McKinsey: Rising consumer optimism may not equal more spending

Consumer optimism continued to increase through August, but recent mixed retail earnings, volatility in the equity markets and economic concerns have led analysts with McKinsey & Co. to put a cautious outlook on consumer spending for the balance of this year.

McKinsey’s ConsumerWise survey showed more bifurcation among shopper demographics with wider gaps relating to optimism. The report found younger consumers displayed significantly higher optimism than older consumers, while male and female respondents in the survey felt differently about the economy.

While inflation has consistently dropped from its 2022 peak, 53% of respondents in the McKinsey survey said that rising prices and inflation are among their concerns. McKinsey said the inflation overhang is likely to blame for their concerns.

“Just because inflation rates stabilize it can take months or even years for consumers to adjust to the higher prices that can erode spending power,” the report noted.

Major retailers such as Walmart and Target have announced plans to reduce prices to woo shoppers. McKinsey said 37% of survey respondents acknowledged retailers trying to help them lower the cost of their shopping basket. McKinsey said respondents plan to modestly increase spending on most essential items, semi-discretionary and discretionary items over the next three months. At the same time, spending on entertainment, vehicles, and home improvement is expected to decrease by a majority of respondents in the next three months.

The report also found consumers, especially Gen Z and millennials (ages 18-43), continue to be price-sensitive with 76% of consumers trading down to lower-priced items in the past year. That number goes to 86% for the youngest consumers. Gen Z (ages 18-27) nearly 50% report changing retailers for a lower price or discount, up from 44% last quarter.

Consumers also are turning to buy now, pay later (BNPL) services more often when shopping via e-commerce for back-to-school items. McKinsey reports all income levels use BNPL services, including 18% of middle- and high-income consumers. Deferred payment platform Klarna reports that 40% of its sales in the recent quarter came from new users. Klarna said it has 40 million U.S. customers, and 70% are Millennials (ages 28-43).

The McKinsey report was released as retailers face a holiday shopping season that some analysts warn may be lackluster. Analysts at Salesforce predict U.S. holiday sales will total $272 billion, up 2% year over year.

“This season will be competitive, intense, and no doubt focused on pricing and discounting strategies. It’s never been more important to leverage technology like AI and rely on your customer data for guidance and insight into marketing campaigns – especially the holiday promotional calendar – that keep your loyal customers buying more and buying from you,” said Caila Schwartz, director of strategy and consumer insights at Salesforce.

Craig Johnson, president of Customer Growth Partners, sees retail sales for holiday up between 2.5 and 3.5%. Johnson said the holiday season should be so-so at best as higher household debt will limit spending. Deborah Weinswig, the CEO at Coresight Research, is more optimistic with her holiday spending growth prediction at 4%.