Pranil Balram
Bachelors of Science, Business Administration, San Francisco State University
Master in Business Administration, Corporate Finance, Cal State East Bay
Why a Stretched American Consumer May See the Holidays as a "Last Hurrah"Key Insights
The current year appears to be turning out better than many retailers had anticipated. However, a number of companies claim they managed to extract a little more from weary consumers, while economists caution that demand may decrease next year. Sales this fall exceeded expectations, prompting companies such as Gap (GAP), Ralph Lauren (RL), TJX Cos. (TJX), E.l.f. Beauty (ELF), Home Depot (HD), and Walmart (WMT) to revise their year-end projections upwards, even though executives pointed out indicators of consumer fatigue. According to company leaders, shoppers are opting for less expensive brands, taking advantage of sales, and postponing significant purchases. Economists noted that many Americans are grappling with basic expenses following years of persistent inflation, while more affluent consumers are hesitating on making large expenditures. Consumer Spending Increases Gradually Americans' perceptions of the economy have improved over the past few months, yet consumer confidence still falls short of levels seen before the pandemic, according to the University of Michigan’s Consumer Sentiment Index. Economists have noted unexpected rises in core retail spending, which increased by 0.4% in October, as reported by the Commerce Department. At the same time, credit delinquency rates remained "high" in the third quarter, as credit card balances grew, according to the New York Fed. Brands have taken advantage of a broad search for more affordable prices. According to Ernie Herrman, the CEO of their parent company, Marshalls and T.J. Maxx dominate the competition in terms of value. Old Navy has gained traction with both moderate- and high-income earners, stated Gap CEO Richard Dickson. Additionally, CEO Douglas McMillon noted that households earning six-figure incomes contributed to Walmart's growth. Walmart has cut prices on thousands of products, as has Target (TGT). However, Target faced more challenges in the third quarter due to its focus on apparel and other non-essential items, rather than kitchen staples. Although Target conducted more transactions last quarter, they were generally for smaller amounts, according to executives, who noted that customers displayed a more significant reaction to promotions compared to the previous year. "Considering shopping patterns, especially what we've observed in Q3 and anticipate for Q4, it’s clear that consumers are prioritizing value," said Target CEO Brian Cornell recently. "We believe this trend will persist." Wealthy Families Refrain from Making Large Purchases According to Chedly Louis, vice president of corporate finance at Moody's Ratings, while many customers are looking for methods to cut costs on necessities, people with more money find it easier to implement savings plans. In general, low-to-mid-income consumers visit the grocery shop more frequently, but their basket sizes are smaller, Louis stated. "That middle-class to upper-class consumer is more inclined to shop at Costco, Walmart, and make bulk purchases." According to Nationwide Mutual Insurance Company financial market economist Oren Klachkin, wealthy Americans are still able to spend with reasonable ease. However, he noted that consumers are hesitant to make significant purchases due to high interest rates and uncertainty about how the economy may be impacted by the policies of the next president and international events. Many stores have seen a decrease in high-priced sales as a result. Executive Vice President Rick Gomez claims that Target customers are choosing minor indulgences like candles and vases over televisions. According to Lowe's and Home Depot, major home improvements have slowed. In the most recent quarter, transactions exceeding $1,000 decreased by almost 7% year over year. Additionally, executives at Williams-Sonoma (WSM) and La-Z-Boy (LZB) stated during recent earnings calls that the demand for furniture is not very strong. The holiday shopping season might end up being a "last hurrah," Baumohl said. He claimed that consumers had a generally positive attitude on the state of the economy. However, "we're going to see some of that confidence fade come next year, in large part because people are actually going to have to face the reality of their personal finances." |
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