People shop at a mall in Houston, Texas. Brandon Bell/Getty Images hides the caption
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Brandon Bell/Getty Images
People shop at a mall in Houston, Texas.
Brandon Bell/Getty Images
It’s a timid kind of fear. Big chain stores like Walmart, Home Depot and TJMaxx are gearing up for a tough year as shoppers have started to scale back – but for how much longer? Some retailers like Best Buy and Macy’s are already feeling the slowdown.
More than a dozen retailers have released a spate of financial reports in recent weeks. You have a comprehensive view of consumer spending, which is a major driver of the US economy. Here’s what they say.
People are still spending, even though store forecasts are cautious
Holiday discounts and a fairly warm January brought shoppers on a surprise shopping spree to malls and department stores to start the year. Big-box and grocery giants — Walmart, Costco, Target, Kroger, McDonald’s, and others — reported rising sales thanks to higher prices for groceries and essentials.
McDonald’s CEO Chris Kemczinski said the US could experience a “mild to moderate” recession and US inflation will continue but has likely peaked:
“Overall, whether in Europe or in the US, consumers are actually holding up better than we probably expected a year ago or six months ago.”
Arun Sundaram, who follows many retail and food companies at equity research firm CFRA, says companies have been hit by last year’s unexpected twists and turns, including rising inflation and the war in Ukraine. So you want to set low expectations for another uncertain year.
Walmart CEO Doug McMillon cited “many unknown unknowns” even as he forecast store sales growth for the year:
“Customers are still spending. … It’s obviously not clear to us what the back half of the year looks like. … We could slide into a recession. We don’t know what’s happening with consumer spending. We don’t know. I don’t know what’s happening with layoffs and household incomes.”
Food and beauty products are trending
Shoppers are choosy (or “picky,” as Walmart puts it) as they buy fewer electronics, for example, and instead spend the money on the bare necessities. We’ve heard this from Kohl’s, Walmart, Target — and Best Buy, which have forecast that 2023 will be their worst year yet for sales of computers and other consumer electronics.
High grocery inflation has led to higher grocery spending, leading to Kroger making one of the most optimistic sales forecasts for the year. Fast-food prices have also risen, and Wendy’s CFO Gunther Plosch said stores had seen “no visible consumer resistance.” (He added that Wendy’s itself saw the biggest inflation in fries — and the biggest price drop in beef.)
Makeup, skincare, and perfume counters are other places where shoppers spend big. Target and Kohl’s (which has a deal with Sephora) both cited heavy spending on beauty products as a way to offset the loss of interest in other divisions.
We’re shifting more spending to travel and activities
Home Depot has also blamed the recent slowdown in shopping on shoppers who are spending more of their budget on outings and travel. The retailer said people are still renovating and undertaking projects but are more cautious about spending on large items like appliances, grills or patio furniture.
Best Buy and Macy’s highlighted the same trend. Macy’s CEO Jeff Gennette said he expects people of all incomes to feel financial pressure this year:
“On the surface, the consumer is in better shape than 2019. Jobs and wages are strong, and savings levels are elevated compared to historical levels. But… inflation has outpaced wage growth and revolving credit is rising. … [We] expect the allocation of disposable income to continue to shift towards services and essential goods. … [But] We believe that the desire to be with loved ones, go on vacations and attend events has not waned and expect the demand for gifts and occasions to continue.
With that in mind, Costco CFO Richard Galanti mentioned some tentative signs that people might start spending more on things they might need for activities like camping and water sports gear. He also pointed to slowing inflation:
“We continue to see some improvement in many items, commodity prices are starting to fall — not back to pre-COVID levels in some examples, but they continue to offer some relief — things like chicken, bacon, butter, steel, resin, nuts. ..Our average transactions, our frequency of purchases has increased… So these things bode well, but people are certainly spending their dollars where they feel they should be spending them.
(Wealthier) shoppers are moving to cheaper stores and private label
Fast-food spots like Wendy’s are seeing more higher-income customers potentially switching from more expensive restaurants. These wealthier shoppers are also key drivers of Walmart’s growing grocery sales.
Dollar stores and discounters like TJMaxx are reporting growing sales and new shoppers are coming to Dollar Tree, as CEO Rick Dreiling said:
“What we’re seeing is the consumer making $80,000 a year is trading down… The current economic climate is driving more consumers with higher incomes into value retail.”
Own brands are also on the rise. Costco, Kroger, Walmart and Target said shoppers are increasingly turning to private brands rather than big national brands like Kroger’s own Home Chef. These products actually bring higher profits to companies.
CFRA analyst Sundaram said record-low unemployment and people’s savings built up during the pandemic lockdown have supported much of current spending.
“Consumers are still willing to spend, but their ability to spend has started to decline,” he said, “and now it’s starting to decline at a perhaps more alarming rate.”
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