Buyers hunt bargains to go with the gifts

Strategic shopping hurting profit margins of retailers

This time last year, Alexis Taub’s direct-to-consumer jewelry business was flooded with orders for tennis bracelets and tennis necklaces.

“People did not care what they were spending,” she said, noting that the pieces could run several thousand dollars. “The amount of orders we had for them was crazy.”

This year, there has been a shift — customers are opting for gifts in the low threefigure range, like gold hoops and single-stone bracelets and necklaces.

“People are so price-conscious now,” said Taub, 29, who owns Alexis Jae Jewelry in Westchester, just north of New York City. “Our volume is actually up even though the average order value is down.”

Consumers have shown remarkable resilience this year in light of stubbornly high inflation and soaring interest rates. But cracks are starting to show, experts say, just as the holiday shopping season is increasing.

Retail sales data, consumer surveys and quarterly earnings reports from some of the nation’s largest chains released recently suggest a more subdued holiday shopping season than in 2021, when Americans were shaking off their pandemic stupor. Consumers are being more strategic — hunting for deals, comparing prices and trading down — as well as cutting back on what they buy themselves.

“There’s a sort of an underlying resilience, which is always out there,” said Jonathan Sharp, a managing director with the consumer and retail group at the consulting firm Alvarez & Marsal. “I think at the moment, though, that masks the fact that the consumer is making it really difficult for retailers to make this consumer spending profitable.”

And while stores are giving these savvier shoppers what they want, like earlier sales and more markdowns, he said, the catch is that “it is actually eroding their margins.”

This was reflected in the latest federal data. Earlier this month, the Census Bureau reported that retail sales surged 1.3% in October — though much of that spending went to necessities such as gas and food. Americans also spent more on furniture and even cars but continued to pull back on technology, such as laptops, smartphones and appliances.

Meanwhile, third-quarter financial results from such brands as Wayfair, Kohl’s and Target showed that profits slowed despite early and

steep discounting to offload excess inventory. Target alone saw its net income plummet nearly 90% from the same three months last year.

“It has sent a wave of concern through the sector. [People] are being very cautious with guidance, and they’re prepared almost for the worst,” said Neil Saunders, a managing director at the analytics company GlobalData. “… This idea that consumers are defying gravity, and that they will go on spending at elevated levels ad infinitum, I think is coming to a close.”

Economists and policymakers closely track consumer spending — which makes up more than two-thirds of the U.S. economy — for any sign of diminishing demand. At the same time, the Federal Reserve has been trying to beat back historically high inflation by raising interest rates in a way that stops short of tipping the country into a recession. The labor market has remained strong, which has helped consumers continue to spend.

But now, even more affluent shoppers are feeling the strain and making more modest choices. A recent consumer sentiment survey from Alvarez & Marsal showed that 45% of consumers earning $150,000 or more are concerned that products have become too expensive. That is a 10 percentage-point increase since the spring.

Walmart and Marmaxx — its brands include TJX and Marshalls — were the winners this earnings season, Saunders said, swooping up those higher-income folks who wanted better value when shopping. Recently Walmart said its third-quarter sales popped 8.7%.

Walmart’s pull is its promise of “everyday low prices” and convenience: Shoppers can pick up groceries, a pair of shoes and a new flat-screen TV all at the same time. It also has one of the largest retail footprints in the country.

Quarterly sales at the umbrella company for TJX and Marshalls grew 3.3% from 2021 and a staggering 17.3% from pre-pandemic 2019, Saunders said.

“One of the reasons that they are good at growing is because they are a value player,” he said. “They are getting customers who are trading down from other parts of the market.”

According to Alvarez & Marsal, 7 of 10 consumers are modifying their spending this holiday season. Almost 40% of shoppers said they will spend less on gifts for themselves this year, 35% said they will spend less on gifts for others and about 25% said they are giving fewer people gifts.

“It’s quite an across-theboard intention to retrench on gifting,” Sharp said.

Ivan De Leon, 23, said he has strayed away from his usual indulgences, like a video game, new phone or other electronics. Money has been tight this year, he said, so he has been thinking ahead for the holidays for months.

“Because it has gotten more stressful and expensive in recent years, I’ve kind of just more or less downgraded in terms of like, rather than buying big elaborate things in my travels, I’ll buy maybe like a little trinket … which tends to be a lot cheaper,” said De Leon, who is volunteering in Louisiana before moving to Georgia to work as a firefighter.