Inside Retail: State of the Industry Quarterly Report: A deep dive into the stories that shaped Q1

(Download a PDF version of this month's report at the bottom of the article.) Executive summary Heading into 2023, the retail industry knew that changes and challenges were ahead. With the pandemic in the rear view mirror, consumers are squarely planted in a new reality that brings its own set of challenges. In many ways, the first quarter of the year always brings a fresh perspective to the industry. Against the backdrop of winter, consumers can focus on hearty cooking, building resolutions, warm weather trips and longer days ahead. However, the first quarter represented continued anxiety about personal finances, retailer bankruptcies and more for the industry and its consumers. The comparison period to the rise of the Omicron variant helped the industry to outperform expectations, but long-term concerns about the health of the consumer developed. News such as banking crises, social media bans and the ending of pandemic-related assistance all weigh heavily on society as we enter the second quarter. It’s clear from the narratives that emerged during the first quarter that the retail industry must remain agile in its operations and relevant to consumers. The focuses of last year such as the metaverse, supply chains and inflation have given way to value, generative artificial intelligence (AI) and data monetization. Retail consumers are evolving at a blistering speed, and keeping up is critical to future success. What will the rest of this year bring? The second quarter will be the pressure test on retailers and consumers to see if the industry really is faring better in 2023 than expected or if the first quarter will be an outlier in a year of retail recalibration. Providing value will be the key message of the next three quarters, while experience and convenience take a back seat. However, investing in innovation must continue throughout the year in creating unified retail ecosystems and improving the path to purchase for consumers. Both consumer sentiment and inflation have improved since the middle of 2022, but lingering effects can be felt across retail as value becomes the most important factor in purchasing decisions this year. Consumers are hoping to better themselves and their financial position in 2023 despite headwinds, and retailers are going to have challenges staying top of mind. Through the lens of the consumer Entering the first quarter, consumers were ready to put the last year behind them. After battling the emergence of the Omicron variant, inflationary price increases, war in Europe and climbing debt, the first quarter was the reset that many needed. Overall, consumers are feeling slightly more bullish about the economy and their place in it compared to the middle of last year. However, that doesn't mean that consumers feel totally secure in their daily lives and personal financial situations compared to the height of the pandemic. The bifurcation of consumers socioeconomically continued into the first quarter, and the ending of some extended benefits like Supplemental Nutrition Assistance Program (SNAP) left lower-income families with fewer options than last year. Consumers continue their focus on living “well” with many partaking in the annual tradition of “Dry January,” but beyond that, weight-loss enhancing drugs dominated conversation in popular culture. It’s clear that consumers are each looking for their new normal in many aspects of life, and trying to define who they are and what matters to them. One of the key improvements for consumers in the first quarter compared to last year was the comparison period to the blistering spread of the Omicron variant. The spike in cases kept many consumers from traveling, attending in person events and shopping as planned in the first quarter of last year. No such fear loomed over consumers this year. According to Criteo, travel bookings in North and South America are close to pre-pandemic levels as of the first quarter, and hotel bookings in the U.S. are up 50% compared to 2022. Even despite the increased economic pressure on consumers, the desire to return to out-of-home activities will sustain experiential demand through this year. Overall, consumer sentiment is tricky to pin down during the past quarter, with some improvement in sentiment compared to 2022, but many anxieties remain. The Expectations Index, according to the College Board, still falls below 80, indicating that a recession may present itself within the next year. Deloitte’s State of the U.S. Consumer Tracker indicates that 40% of consumers are concerned about their levels of savings in the first quarter compared to 60% in the first quarter of last year, which does signal some improvement in attitudes over time. Despite consumer concerns improving, sentiment around rising prices remains low. Almost 80% of consumers have concerns about rising prices on everyday purchases, according to Deloitte’s tracker. Consumers clearly proceeded with caution in the first quarter when it came to spending money, and those hesitations are certainly an indication of what’s to come for the remainder of this year. Consumers are turning to credit cards to make up for dwindling savings and keep up with consumption habits despite inflation. Even with some improvements in sentiment, personal debt load increase is looming for many consumers. As of the fourth quarter of last year, credit card debt climbed to $930 billion in the U.S., which grew by almost 19% compared to 2021. Increased credit card balances create headwinds for retailers as consumers grapple with their debt load and try to make sensible purchasing decisions, while also wanting to maintain their previous lifestyle. Student loan debt discussions are tied up with the Supreme Court, and the repayment pause is set to end for borrowers in the second quarter. The emergency SNAP benefits enacted during the pandemic ended in February, and the standard SNAP recipient will see on average $90 less in benefits per month. SNAP recipients and other lower income households have already met steeper obstacles with inflationary price increases at retail, and this change will greatly decrease their ability to spend on essential categories, such as groceries, household goods and gasoline. Retailers and brands who service these consumers will be challenged to create convenient and valuable retail offerings for these shoppers who need them the most. Lower-income consumers face more challenges than upper- and middle-class families this year, but the end to pandemic-era benefits further squeezed income in the first quarter. Finally, looking through the lens of consumer behavioral changes, a renewed focus on weight loss in popular culture occurred that goes beyond the traditional New Year’s resolution. Beginning in 2022, diabetes drug Ozempic became vernacular within U.S. society as its impact on weight loss and appetite suppression garnered attention. As of the first quarter, the drug has become ubiquitous across the pop culture landscape and its hypothetical use by celebrities and notable figures to lose large amounts of weight quickly. According to Meltwater’s social listening, in the first quarter Ozempic’s total social engagement was more than 5 million, up 80% from the prior quarter. The debate about the drug’s long-term effectiveness and use solely for weight loss are highly contested, but it’s clear that finding a quick fix for weight loss is on the mind of the consumer post-pandemic. Industry performance snapshot For many retailers, the fourth quarter of 2022 was the culmination of a volatile year, and tepid holiday performances left the industry cautious as it entered 2023. Brands welcomed the first quarter with the promise of higher value across shelves, enhanced private label opportunities and easing inflationary pressures on margins and prices. According to many in the industry, consumer demand is down across many categories so far this year, even as the industry faced better comparable time frames to the Omicron outbreak last year. Overall, performances were steady for the holistic retail industry, and January was unexpectedly strong. As retailers share their earnings from the first quarter in the coming weeks and months, it will be interesting to see how the consumer is embracing this new year, and how retailers are meeting or failing to meet changing behaviors. According to the U.S. Census Bureau’s department of commerce, retail sales were up 6.4% in January and 4% in February compared to 2022. January in particular saw the highest month over month growth of which surpassed all expectations for sales growth after a sluggish holiday. January in particular saw the highest month over month growth of which surpassed all expectations for sales growth after a sluggish holiday. The numbers aren’t adjusted for inflation, signaling the year over year growth in dollar sales is in line with price increases, and may not indicate a true growth in unit demand at retail. Food and drinking services had the fastest growth across both months, which both stems from inflation, but also consumers continued consumption and rebound of both in-home and out-of-home food consumption. According to Circana, consumer demand is declining across the board at retail, for both essential and non-essential goods. According to their review of $2.9 trillion in consumer spending, consumers are prioritizing purchasing based on their needs instead of replacing items they already own or may not need right away. The industry needs to align itself to what consumers are shopping for now instead of what they may have wanted last year or the year prior. The U.S. Census Bureau’s department of commerce also released its numbers for 2022 e-commerce sales and sales penetration. According to the bureau, e-commerce sales grew almost 8% above 2021, and penetration held steady at 14.6%, which is the same penetration as 2021. The industry’s e-commerce growth has stabilized since its initial surge in 2020, which presents new implications for retailers unified retail strategies. Most channels are experiencing sales growth which is fueled by higher prices and more frequent trips, according to Numerator’s Shopping Behavior Index. Sales are up for the quarter from all income brackets, but spend per trip is stable for both low-income and high-income shoppers and down for middle-class shoppers, Numerator reported. Noteworthy news The first few months have been dominated by not-so-rosy coverage of the retail industry and its performance, despite the relative stability of the industry illustrated by the performance metrics above. Bankruptcies, store closures, layoffs and more dominated the news cycle and left consumers and the industry reeling from the coverage. Beyond the retail industry itself, retail adjacent businesses such as social media and financial services each faced public challenges that certainly will create ripple effects for the retail consumers. It’s no surprise that consumer sentiment is being pulled in many different directions based on their desire to protect investments and capital while also feeling slightly better about the economy. Fast casual and quick-service restaurants continue to be a bright spot across the food and beverage space, while delivery also is a larger contributor to growth. The first quarter was full of announcements, new products and speculation around the next moves for players in these channels. Cava, a Mediterranean-inspired fast casual chain, filed for an IPO in the first quarter, citing consistent growth and a diversified portfolio of food service and grocery products. Many fast casual chains focused on building strong brand identity and affinity with consumers as competition intensifies. Chipotle, a brand that has had volatile success in the past, leaned into consumer born trends in the first quarter to meet the demands of its guests. TikTok creators introduced a version of Chipotle’s quesadilla, but the current ordering infrastructure and menu online couldn’t support the creation, so modifications were needed to complete the item. Chipotle took notice and recalibrated its ordering and kitchen to support the recipe and launched the item “officially” in first quarter. Finally, delivery continues to be the growth driver across grocery and fast casual, and players may be scaling quickly. The first quarter brought much speculation about an Instacart IPO after its ditched plans in 2022 and reported strong growth at the end of last year. While the company hasn’t officially announced intentions, third-party delivery and fulfillment solutions continue to help the industry innovate and optimize unified retail strategies. Dollar stores were a dominant channel in the first quarter due to their positioning to consumers during current economic conditions and shopper uncertainty. Dollar Tree posted high single-digit same-store sales growth in the fourth quarter of 2022, but the news story of the first quarter relates to the dollar channel's position within grocery. According to Coresight research, one in five consumers shop the dollar channel for groceries and many chains are working on adding more fresh and prepared products for their shoppers. The dollar channel is poised to find continued success throughout this year, and their expanded assortments will certainly pull sales away from other sectors of retail, particularly with lower income households. Finally, the first quarter began to fulfill the prophecy of a recalibration of the retail industry. The first quarter saw major chains struggle, including a bankruptcy filing from Party City and Bed Bath and Beyond’s challenged financial position and cash flow. Direct-to-consumer brands, such as Allbirds, announced repositioning efforts to better align operations with future objectives. All of these announcements may be an indication of what’s to come, particularly in the general merchandise sector. However, essential retailers must pay attention to the struggles of other sectors despite the stability of their business today. Retailers and brands who lack the agility to respond to changing consumer needs efficiently will no doubt fall behind this year. The big picture The first quarter told a story of polarities within the retail industry: consumers who are secure but anxious, an industry that is stable but on the brink, and consumer spending that is reserved but not dried up. As the industry looks ahead to the second quarter of the year, some of these attitudes may pull further away from each other, but we also might finally see some spending behaviors cement themselves for the remainder of the year. Still plenty of opportunities for growth exist, but they aren’t quite as obvious as in previous years. In many ways, this quarter showed a return to form for retailers; many in earnings calls reiterated commitment to value, choice, and convenience for their shoppers and guests and a renewed focus on stores. In other ways, retailers are looking ahead to uncharted territory to meet the demands of a consumer who is much further ahead in trend creation and adoption. Retailers recognize that with changing customer dynamics and lifestyles, the need to provide value to shoppers takes center stage. Convenience, experience and safety were core pillars of retail strategies during the past few years, but leaning into value is imperative in this year’s retail environment. Providing value can take many forms, but increased efforts in price-point marketing, private label development, quality of goods, and customer service and satisfaction are all ways to provide value beyond prices and promotions. Customers don’t always need the lowest price if the perception of value for the purchase is there, but retailers need to showcase value across all sectors instead of only focusing on high-end consumers. In the first quarter, many retailers announced programs to bring value forward to shoppers instead of focusing on other pillars of the retail experience, especially when consumers are more thoughtful about every purchase. Stretching the consumer’s wallet to go further while also leaving shoppers satisfied with every purchase is the pinnacle of 2023 for retailers, and value-based thinking is needed to reach that peak. If the buzzword within retail last year was the metaverse, the buzzword of the first quarter is generative AI. Since the public launch of ChatGPT in the fourth quarter of last year, generative AI solutions have taken hold of consumers and the retail industry. AI and machine learning are critical in many retail functions to scale and create efficiencies in areas such as order fulfillment, supply chain, e-commerce path-to-purchase and others, but this new form of AI can improve merchandising decisions, customer service and the overall brand engagement. Tools like generative AI have real application at retail with product suggestions, post-purchase service and personalization across digital and physical channels. Retailers and brands should be strategizing now how to incorporate these tools into their business models now to keep pace with consumers and early adopters. While the metaverse has more niche applications for retail, generative AI has the potential to improve retail for business and consumers alike. With the stabilization of e-commerce penetration and growth across retail, the first quarter shifted focus back onto the store. Across trade shows, solutions and technology to optimize the in-store experience were on display and data monetization for physical retail is a clear priority for retailers and third-party operators. Smart cart technology is rolling out across essential retailers, and grocers and c-stores are investing in prepared food expansion to entice customers to make that extra trip. Optimizing stores to meet consumer needs today also requires agility in store design and formats. Today, many retailers must invest a lot of capital into upgrading stores and in-store systems, but what if those enhancements could allow them to do that with ease in the future? Retail stores are here to stay, especially after their rebound with post-pandemic consumers, and they can no longer be an afterthought in the retail ecosystem. Download a PDF of Retail Leader Pro's April 2023 Retail Lowdown: State of the Industry Quarterly Report here. About the Author Elizabeth Lafontaine is the Chief Retail Analyst at Retail Leader Pro. Backed by nearly a decade of retail experience, she uncovers emerging trends in consumer behavior to help retailers and brands tap into new insights and create winning strategies.

(Download a PDF version of this month's report at the bottom of the article.)

Executive summary

Monthly
Subscription

TRIAL
SUBSCRIPTION

ANNUAL
Subscription

(Download a PDF version of this month's report at the bottom of the article.)

Executive summary

Monthly Subscription

TRIAL SUBSCRIPTION

ANNUAL Subscription

Monthly
Subscription

TRIAL
SUBSCRIPTION

ANNUAL
Subscription