Inside Retail: State of the Industry Quarterly Report: A Deep Dive Into the Stories That Shaped Q4 2022

(Download a PDF version of this month's report at the bottom of the article.) Executive Summary In many ways, 2022 was a return to normalcy for the retail industry after 1.5 years of high-flying growth. Consumers came back down from the financial highs of the pandemic period, and by the time we reached the fourth quarter, months of inflation and high costs began to wear on them. Heading into this quarter, many questioned how the retail industry would fare during the holiday season with higher prices and higher levels of inventory coupled with a less interested buyer. Ultimately, retail demand was down through the first few weeks of December within general merchandise, while grocery was able to capture consumers’ attention with holiday gatherings back in full force. The U.S. consumer faced so much noise in the fourth quarter, between student loan forgiveness and the subsequent program pause, higher levels of credit card debt and continued inflation. The retail industry struggled to drum up buzz around the holidays, and another elongated holiday season left consumers fatigued by the time Black Friday and Cyber Monday came. Q4 brought some interesting announcements and recurring themes throughout retail. Major M&A announcements in the grocery space clearly spell increased competition and more advancements to come. Layoffs across big tech and retail technology companies may be an indication of what’s to come in 2023 and could have multiple implications for retailers. The retail industry struggled to drum up buzz around the holidays, and another elongated holiday season left consumers fatigued by the time Black Friday and Cyber Monday came. Additionally, Q4 brought a winter storm that disrupted both retail and the travel industry, and the Southwest cancellations may have created some learnings for retailers about brand equity and value with the consumer. Consumers are focused on mission-driven shopping behaviors, allowing them to mix and match purchases at different chains to satisfy their needs. Department stores staged an unlikely turnaround of their businesses heading in the holiday season. And TikTok’s new foray into e-commerce and shopping should certainly present some opportunities for grocery, CPG and general merchandise brands. Where do we go from here as we head into 2023? Wages are going up in many states, and while recession talks loom and layoffs continue, we may see inflation begin to stagnate. The consumer will likely continue to hold the power in the shopper/retailer dynamic and mission-driven shopping behaviors will likely continue. From a strategic perspective, now is the time to understand what matters most to your core customer and how to build technologies and strategies that speak to that need. Do not shy away from investments even during what will be a challenging retail year, because the consumer still holds high expectations. Finally, with holiday coming to a close, it’s worth noting that we may have elongated the season a bit too far and need to be cautious of the impact on consumer spending and attention span. Through the Lens of the Consumer The U.S. retail consumer undoubtedly faced a more challenging environment throughout 2022, and the fourth quarter created similar headwinds. A midterm election placed in the middle of the quarter pulled some attention away from other aspects of consumers’ daily lives, and an elongated holiday season stretched attention throughout Q4. But, swirling fears around inflationary price increases, a tepid economy, employment situations and personal debt load left consumers in a more vulnerable position heading into the holidays than we’ve seen in the past 2-3 years. Student loan arguments raged throughout the fourth quarter as laid plans came under fire. Currently, borrowers hold $1.75 trillion in student loan debt, and in August came the announcement of student loan forgiveness of up to $20,000 and repayments to finally resume in January 2023. The application went live in October with millions of applications, only to be temporarily suspended in November with legal proceedings challenging the program’s authority. Currently, the pause on repayments has been extended through mid-2023 as legal proceedings continue. With many consumers banking on the forgiveness program and questions about their personal finances once payments resume, many feel uneasy. Inflation continued to be the buzziest word in the fourth quarter of last year, as it was throughout 2022. According to the consumer price index, inflation stood at 7.7% and 7.1% for October and November respectively, compared to the previous year. While this is slightly down from the high of 9.1% in June, consumers still paid the price for increases into Q4 as holiday shopping began. Inflationary price increases, combined with less favorable inventory positions, left many retailers with squeezed margins and profitability in the second half of the year. Consumers' personal financial situations took a turn throughout 2022, and credit card balances have climbed over this year heading into Q4. According to the New York Fed, in Q3, credit card debt rose 15% over 2021, leaving consumers with higher balances and outstanding debt heading into the holiday season. Through a consumer lens, the midterm elections showcased the fact that despite economic headwinds, there were fewer shifts in opinion as anticipated amongst voters. Two additional states voted to legalize the recreational sale of marijuana, bringing the total count to 21. Finally, looking ahead, minimum wages are going up across many states. Nevada voted to increase minimum wage to $12 beginning in 2024, while 26 states are increasing their wages beginning in 2023. From an economic sentiment perspective, this increase in wages and earnings for consumers has a positive impact on their ability and desire to spend on both essential and non-essential retail categories, and bolsters the discretionary income of many. Industry Performance Snapshot There is little doubt that the fourth quarter is far and away the most integral to success during the retail calendar year. From a grocery and CPG perspective, gatherings, holiday meals and celebrations all require additional investments. This quarter often showcases general merchandise, as consumers scour retail for gifts for family, friends and themselves. This holiday proved to be longer than ever, and favoring online more than expected. Overall, while sales were up in many sectors, demand has softened compared to last year as inflationary pressures drove up the average unit retail (AUR). According to The NPD Group, general merchandise retail for Q4 through the second week of December was down 6% in dollars and down 10% in units compared to 2021. This includes the metric that Cyber Week sales alone declined 2% compared to the year prior. General merchandise, a shining star during the pandemic due to pent up consumer demand, faced incredibly challenging comps in Q4 — and with consumer sentiment down, less discretionary income across cohorts, and other sectors’ continued rebound, the holiday hasn’t materialized as it did in past years. The U.S. Census Bureau U.S. Department of Commerce released figures for October and November retail sales across all sectors, with November up 6.5% and October up 8.3% compared to 2021 sales. The industry overall has been bolstered by price increases due to inflation to offset demand. Gasoline, food services and drinking places all contributed to the majority of the growth, which is in line with the highest pricing adjustments throughout 2022. While the holiday season tends to be heavily skewed toward general merchandise, grocery shines during occasions. According to IRI, Thanksgiving volume sales grew 6 percentage points compared to 2021, indicating a willingness to spend despite the economic headwinds. Inflation for Thanksgiving ingredients was around 14% in total versus last year, and 44% of shopping was purchased on promotionl by consumers. In regard to the tentpole events of Q4 — Black Friday and Cyber Monday — consumers still participated, but clearly on their own terms compared to past years. According to Adobe Analytics, Cyber Monday sales totaled $11.3 billion and were up close to 6% compared to 2021. Black Friday online sales totaled $9 billion and were up a slightly more modest 2%. Within general merchandise, The NPD Group reported sales for Black Friday week were down 8% in units compared to 2021 and down almost 20% versus 2019. More sales shifted online this year, but overall demand for the events continued to soften, indicative of the elongated holiday season and fewer people engaging in the holiday deal hunt on that weekend alone. Noteworthy News While retailers tend to keep their heads down during the holiday season and focus on delighting their shoppers, we saw a lot of retail and consumer news break during the fourth quarter of 2022. After a few quiet years for retail activity, Q4 brought some major M&A announcements as well as layoffs impacting the retail consumer — especially those in high-income sectors. Consumers faced financial and health-related pressures in the fourth quarter, and retailers reacted both to spur spending as well as protect their shoppers. Earnings released this quarter from the third quarter were varied across the board, but retailers recognize that consumers are beginning to pull back and question their spending habits. Q4 brought major M&A announcements, and ones that ripple across the industry more than any prior quarters in 2022. In October, Kroger announced its intended acquisition of Albertsons in a deal that would create the largest specialty grocery chain and allow them to compete with the multinational behemoths of Costco, Walmart and Amazon in the grocery space. This announcement elicited reactions from across the industry, as consumers and suppliers grapple with an even further consolidated grocery sector and regional supermarkets focus on their value proposition to shoppers. Candy maker Ferrero announced its acquisition of ice cream maker Wells Enterprises, the second-largest ice cream manufacturer in the U.S. Similarly, Victoria’s Secret announced in the fourth quarter that it will acquire direct-to-consumer darling Adore Me. The M&A activity in Q4 highlights that companies with similar category dominance need to find growth as the market consolidates, and this is a way to expand reach and sales. Consumers and retailers faced pressures from the explosion of Q4 illness and the creation of a “Tripledemic” — from increased flu, RSV and COVID-19 activity. Walgreens and CVS both limited sales of certain fever-reducing medications in response to the skyrocketing demand, and many drug and grocery shelves were left bare this holiday season as the need for cold and flu aids increased. After a year of economic headwinds, high inflation and fears of a potential recession, layoff season began in the fourth quarter — specifically within the tech sector. Giants such as Twitter, Meta, Salesforce, and retail crossovers like Amazon and Doordash all laid off thousands of employees each. While at the surface level this might not seem like a huge hit to retailers, the impact may have multiple repercussions for the industry. Firstly, tech sector employees held higher levels of disposable income that benefit retail in essential and non-essential sectors. Secondly, the shopping power of these companies and their influence on trends and demand generation in retail is unparalleled. And finally, these layoffs may be indicators of what is to come in other outside sectors in 2023. The Big Picture While lessons learned from the holiday season are always at the forefront of everyone’s minds, there have been several key themes that emerged across Q4 in 2022. From the rebound of retail sectors, to retail ventures within social media, to changes in consumer behavior and outside sectors pulling consumers’ attention away from retail, the industry can learn a lot from the last quarter as we head into 2023. Consumers are clearly in the driver’s seat of their consumption habits, and that fact has changed the landscape in countless ways. It’s clear that consumers hold brands and retailers to a higher standard, and also prefer to hold the power over their purchases. Winter weather always appears to cause mayhem across the country, but its alignment with this year’s holiday week had many unintended consequences. Super Saturday fell right in the middle of the storm’s path, and consumers were forced to reckon with less-than-ideal shopping conditions. Then, there were the travel cancellations and delays. Southwest’s operational meltdown in the face of the storm and antiquated technology systems created a buzz across social media, and not just with disgruntled customers. Southwest serves as a cautionary tale for the retail industry in its ability to lose brand equity with consumers in a matter of days. The customer and brand relationship is so delicate and consumers hold an expectation that the brands they engage with are operating with the highest of standards. Many of those Southwest passengers may be your target audience or your loyal shoppers, and those lasting feelings from another brand’s failure may leak into how they perceive brands across sectors. We couldn’t neglect themes emerging from this year’s holiday season, and once again the elongation of the holiday season is now appearing to be the new normal. Holiday no longer runs from Black Friday on — it begins the first or second week of October. With retailers battling excess inventory, seasonal challenges and inflationary pressures, starting holiday early was a bet to still gain the consumer’s attention during this critical time period. Amazon continues to run a prime-exclusive shopping event, with slightly less excitement than prior years. But, this elongated holiday season ultimately clips the most important tentpole events like Black Friday and Cyber Monday. There was no sense of urgency for consumers to shop Black Friday deals early, and with so much data and support at their fingertips, consumers feel empowered to shop when it works for them. We may have finally made the holiday season too long, as the excitement surrounding larger shopping days has evaporated. Across sectors of the retail industry, there’s a clear shift in how consumers interact with individual chains. According to research from Placer.ai, there’s a growing trend in mission-driven shopping, or consumers sourcing specific products from different grocery outlets depending on their specialty. This patchwork of the retail path to purchase allows consumers to hone in on a chain’s specialty and create a market basket that reflects their wants and needs. This can also be seen within general merchandise: consumers very rarely dress head to toe in a singular brand. As consumers continue to take authority over their retail journeys, chains need to lean into their specialty and message that to consumers to keep loyalty high and increase the potential to bring consumers into other categories. TikTok’s momentum throughout 2022 is undeniable, and the fourth quarter brought news that may even more closely align its vision with that of the retail industry. TikTok is the creator and curator of retail trends today more than any other platform — and the platform’s ability to accelerate trends is staggering in the non-essential and essential retail spaces. In October, it was speculated that TikTok may be opening fulfillment centers and later in November the company quietly launched its e-commerce product, called TikTok Shop. Rolling out shopping features to enhance social media platforms isn’t new, but with TikTok’s broad reach and ability to spawn trends incredibly fast, it presents an interesting new opportunity for general merchandise, CPG and grocery brands to engage directly through the platform with creators and target audiences. Finally, in an unlikely turnaround, we are now back in the moment of the department store. Department stores, during the past decade, struggled to find their footing in a new era of retail where speed to market, value and efficiency prevailed. Brands across the value chain struggled, with those positioned both at the low-end and high-end failing to capture the attention of consumers who had more choice than ever. Department stores were no longer the source of trends or the retail authority in an industry that had long considered them the tentpole sector. But, throughout 2022, Macy’s has thrived in an otherwise volatile market, and Neiman Marcus shared in October that their business had rebounded from troubled times, thanks in part to their top loyal shoppers. In a time where many other retail sectors are struggling to define their ROI for consumers, some department stores who played the long game have once again cemented themselves in the fiber of retail. There are many lessons to learn from these rebounds, including long-term strategic investments, reading and reacting to consumers, and focusing on experience and efficiency. Other sectors will go through this same reckoning, and having a strategy in place now is key to riding the wave. Download a PDF of Retail Leader Pro's January 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.)

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

Executive Summary

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