People shop at a mall in Houston.
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People shop at a mall in Houston.
Brandon Bells/Getty Images
It’s a kind of expected anxiety. Big chains like Walmart, Home Depot and TJMaxx are bracing for a tough year as shoppers have already started cutting back – but how much longer? Some retailers, such as Best Buy and Macy’s, have felt the slowdown.
More than a dozen retailers have released a flurry of financial reports in recent weeks. They have an overview of consumer spending, which is the main driver of the US economy. Here’s what they said.
People are still spending, despite cautious store forecasts
Holiday discounts and a fairly warm January sent shoppers into malls and department stores in a frenzy. Surprise shopping at the beginning of the year. Food and big-box giants — Walmart, Costco, Target, Kroger, McDonald’s and others — report growing sales on the back of higher prices for food and essentials.
McDonald’s CEO Chris Kempczinski said the US could see a “mild to moderate” recession and US inflation will continue but is likely to have peaked:
“Overall, consumers, whether in Europe or in the US, are actually holding up better than we might have expected a year or six months ago.”
Arun Sundaram, who tracks multiple retail and food companies at equity research firm CFRA, said companies were hit by last year’s unexpected ups and downs, including soaring inflation and war in Ukraine. So they want to set low expectations for another uncertain year.
Walmart CEO Doug McMillon cited “a lot of unknowns” even as he forecast in-store sales growth for the year:
“Customers are still spending. … Obviously we don’t know what the second half of the year will look like. … We could fall into a recession. We don’t know what will happen with spending. We don’t know what will happen with layoffs, household income.”
Food and beauty products are the splurge of the moment
Shoppers are being picky (or “picky,” as Walmart puts it) when they buy fewer electronics, such as spending that money instead on essentials. We’ve heard this from Kohl’s, Walmart, Target — and Best Buy, forecasting that 2023 will be the worst year for sales of computers and other consumer electronics.
High food inflation means more spending on groceries, prompting Kroger to issue one of the most optimistic revenue forecasts for the year. Fast food prices have also increased, and Wendy’s CFO Gunther Plosch said its stores have not seen “any clear objections from consumers”. (He added that it was Wendy’s that saw the biggest inflation on chips — and the biggest price drops on beef.)
Makeup, skincare, and fragrance counters are other places shoppers splurge. Target and Kohl’s (which has a deal with Sephora) both call for high spending on beauty products as a way they offset a loss of interest in other divisions.
We are shifting more spending to travel and activities
Home Depot blames the recent slowdown in shopping, among other reasons, with shoppers spending more of their budgets on outings and travel. The retailer says people are still renovating and working on projects, but spending more carefully on expensive items like appliances, ovens or patio furniture.
Best Buy and Macy’s highlight a similar trend. Macy’s CEO Jeff Gennette said he expected people of all income levels to feel financial pressure this year:
“On the surface, consumers are in better shape than they were in 2019. Employment and wages are stable, savings are up from historical levels. But … inflation has outpaced wage growth. and revolving credit is increasing. … [We] It is expected that the distribution of disposable income will continue to shift towards essential goods and services. … [But] We believe that the desire to be with loved ones, go on vacations and attend events does not diminish, and expect the need for gift giving and the holidays to continue.
In that direction, Costco CFO Richard Galanti mentioned some tentative signs that people might start spending more on things. that they may need for activities, such as camping and water sports equipment. He also marked easing inflation:
“We continue to see some improvement in many commodities, commodity prices starting to fall – not returning to pre-COVID levels in some examples, but continuing to provide some relief – things like chicken, bacon, butter, steel, turpentine, nuts… Our average deals, our shopping frequency increased…So those things bode well, but every people are definitely spending their dollars where they feel they should be spending them.”
(Wealer) Shoppers are turning to cheaper stores and branded stores
Fast food outlets like Wendy’s are attracting more high-income customers who may be moving away from more upscale restaurants. These affluent shoppers are also a key driver of Walmart’s growing grocery sales.
Dollar stores and discounters like TJMaxx are reporting growing sales, with new shoppers coming to Dollar Tree, as CEO Rick Dreiling said:
“What we’re seeing is consumers making $80,000 a year are dropping prices… The current economic environment is driving more higher-income consumers to move into value retail.”
Store branding is also on the rise. Costco, Kroger, Walmart and Target say shoppers are increasingly choosing private brands over major national brands, like Kroger’s Home Chef private label. These products actually bring companies higher profits.
CFRA analyst Sundaram said the record low unemployment rate and the savings people amassed during the pandemic lockdown has greatly supported current spending.
“Consumers are still willing to spend, but their ability to spend has started to decline,” he said, “and now it’s starting to decline at a rate that may be more alarming.”
