November 20, 2023
It seems like all we’ve heard this year from major U.S. retailers is how consumers are “under pressure” as pandemic-era savings dry up and inflation rates remain elevated. Several surveys showing weak consumer sentiment have backed up retailers’ claims. The only problem is that actual data showed otherwise, and consumer spending was consistently higher than expected.
So, as we approach the all-important end-of-year holiday shopping season, should we really pay attention when Walmart Inc. says it’s being “more consumer cautious than it was 90 days ago at this time” and that there was A “steeper decline” in sales during the final two weeks of the fiscal third quarter that ended Oct. 31? The answer is definitely yes.
Despite its reputation as the retailer of choice for low-income households, Walmart’s customer base is more diverse and closely resembles the general American population, having been successful in attracting more upscale customers. As the largest retailer in the United States, more than $1 of every $5 spent on food and drink delivery in the United States passes through its checkout, according to Bloomberg Intelligence. If we add non-food products to this, their proportion is even higher. That gives you a great read on the consumer. It’s no surprise then that Walmart shares fell 8% on Thursday after the company provided its bearish report.
And Walmart isn’t the only retailer to raise questions about the strength of consumer demand last week. Target Corp. said Wednesday it continued to see a decline in sales of things consumers simply want but don’t really need, such as clothing and home furnishings, although there had been an improvement from the second quarter. It’s worth noting one particular shopping trend highlighted by Target. Chief Executive Brian Cornell said consumers were putting off many purchases until the last minute. For example, they did not buy winter clothes until it was cold, which was a change from recent habits. Cornell didn’t say it exactly, but this is classic recessive behavior.
Then there was Home Depot Inc. The home improvement retailer warned Tuesday that consumers continue to cut back on large, expensive items. Bloomberg News reported that Evercore analysts said this in reaction: “Consensus estimates for 2024 are too high for Home Depot and most of our home improvement-related names.” German meal kit company HelloFresh SE saw its shares fall 22.4% on Thursday after cutting its profit outlook, partly due to fewer new US customers. Not even the luxury market is immune. Britain’s Burberry Group Plc joined several high-end retailers in highlighting continued weakness among the merely comfortable, rather than the super-rich, with U.S. comparable store sales falling 10% in the three months to March 30. September.
What’s actually happening? Nobody knows for sure. Even Walmart CFO John David Rainey said he couldn’t pinpoint exactly what had happened in the second half of October. Slower inflation should be boosting household purchasing power for most goods and services. But Americans now live with the highest borrowing costs in a generation and shrinking bank accounts, as evidenced by a historically low savings rate of 3.4%.
Meanwhile, federal student loan payments resumed on October 1. Apollo Global Management chief economist Torsten Slok noted in an Oct. 24 research note that the government’s Household Pulse Survey shows an increase in the percentage of consumers who say they are having difficulty paying their household expenses. home. Not only that, but the difficulties were concentrated among households with a college degree, who earned between $50,000 and $150,000 a year.
Perhaps the real question is why consumer demand was stronger for longer than most expected. Maybe it’s as simple as it took time for the overloaded spending habits of the pandemic era to cool down. Bring food kits. While consumers may have initially been content to continue paying for them once they returned to offices and restaurants reopened, increasing pressure on their disposable income forced them to cut back somewhere. Goodbye meal kits.
And there may be another reason for the October spending slowdown that Walmart cited. Travel increased over the summer and Americans sought tickets to concerts and high-profile events. Credit card bills will need to be paid throughout the fall. Back-to-school spending may also have stretched budgets. At the same time, some Americans may have made cuts to ensure funds were available to take advantage of Black Friday retail deals.
Be on the lookout for what is likely to be a showdown between retailers and buyers. Chain stores have worked through their mountain of inventory, so they don’t need to discount as aggressively as last year. But consumers know that inflation is declining and will look for bargains. In total, the National Retail Federation expects November and December sales to increase a modest 3% to 4% over 2022.
In that sense, it is possible that the slowdown that Walmart identified turns out to be just a blip. Rainey said the drop in sales coincided with a period of unseasonable weather and that demand had recovered in November, boosted by promotions and the arrival of new seasonal products in stores. Betting against the American consumer has been a losing bet this year. The next few weeks may determine if the game has changed.