In our four-part blog series, RSM’s senior industry analysts explore back-to-school shopping trends and the impact on consumer businesses.
Many analysts use back-to-school shopping as an indication for how holiday sales will trend, a theory confirmed on Walmart’s recent earnings call.
If July’s retail sales are any indication, holiday sales will be focused on individual product categories and consumer spending by income level.
If July’s retail sales are any indication, this year’s holiday sales will be largely focused on individual product categories and consumer spending by income level. July had both nominal and real year-over-year growth from top-line retail sales, core retail sales and nonstore retailers.
But at the category level, apparel, general merchandise and recreational product retailers are experiencing real sales contraction, even at a time when nominal sales have grown. This is most likely because of deeper discounts required to reduce high inventory and a broad pullback in these categories after heavy spending during the pandemic.
Despite a recent increase in consumer debt levels and the resumption of student loan payments in the fall, consumers continue to spend, supported by the growth in household assets over the past three years.
It is more likely that any pullback in goods spending this holiday season will be driven by fatigue rather than an inability to spend as consumers continue to shift spending toward travel and experiences, and away from products.
It remains to be seen what, if any, impact the resumption of student loan repayments will have on overall spending. There are still options for people to delay some payments, and it is also important to note the oft-cited $1.5 trillion of outstanding debt will not come due at one time; consumers will continue to evaluate monthly budgets as payments come due.
While a subset of consumers may be under additional financial stress, the majority of monthly spending is coming from consumers with higher incomes, a group unlikely to be affected by the resumption of these payments.
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Retail performance in July was largely driven by discount events, most notably by Amazon’s Prime Day, July Black Friday sales events and others, a strategy that is likely to be repeated during the holiday season.
In our holiday forecast last year, we expanded holiday sales to include October, a trend that is likely to be repeated this year as retailers compete for consumer dollars earlier in the season.
The days of waiting for Black Friday to introduce large-scale discounts appear to be over; retailers that wait until after Thanksgiving for sales events risk further fatigue from consumers.
Earlier spending could benefit wholesalers, most notably apparel companies, which continue to sit on elevated levels of inventory in the event of retailer reorders.
The strong labor market continues to give consumers the confidence to spend each month. The narrative of the consumer being dead or significantly pulling back on spending has not yet materialized. This is not to say a pullback will not happen; rather, we have not yet seen consumers heed warnings of pending financial stress.
An unknown in the labor market is the termination of day care subsidies this fall, which could hurt spending if families must choose between work and child care, particularly at a time when many companies are pushing employees to return to the office.
The takeaway
The holiday shopping season will be shaped by the performance of individual product categories and income levels. Discount events in October will most likely drive early holiday shopping, just as they did last year. Rising consumer debt and the resumption of student loan payments have yet to dampen consumer spending, and it remains to be seen if those factors will be felt during the holiday shopping season.
