The Supply Side: Early holiday spending underway; lackluster year expected

Christmas shopping has begun with one in four consumers starting in October and the majority expected to reduce spending from a year ago, according to data research marketing agencies.

The National Retail Federation (NRF) forecast total holiday spending to increase by 2.5% to 3.5%, down from the 3.8% growth reported in 2023. Mark Matthews, research director at NRF, said prices on many goods are lower than a year ago, so retailers have to sell more units to achieve the same results as last year. He noted that while consumer sentiment has been lower, those measures are relatively poor indicators of spending.

“They’re spending what’s in their wallet as opposed to what’s in their heads, which has been relatively beneficial for the economy,” he said.

Bain & Company expects sales growth to slow this holiday season. The firm estimates U.S. retail sales will total $941 billion during November and December, up just 3% from a year ago and well below the 5.2% average increase over the past decade. Bain expects in-store sales to remain relatively flat, growing just 0.5% year over year. Bain predicts department stores, sports and hobby stores will see negative single-digit sales this holiday season. Saving the day will be online sales, which Bain expects to grow 9.5% from last year.

Bain’s research indicates U.S. households across all income cohorts reported a worsening fiscal outlook, with upper-income households representing more than half of spending reporting the steepest declines.

“It’s been a relatively slow year for U.S. retail, as consumers have grappled with rising costs and growing unemployment,” said Aaron Cheris, partner at Bain’s retail division. “If retailers want to beat these gloomy expectations, they will need to get an early start, emphasizing value and finding ways to delight shoppers during a stressful season.”

Moody’s economists said retailers continue to face challenges that could stifle holiday spending as shoppers have to allocate more of their income to more costly non-discretionary expenses like housing, insurance and health care. Moody’s also cautions that credit card delinquencies are rising among lower-income households, a sign of spending overload.

Some marketing firms predict better holiday results. PricewaterhouseCoopers expects shoppers will spend an average of $1,638 on gifts, travel, and entertainment this holiday season, up 7% from a year ago and twice as optimistic as the NRF’s predictions. PwC expects spending to bifurcate across income groups, with one-third of consumers earning more than $65,000 per year planning to spend more, compared to just one-fifth of consumers earning less than that.

PwC predicts millennials (ages 28-43) to spend $2,222 this holiday, up 22% over the past two years, while younger Gen Z (ages 12-27) are expected to spend $1,752, rising 59% over the same period. Older generations will spend considerably less, with Gen X (ages 44-59) and baby boomers (ages 60-78) reducing spending by 9% and 6%, respectively.

The data firm also reports 57% of respondents described their financial situation as strained — either unable or struggling to pay monthly bills or able to cover them with little left for savings, holidays or extras. Consumers are now more selective in their spending, with 85% considering cutbacks over the next six months, primarily in nonessentials like dining out, clothing and luxury items. PwC also found price-sensitive consumers have grown more discerning and are adapting their shopping behaviors. The survey found 45% are trying resale and used products, up from 38% last year.

Nikki Baird, vice president of strategy at retail tech firm Aptos, said as deflation continues in many retail categories, this holiday season will likely be lackluster for retailers as they aren’t just competing with other retailers, but also they are competing with other ways consumers spend.

She said American consumers have been more resilient than anyone could have expected, but that isn’t a free pass for retailers as there is no shortage of ways consumers can spend their discretionary dollars. Consumer expectations for in-store shopping have never been higher, and retailers that have invested in tech, labor and digital transformations in stores will be in the position to win. She said consumers want value and convenience this holiday season, noting that shopping experiences also matter.

For those retailers falling behind the curve, Baird warns, “It’s too easy to kick the can down the road until you suddenly realize there’s no road left.”

SHOPPING BEHAVIORS
Artificial intelligence consulting firm Ankura said 24% of survey respondents had already started holiday shopping in early October thanks to a record Amazon Prime Day event, with 49% participation among the respondents. Prime Day is expected to surpass Black Friday’s 45% participation rate for the respondents. Ankura reports 43% of respondents take part in Cyber Monday sales events, on par with a year ago.

In addition, buy-now-pay-later (BNPL) services are gaining popularity among younger generations, with 47% of surveyed Gen Z and 40% of millennials expecting to increase their usage of these services.

A new study from global payment solution provider Splitit reports 38% of consumers plan to use BNPL options when self-gifting this holiday season. More than two-thirds (67%) of parents plan to use the options for their holiday purchases this year, while 43% of consumers surveyed said the availability of BNPL will influence where they shop.

Nearly 40% of millennials intend to use pay-later options more frequently during the holiday season than they typically do throughout the year. The study found that 49% of parents say BNPL plans reduce the guilt of splurge purchases by spreading large expenses out over time. That number increases to 52% for millennials.

Overall, 28% of holiday shoppers are likely to use BNPL plans this holiday season, and two-thirds said they will do so to buy gifts for others. Additionally, 30% of holiday shoppers expect to use BNPL options more frequently during the holiday season than during the rest of the year.

“Though we see a strong interest in shoppers buying for themselves using pay-later plans this holiday, nearly two-thirds of consumers also plan to use flexible payment options for gifting,” said Splitit CEO Nandan Sheth. “Millennials and parents, in particular, are leveraging pay later options to justify large purchases and better manage their finances.”

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.