The Supply Side: Early read on holiday sales expectations is cautious

Retailers often live and die by holiday sales. Early predictions suggest lackluster overall spending this year, with growth barely outpacing higher prices. Deloitte forecasts holiday retail sales to grow between 3.5% to 4.6% this year, roughly half the 2022 growth rate of 7.6%.

Deloitte pegs total U.S. holiday sales to range between $1.54 trillion and $1.56 trillion between November and January. E-commerce sales are expected to grow between 10.3% and 12.8% year-over-year to total between $278 billion and $284 billion.

“We expect healthy employment and income growth to keep the volume of sales growing for the 2023 holiday season,” said Daniel Bachman, Deloitte’s U.S. economic forecaster. “Inflation, which accounted for much of the increase in retail sales value last year, should moderate. This means the total value of retail sales will grow more slowly than last year.

“Our forecast also reflects a decreasing pool of pandemic-era savings, both of which will weigh on retail sales and are reflected in our lower projected growth for the season.”

Bain and Co., a management consulting firm, has a slightly more cautious projection with its report that forecasts sales to grow 3% in November and December, reaching $915 billion. It would be the lowest growth rate since 2018. Bain expects 90% of the overall growth in sales to come from online transactions.

Adjusting for inflation, Bain projects U.S. holiday retail sales growth will be sluggish at just 1%, well below the 10-year average and the lowest real sales growth since the financial crisis.

Gerald Storch, an adviser with more than 30 years of experience in top management and board seats for retailers such as Target, Supervalu, Hudson Bay and Fanatics, said the Bain and Deloitte predictions, when adjusted for inflation, indicate a sluggish holiday season for many retailers.

When looking at Bain’s report, U.S. retail sales growth this year is up only 4% on a nominal basis, including inflation. With a Consumer Price Index (CPI) reading of 4.3% in August compared to a year ago, Storch said sales are flat, and that is not likely to improve through the end of the year.

Bain reported that sales growth has come mainly from e-commerce and select in-store categories such as health, personal care and food and beverage. Other in-store categories have decelerated over the past few months, with some categories declining in overall sales. Bain said that as consumers spend more on necessities, there is less money to spend on discretionary items like holiday gifts.

“Retailers are facing new challenges this year and are overcoming headwinds from higher interest rates amid increasing debt,” said Aaron Cheris, head of Boston-based Bain’s Americas Retail practice.

If inflation eases, Cheris could see a boost to holiday retail growth. Bain expects shoppers to pull forward more holiday spending this year, including during October sales, and the firm predicts holiday sales could also benefit from greater consumer spending power as wages, disposable income, and stocks go up relative to last year.

“Savvy retailers will start early and lead with value messaging — both in terms of price and quality — employing positive commonalities to appeal to potentially cautious consumers this holiday season,” said Sarah Irizarry, associate partner in Bain’s Retail practice. “Winners will continue to invest amid challenges and focus on new solutions that personalize their offerings and improve overall customer service.”

Deloitte’s report also provided some upside possibilities. Nick Handrinos, vice chair at Deloitte LLP, said there will continue to be a battle for consumer spending.

“A sharp rise in spending on services post-pandemic shows signs of leveling off since last year, and compared to pre-pandemic levels, spending on durable goods remains high,” Handrinos said. “This season, e-commerce sales should continue to be strong as consumers search for the best deals online to maximize their wallets. Retailers who remain flexible to shifting consumer demand and behaviors will likely be poised for growth this holiday season.”

The National Retail Federation (NRF) will release its holiday sales forecast in early October, but the trade group recently lowered its annual retail sales guidance, citing a slowing economy. NRF Chief Economist Jack Kleinhenz said recent data signals a slowdown in the economy’s momentum.

“Progress has been made on combating inflation, but higher prices remain,” Kleinhenz said in September. “While consumers are still spending, the composition of their spending continues to favor services over retail goods and even then, there was less momentum going into the third quarter.”

He said retail sales growth in 2023 will likely be around 4%. Kleinhenz also referenced consumer confidence that took a hit in August as high prices and interest rates weighed on shopper’s decisions.

Walmart President and CEO Doug McMillon had a more upbeat read on consumers while speaking at the Golden Sachs’ Global Retail Conference on Sept. 12. He said grocery inflation is coming down but not to the levels of two years ago.

“Inflation and higher prices are kind of with us. We’ll see disinflation, but not all the way back to deflation … certainly not in the short term,” McMillon said.

He said the job market, wage increases and some pockets of disinflation have helped consumer spending. McMillon said the economy is better than he expected at the start of the year. He said shoppers with constrained budgets have switched to private brands. McMillon said Walmart has also been able to attract customers across higher income levels, improving its situation.

McMillon said Walmart’s strong back-to-school season indicates that holiday sales will perform well.

Storch said Walmart has been a winner because of its heavy exposure to food and necessities and the revenue from its growing suite of services that set it apart from department stores and other specialty retailers.

Editor’s note: The Supply Side section of Talk Business & Politics focuses on the companies, organizations, issues and individuals engaged in providing products and services to retailers. The Supply Side is managed by Talk Business & Politics and sponsored by Firebend.