand out this season as a category given the opportunities for shared occasions due to reduced pandemic restrictions and changes in migration patterns that will result in consumers wanting to show off new homes). When looked at relative to 2019, 4 more days over 30 will result in a 13% dip in visits/transactions on any given day. Additionally, aligning and interpreting the post-Thanksgiving days will be tricky.
  • E-commerce versus physical stores. Do physical stores stand out more prominently during holiday 2022 as consumers more carefully scrutinize each purchase to assure "the perfect gift?" Recent Morning Consult survey suggests yes. (See our larger view on on Meta ) Additionally, e-commerce continues to be challenged by IDFA, marketing effectiveness, and higher cost to acquire & serve customers, all topics that we have written extensively this year.’s visitation data from its Amazon's fulfillment centers indicate a softer September and start to 4Q22 for its North America Retail segment. Recent reports of corporate realignments at the company suggest that the softness is intensifying. E-commerce was 40% of holiday category sales in December 2021--flat e-commerce growth allows for a lot of opportunities for physical retailers.

  • Holiday 2018 redux. Holiday 2018 offers the best historical parallel in our opinion to the current period. In that year, the Federal Reserve increased the Fed Funds rate two times (25 bps each) ahead of market expectations and it began to reduce its balance sheet (i.e. the taper). In response to those moves, the stock market tanked 20% and housing ground to a halt. Additionally, the media was ripe with views that the U.S. was soon to enter a recession. In response to the decline in stocks, bonds, and housing (i.e. factors that play heavily into consumer's perceived wealth) as well as rising concern about a recession, consumer confidence declined, and retail sales substantially decelerated as is shown in the table below. Additionally, consumer momentum shifted to discount, club stores, and off-price retailers. This year the monetary tightening is orders of magnitude greater than that of Holiday 2018. As such, the deceleration should also be greater. This week, commentary from the University of Michigan in its consumer survey indicates declines in sentiment across distributions of age, education, income, geography, and political affiliation, and that buying conditions for durables decreased most sharply.

  • 2023 outlook? What about the potential for a brighter 2H23? That seems more likely, as 1H23 headwinds begin to fade. Monetary policy should be easing, and if so, interest rates will be in decline and that will support a higher stock market and an improvement in housing. Moreover, prior headwinds for retailers such as ocean and air freight and excess inventory will be in the rearview mirror allowing for margin recovery. For example, currently the Shanghai to LA container spot price is down 75%. At this time last year, the spot price was 500% to 2019. JPMorgan estimates that cumulative freight headwinds compared to 2019 stands at 246 bps. Separately, given our viewpoint on labor--an intense cost pressure across the industry since 2018, the labor scarcity and wage cost pressures will have eased. Lastly, the competitive pressures from digital goods and services will likely be substantially diminished (even compared to pre-pandemic levels).

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Thomas Paulson

Director of Research and Business Development,

Thomas Paulson spent 20 years as a Wall Street analyst and a member of asset management teams at AllianceBernstein and Cornerstone Capital, representing top-50 ownership positions including Target, Home Depot, Nike, Amazon, Google, and many more. He brings consumer related expertise and knowledge of enterprises in retail, CPG, financial services, telecom, and entertainment.

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