Retailers know consumers’ shopping spree won’t last
Walmart kicked off this earnings season for major retailers with a poignant statement about what lies ahead: “We don’t know.”
On Chief Executive Officer Doug McMillon’s list of unknowns: the shape of consumer spending, incomes, layoffs and a recession. His caution has been echoed in call after call across the retail industry. Executives, bruised by the tumult of the past few years, brushed aside what were broadly better-than-expected earnings for last quarter to focus on a future rife with uncertainty.
Best Buy CEO Corie Barry told investors that the company is preparing for continued volatility and another “down year” for the industry. Lowe’s said it’s seeing a “cautious consumer,” who is “anticipating and responding to value.” Target executives mentioned uncertainty numerous times. Don’t be surprised if uncertainty continues to be the big talking point when Gap and BJ’s Wholesale Club report this week.
At this point it’s pretty clear that the executives considered closest to the pulse of household spending have no idea what’s next as the Federal Reserve takes aim at the irrepressible American consumer. Yes, they’re stretched by inflation and trading down to store brands for essentials, but not stretched enough to forego eating out or splurging on sky-high flight tickets. Ricocheting shopping patterns have added to the difficulties with planning.
There was little warning, for example, before the virus shut down stores and infected millions, many of whom were front-line retail workers. People then went from avoiding restaurants and making air fried food at home in their yoga leggings and sweatpants to revenge spending and traveling for delayed weddings and holidays.
The challenge, so far, is not how much money people have to spend. JPMorgan & Chase CEO Jamie Dimon said this week that consumers are spending 10 percent more than last year, 40 percent more than before the pandemic, and they’ll still have excess money to spend until the end of the year.
The trick for retailers is figuring what households will spend on, where they’ll withdraw and when they’ll hit a Fed-induced spending cliff.
For now, grocery stores and food suppliers are seeing some of the best margins they’ve had in years; while spending on restaurants and bars surged 24 percent in January from a year earlier. The thirst for luxury is strong, just not among the middle-income shoppers Nordstrom targets. Discretionary purchases have taken the biggest hit, evidenced by the painful buildup of inventory that retailers are only just getting on top of — not a mistake anyone wants to repeat.
Some are responding to people’s eagerness to shop in-person again. Real estate landlords suddenly find themselves with the upper hand as the likes of Target, Dick’s Sporting Goods, Dollar General and TJX invest in opening new stores and rolling out upgrades. That’s an expensive undertaking in response to what may easily be a momentary spike in demand for in-person shopping given how comfortable we’ve all grown with the online alternative.
Of course, what retailers see on the ground matters. They have a growing amount of data on our spending patterns. They’re often the first to see when people are tapped out of cash; swapping premium names for cheaper store brands, using more coupons and buying in bulk. Savvy investors know this.
The resounding air of uncertainty in the latest run of earnings updates shows executives are listening to the Fed, which sees raising interest rates as a necessary measure to tame inflation. Many retailers have been able to hang on because consumers kept spending through the height of the pandemic and after — the exact evidence the Fed sees as reason to keep going with its historic hiking cycle.
So while investors and economists argue over soft and hard landings, for retailers it all amounts to a straight-up crash.
Leticia Miranda is a Bloomberg Opinion columnist covering consumer goods and the retail industry. She was previously a business reporter at NBC News and a retail reporter at BuzzFeed News.