Retailers Struggle to Read Consumer Signals for Q4

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Retailers are looking at a major balancing act heading into the holiday season this year, with consumer signals and economic indicators a mixed bag and absolute boatloads of excess inventory, much of it old, to contend with in order to make Q4 a success.

On the economic front, the latest Consumer Price Index from the Department of Labor, gauging the rate of inflation, was unchanged in July, up 8.5% from 12 months ago. Excluding food and energy, the CPI rose 5.9% last month.

The National Retail Federation is taking an optimistic position, adopting the Biden administration line that the historic marker of two consecutive quarters of negative GDP growth does not equal a recession now or for the balance of the year.

“Back-to-back contractions have heightened fear of a recession, but while the economy has lost momentum heading into the second half of the year, economic data is not yet consistent with a typical recession,” said Jack Kleinhenz, the NRF’s chief economist, in a release. “Our view is that while the economy is functioning at a slower pace it is likely to avoid a recession this year.”

Kleinhenz did hedge a bit, saying that while the underlying strength of the economy is sound enough to handle nagging inflation and keep the threat of recession at bay, such an event would be “short-lived even if we are wrong.”

A rising unemployment rate would be another recession indicator, the NRF noted, but it was at 3.6% in June, down from 4.1% in January and a tick above the pre-pandemic low of 3.5% in January 2020. Another positive indicator was retail sales growth of 7% in the first half of the year, excluding automotive, fuel and food, in the middle of a range NRF is projecting for the entire year.

“At this juncture, the key concern remains inflation and the Fed’s policy moves to contain it,” Kleinhenz said. “As the central bank attempts to adjust monetary policy, it faces the dangers of continued inflation if it doesn’t do enough and a recession if it goes too far. Consumer reaction to interest rate hikes is hardly immediate or predictable, making it impossible to judge the effect of the Fed’s reactions in real time and quickly correct any oversteering.”

According to the U.S. Census Bureau, the retail inventory-to-sales ratio, a measure that tracks the rate of inventory turn, was at 1.21 as of July 30, up 10% from 1.10 a year ago. Any number of recent quarterly calls demonstrate how much high inventory levels are acting as a drag on profits, as precautionary stockpiling from late 2021 and early 2022 has collided with shifting consumer behavior.

Taboola, whose platform makes content recommendations for ad publishers, said consumer content preferences are showing up as a proxy indicator of sentiment. For instance, in the 45 days prior to Aug. 17, readership trends show a 2,000% increase in consumers viewing content on discounting, and a 119% increase in “dollar store.”

Dave Marcott, SVP of Cross-Industry/Cross-Border and Technology at Kantar Consulting, said retailers these days are practicing “wishful thinking” when it comes to consumers and the demand signals they’re putting out, a stance he characterized as neither negative nor positive.

Since retailers can’t go back to the relatively predictability of 2019 in terms of normal demand indicators, Marcott said, they have to basically do the best they can based on current run rates.

“On the demand side, they basically have to overlook most of the static that’s out there, be it inflation, politics, climate change or whatever, and say okay, based on where we’ve been going and where we think we’re going to be, we’ll order accordingly,” he said. “The difficulty with that is, virtually all the normal variables you put in there don’t exist. That’s a bit of a challenge.”

Marcott said a normally reliable variable like price sensitivity has gotten much harder to read, as prices in general have skyrocketed and many promotions are virtually nonexistent since retailers can’t afford deep discounting – except to move mounds of dated inventory.

“It’s not unusual to see things put on promotion at essentially 5% off, which is a percentage that almost doesn’t exist in the perception,” he said. “I’m not finding price driving decisions like it used to. As a retailer, I don’t know what price sensitivity is, I don’t quite understand the needs, and I haven’t figured out shopper routines, since most people are not going back to a physical worksite.”

While school routines for families with children is one area where consumer behavior has reset, the back-to-school season was “not a success” in 2022, Marcott said. “Everyone presumed it would be bigger but demand was soft,” he said. “So that takes a normal demand element I as a retailer would use (for Q4 modeling) off the table.”