State of the State 2024: Mixed bag predicted for retail sector in 2024

Editor’s note: The State of the State series provides reports twice a year on Arkansas’ key economic sectors. The series publishes stories to begin a year and stories in July/August to provide a broad mid-year update on the state’s economy. Link here for the State of the State page and previous stories.

A U.S. recession never happened in 2023 and retailers managed to post holiday sales growth of 3.8% to $964.4 billion according to the National Retail Federation (NRF). For the full year, NRF reports retail sales increased 3.6% to a record $5.13 trillion.

“Consumer spending was remarkably resilient throughout 2023 and finished the year with a solid pace for the holiday season,” NRF Chief Economist Jack Kleinhenz said. “Although inflation has been the biggest concern for households, the price of goods eased notably and was helped by a healthy labor market, underscoring a successful holiday season for retailers.”

Kleinhenz cautioned that tighter credit conditions along with higher borrowing costs are still a problem for consumers this year along with slower wage and job growth expected through the first half of this year.

“Spending is elevated relative to current income, and maintaining the recent pace of growth will be increasingly difficult,” he said.

Jan Rogers Kniffen, a retail consultant and CEO of Kniffen World Wide Enterprises, remains bullish on consumers and the retail sector in 2024. Kniffen said the cost of goods is coming down while the price tags on experiences are still rising.

“The holiday season was strong overall and most retailers made money, largely because they have done a better job managing inventory. Growing revenue will be harder this year because of price deflation in goods. Retailers will have to sell more at lower prices to get the same results,” he said.

He predicts the first half of 2024 will be slower for retailers, while Walmart, Costco and other mass retailers will do well because of their market share in food and consumables. He said consumers will also return to spending on apparel and other goods by summer.

“There is no doubt consumers spent more on experiences in 2023 as travel and outings were off-limit during the pandemic. But I expect travel to slow in the coming months and consumers to see value in the lower-cost goods. If interest rates come down and mortgage rates get to 5% by mid-year I foresee more people buying houses and that should bode well for Home Depot, Lowes and home furnishing category sale,” Kniffen said.

He said there will be store closures and bankruptcies, but there will be more store openings as consumers continue to return to brick and mortar. Kniffen has a short list of retailers he believes will lead the pack in 2024.

“Walmart is the best retailer in the world at scale because of their investments in in-store experiences and connecting stores with online and a growing suite of services. Ulta is another favorite for some of the same reasons. Ulta has tremendous customer loyalty in a resilient category like beauty and wellness,” Kniffen said.

He said Dillard’s and Macy’s are also poised to do well in 2024, in part because they are family-controlled, low-to-no-debt, and have the ability to invest where they need to. He said this gives them an advantage over other department stores.

Scott Benedict, principal at McMillan Doolittle, said one of the messages he got from the recent NRF annual convention was the expanding bifurcation in the retail sector. He said mass retailers like Walmart and Costco, dollar stores, off-price players and grocery segments are winning consumer favor and the specialty, department stores and niche online-only competitors are having more trouble.

Benedict said big retailers that can offer value every day, or the off-price dealers that provide treasure hunts for top brands at a discount are likely to fare better than the full-price retailers that must rely on sales to woo consumers. He also believes the first half of 2024 could be slower than the back half of 2023. He said consumers are seeking the best value for the goods, services and experiences they purchase and that behavior is not likely to change.

Benedict said the world is evolving and changing at a faster pace than some retailers are ready for. From leveraging generative artificial intelligence to improve shopper experiences and internal operations to growing revenue with services like retail media, Benedict said well-capitalized, innovative retailers will have the opportunity to grow market share over lagging competitors.

Economists at Wells Fargo Securities expect the U.S. economy will slow in the first half of 2024, but stave off recession. The U.S. economy grew at 3.3% in the fourth quarter of 2023, slower than the 4.9% GDP reported in the third quarter and better than the first half of last year. Consumer sentiment jumped 13% in January, the highest reading since July 2021, according to the University of Michigan Survey of Consumers. The improved sentiment was linked to lower inflation and strengthening income projections, according to the survey.

Grace Zwemmer, economic research analyst at Oxford Economics, said confidence alone is not a good indicator of where consumer spending is headed. Consumers spent in the back half of 2023 when sentiment was less bullish.

Wells Fargo Economist Sarah House said consumer reliance on credit and buy now, pay later financing is helping to prop up spending. Overall delinquency rates have been low, but credit card issuers from Capital One to Visa have recently reported rising delinquency rates among more of their customers.

Kniffen said consumers who used deferred payment forms to finance holiday spending will have to lay low in the first quarter as they make repayments. That’s why he expects softer non-discretionary sales to start the year.

“As long as people have their jobs, gas prices stay lower and food costs continue to fall, consumers will be ready to shop for new summer clothes,” he said.