While the 2022 holiday season was by all accounts a success, retailers may want to buckle down as they head into the new year: four out of 10 U.S. consumers reported that they experienced a worsening economic situation over the past year, and members of this group said it would take time for their concerns to subside even as economic stressors abate, according to Deloitte’s Global State of the Consumer Tracker. Additionally, one-third of consumer respondents are concerned about making upcoming payments.
“Consumers are a little more cautious,” said Steve Rogers, Managing Director at Deloitte in an interview with Retail TouchPoints. “We may have some holiday hangover when those credit card bills hit — those upcoming credit card payments, utility payments and so on will be weighing on their minds, so they may pull back on their spending.”
One key factor is diminishing savings levels: 67% of global consumers surveyed are concerned about their level of savings. Shoppers who built up a financial cushion during the pandemic saw that cushion diminish due to inflation in 2022 — and Rogers credited much of the consumption seen over the past two years to those savings. Without a savings buffer, shoppers will be searching for more ways to cut back their spending.
Nor will these cutbacks be limited to lower-income households. Deloitte found that 51% of lower-income earners and 38% of higher-income earners felt that their finances took a turn for the worse in 2022.
“People are indicating that they intend to spend less than they did last year, and I think that is in reaction to a fairly financially bruising 2022,” said Rogers. “It’s not limited, and this is the interesting part, to lower-income Americans. It’s across the income spectrum. We’re seeing it in the middle class, and we’re even seeing it in one in three in the higher-income class. That’s informing their attitudes, so as we go into 2023 these same people are more than twice as likely to be concerned about their savings levels.”
It is possible that the economic situation could turn around in the coming year. Much of the pressure has come from inflation outpacing wage growth, and if that trend reverses (and the pace of inflation is already receding while the job market remains strong), shoppers may feel enough relief to increase their spending, whether by paying down debt or increasing consumption. The challenge for retailers is understanding where their customers will be six months from now and positioning their inventories, promotional plans and overall business outlook accordingly.
Unfortunately, history isn’t providing retailers with much guidance. “The models that we used to rely on the last two or three decades to forecast aren’t working as well because consumers’ preferences have shifted,” said Rogers. “COVID drove a lot of that, digitized our lives a lot faster, and now with inflation at a 40-year high rate that’s changing our behaviors as well. Forecasting is going to be very tricky in 2023 when you go to place your orders today for things in the summer.”
Promotions can be Effective in this ‘Deal-Seeking’ Environment
While shoppers may be cautious, it’s not all bad news. Although 71% of shoppers are concerned about rising prices and another 65% cited a desire to delay large purchases, plenty of people will be on the lookout for bargains as a way to ease the pressure on their wallets. While this will obviously be a boon for discounters, it also means that promotions could provide particularly powerful incentives in the coming months for all retailers.
“What we haven’t talked about is the six out of 10 who feel like they’re in the same place or better,” said Rogers. “There are enough consumers out there that I think most of your major formats will do pretty well. I don’t think 2023 is going to be a blockbuster year for anybody, but I think you’ll continue to see people ‘deal-seek,’ so the discounters will be alright.”
However, Rogers noted that just because 60% of shoppers still feel economically secure doesn’t mean they’re immune to the pressures affecting their peers. Customers still looking at major purchases like televisions may very well still have the payments on their mind, and so will be just as open to deal-seeking as anyone else. “Even if you’re buying a Mercedes G-Wagen, you still want to get it at a good price,” he said.
Additionally, because the stock market performed poorly over the past year, shoppers who derive a portion of their income from investments are feeling the pinch. This challenge is likely to hit luxury brands harder than others, but it’s another sign that economic uncertainty is having an impact across all income groups.
Retailers Must Show Economic Empathy
The same uncertainty that makes it hard to plan inventory is also making it hard to provide broad recommendations for how retailers can navigate the slate of challenges facing them in 2023, according to Rogers. For instance, Deloitte saw an increased intention to use buy now, pay later (BNPL) services during the holidays, but it remains to be seen if that demand will continue long term as overall debt grows.
What retailers can do is position their messaging to resonate with the many shoppers feeling economic pressure. Rogers suggested emphasizing empathy for the uncertainty many shoppers are feeling, combined with targeted messaging designed to help them navigate their current concerns. Shoppers still want to spend on discretionary items, and it will be up to retailers to give them the deals they need to feel comfortable doing so.
Internally, retailers need to figure out how they can adjust their inventory planning to account for the current turmoil. This includes finding new sources of data to enable more granular planning that will help retailers better understand the challenges their audiences are facing. For example, the biggest concerns in one city may be completely different in another, producing different demands from each set of shoppers.
“When it comes to inventory management, like I said, demand forecasting is going to be really, really hard,” said Rogers. “I think retailers need to ingest other forms of data to better understand where their consumers are, and they may also want to think about in-store assortment a little harder. Because one store in one zip code may be performing very differently than one in another zip code, just based on the financial well-being of consumers.”