In our second installment of our three-part blog series, RSM’s senior industry analyst explores back-to-school shopping trends and the impact on consumer businesses.
Even as inflation has moderated, consumers have indicated price hikes and affordability constraints have remained important considerations when deciding upon a purchase. As the back-to-school shopping season continues, surveys show total spending is expected to decrease, after record highs last year.
While spending and real wages continue to be strong, consumers are moderating, according to the National Retail Federation and Prosper Insights & Analytics. Specifically, consumers are buying fewer items and buying store-brand or generic products to save money. Additionally, a higher percentage of back-to-school shoppers plan to shop at discount stores, spreading out their purchases, waiting for sales and comparing prices online.
For middle-market retailers and consumer companies, the changing behaviors provide challenges and opportunities.
A look at the data
Inflation and strong consumer spending have continued to deplete household savings built up over the pandemic. Between 2020 and now, U.S. households’ personal savings as a percentage of their disposable income has fallen from its peak of 24.5% to 3.5%, according to the U.S. Bureau of Economic Analysis.
The increased savings was created during the pandemic by households practicing precautionary savings during the economic downturn, the inability to spend money, in part, due to business closures, and stimulus checks distributed to the large majority of U.S households.
Specifically, the first monthly child tax credit payment was distributed in the summer of 2021, then repeated in the fall. The U.S Census Household Pulse Survey determined that most of those who received credits applied those funds to food, clothing and school supplies, bolstering back-to-school sales. Expected back-to-school spending grew 57% between 2019 and 2023, but is expected to decrease in 2024, according to the National Retail Federation and Prosper Insights & Analytics.
Also this year, the personal consumption expenditures price index, which takes into account consumers substituting for cheaper items, has moderated to 2.6% year-over-year growth from 4.2% last season, and 5% the year before that, according to Bloomberg.
In addition, consumers’ excess personal savings dropped considerably from the pandemic highs, according to the U.S. Bureau of Economic Analysis. Likewise, lower income brackets are experiencing increased pressures. Credit card and auto loan delinquencies are increasing across all age groups, with consumers aged 18 to 29 seeing the greatest rise, according to the New York Fed Consumer Credit Panel and Equifax. Additionally, household debt payments as a percent of disposable personal income have increased from the pandemic, according to the Board of Governors of the Federal Reserve System (US).
Still, despite reduced excess savings, the overall health of the U.S. economy and consumer spending remains strong, spurred on by a solid labor market and increases in real average wages. Real spending is now above what the Congressional Budget Office’s pre-pandemic prediction for both goods and services.
Buying behavior shifts
However, regardless of the stronger economy, U.S. consumers have demonstrated a shift in buying strategies, building on the trend as inflation has continued. Specifically, consumers are less likely to splurge on name-brand products. Instead, U.S. consumers are choosing to buy less expensive products to save money. Online shares of the least expensive items in personal care, electronics and apparel increased significantly in the first four months of the year, according to Adobe Analytics data. This has brand marketers looking for new ways, in addition to social media outreach, to maintain fan loyalty and keep consumers from trading down on purchases.
Key considerations for middle market businesses
- Realign target audience profiles, taking into account bifurcated household income levels and their specific needs.
- Employ strategies to maintain item penetration, such as creating new products with costs that are viable to sell at a cheaper price, and seek partnerships that sell to new geographies or settings, increasing market share. Brick-and-mortar stores that offer products tailored to the needs and preferences of the area’s income level will experience better results.
- Conversely, consider investments to innovate existing products and add value. Noteworthy, high-quality, brand-name luxury items may attract higher-income buyers who are less price-sensitive and are more willing to pay a premium for products and services.
- Leverage new technology and software to reduce operational costs and increase efficiency, leading to greater productivity and better margins.
For more, read our previous back-to-school series post and check out our additional retail business insights.
