Tough Holiday Season Ahead: Can Retailers Pull a Rabbit Out of a Hat?
Christmas is full of doubt.
Between managing inventories and costs and getting a handle on the consumer mind-set, holiday planning this year for retailers has been trickier than ever. Decision-making has turned acutely cautious amid this year’s pile up of uncertainties over whether the country enters recession, and if so, will it be a deep one; whether gas prices continue to gradually decline or spike to new highs, and how the pandemic, the war in Ukraine, the U.S. mid-term elections and labor availability all play out.
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There are just so many variables and unknowns. With inflation at a 40-year high, exceeding 9 percent, and consumer confidence at a two-year low, Americans began curtailing discretionary spending in the second quarter, further dampening the outlook.
“Whether we end up 5 percent ahead or down 2 [percent], we just don’t know,” said one retail chief executive officer, who requested anonymity. “Agility is key. It’s about hedging some, being flexible and being able to react to what the customer is engaged with or excited about. The news could be bad, but they could see retail as a form of escape. You just don’t know.”
Based on interviews with retailers, vendors, consultants and industry analysts, holiday 2022 will be an extended season like last year’s, but far more promotional with price breaks starting in earnest before Halloween, drawing early shopping and siphoning sales from Black Friday, Cyber Monday and Super Saturday. Some consumers already got a jump on holiday gift shopping, taking advantage of Amazon Prime Day and initial back-to-school promotions.
The top line overall for the industry, sources told WWD, will range from slightly negative to slightly positive, due to tough comparisons to last year’s strong gains and consumers feeling tapped out and worried about the economy. In 2021, U.S. retail sales rose 14.1 percent from Nov. 1 to Dec. 31, according to the National Retail Federation.
But that buying spree seems a distant memory, with store traffic and spending decelerating in the second quarter.
“We had a fantastic year and first quarter, but we’ve seen a slowdown in the past six to seven weeks, pretty much across the board,” said Jim von Maur, president and CEO of Von Maur, the Davenport, Iowa-based department store chain. “Sales have become more erratic. They could be up 20 percent at a store and the next day it’s off, but another store could be up. It’s really fickle business out there.
“Going into holiday, there are a lot of headwinds,” von Maur said. “We took plenty of early orders because we wanted to get that fall merchandise locked in. The flow of goods is improving. Sales in shoes are improving because we’ve been getting resupplied. There are some good trends out there, particularly at higher price points, so it won’t be all bad for holiday. But we are just thinking flattish for the season. Flattish would be good. We’d be happy.”
“We are on a dual path navigating an uncertain environment and continuing to execute on our long-term strategy,” Michelle Gass, CEO of Kohl’s Corp., told WWD after the company nixed the takeover bid from The Franchise Group. “The pressures on consumers have only grown, considering what they are paying for gas, for food and the uncertainty overall. We are flexing and adjusting to make sure we can be relevant.”
As the year progresses, Kohl’s will continue to be “adjusting pricing and amplifying promotions,” Gass added.
“We’ll see more inflationary pressures, which will lead to a recession,” predicted veteran retail analyst Walter Loeb. “Most retailers know this and I expect many have planned strong, extraordinary promotions for the fall and Christmas period. Having these immense price breaks will generate volume. Those Black Friday sales by Best Buy and Macy’s we saw in July are just indicative of what we will see this fall. They are trying to clear inventory and get people to come to their stores. I believe the third and fourth quarters we still see satisfactory business, but there will be a drop off in sales starting in January.”
Retailers, primarily mass merchants, are grappling with excess inventory due to shipments that arrived too late to sell in season, and some over-optimistic ordering for the second half based on last year’s results.
“It’s a pig in a python,” said Craig Johnson, president of Customer Growth Partners. “There is such a huge amount of product in the pipeline. Retailers collectively have not had a chance to sell through all the excess product. A lot of them are in that situation.”
Last week, there was a rumor circulating that Macy’s was cutting two weeks of July receipts. Responding to that, a Macy’s spokeswoman said, “We are operating as usual and have no plans to shut down merchandise receipts. Through our data and analytics tools we’re able to closely monitor the supply chain to tighten our orders and rebalance inventory, where appropriate. We adjust lead times and order sizes, if necessary — based not only on supply chain dynamics, but also customer demand.”
Fitch Ratings’ senior director David Silverman expects “continued choppiness amongst retailers through 2022, particularly those who planned for higher sales volumes and will need to clear excess inventory and cut expenses to protect earnings. We’ve seen companies like Target, Kohl’s, Gap and Bed Bath & Beyond reduce guidance, with some changing senior management teams; this dynamic is likely to continue as 2022 plays out,” Silverman wrote in a report on June sales.
Eveningwear, dresses, party outfits and related categories for finishing off the look like jewelry, footwear and beauty are expected to see good sell-throughs. People are eager to get out and leave their troubles behind. Some retailers see NFTs becoming holiday bestsellers. Menswear, luggage, watches, small leather goods and cold-weather accessories are expected to do well, too.
On the other hand, the outlook on casual apparel, sweats, electronics and home categories — areas that sold well for two years through the pandemic — isn’t as optimistic.
In luxury, occasion dressing, newness and exclusivity trump price.
“We are amplifying the customer experience this year with our focus on retail theater through our retail-tainment approach,” said Lana Todorovich, president and chief merchandising officer of Neiman Marcus. “This includes exclusive collections and immersive experiences with Brunello Cucinelli, Akris, Tom Ford, Schiaparelli and Christian Louboutin. In addition, we will inspire our customers to really live their holiday luxury with newness as we launch more than 100 new brands this fall season.”
“Retailers should generate buzz by offering exclusive or limited-quantity items, or play up trendy features, such as a product’s sustainability,” said Rob Garf, vice president and general manager of retail for Salesforce, the cloud-based software company that tracks sales, trends and customer information for retailers. Otherwise, he said, “retailers’ profits could take a huge hit if they discount too early and too often.” Already, he said, their profits are being squeezed by higher costs, which would include fuel, transportation, labor and materials.
The most agile of retailers, those that can chase reorders of bestsellers to meet the demand, and stymie receipt of merchandise that’s not selling, will fare best. Department stores have become more nimble and have the advantage of selling multiple categories and can grow or shrink presentations based on selling trends.
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Expect T.J. Maxx, Ross Stores, Burlington and other off-pricers and dollar stores to outperform the general industry.
“We’ve seen during inflationary times, the value that off-price offers the consumer is unparalleled. Shoppers have a tendency to trade down from full-price stores in search of a discount, and we’ve seen the off-price sector thrive in similar circumstances,” said Paige Thomas, president and CEO of Saks Off 5th. “We’re focused on providing our customers with an incredible value, and we’re doing that through new programs, savings events and more. We recently launched our new loyalty program, Off 5th Rewards, and while still early, we’re seeing strong results and positive feedback from our customers on the special offerings. This holiday season, Off 5th Rewards members will receive exclusive access to a number of promotions and limited-time sale events.”
Drugstore chains will struggle relative to the spikes in business and higher traffic experienced while administering vaccines. Also, drugstores have been losing some market share to beauty competitors, such as Ulta, which has been steadily opening stores and adding brands.
“Target is going to be successful because it has a value orientation, it’s a one-stop shopping experience, it’s innovative and it operates different shopping channels,” said Ethan Chernofsky, vice president of marketing for Placer.ai, which provides store traffic data and location analytics. While Target experienced lower first-quarter margins, sales were up. “Target invests in its future. They don’t lose sight of the long term. We think they are doing well. Target is showing strong numbers now, and dropping prices on some inventory. They are telling customers, ‘We’re here for you,'” Chernofsky said.
He also thinks indoor malls will perform well for holiday 2022, particularly A malls that are more resilient. “If gas prices remain so high, the indoor malls overall will do very well because shoppers can accomplish so much with a single visit,” by hitting several stores in one visit, Chernofsky noted.
He also expects movie theaters to have a good season after what has been a strong summer so far at the box office. “In a difficult economy, more value-oriented forms of entertainment are attractive. There’s also been a run of blockbuster releases.”
“Expect much bigger and bolder promotions than 2020 and 2021,” said Keith Jelinek, managing director for global performance improvement practice Berkeley Research Group. “The promotion cycle is going to start heavier and earlier. Inventory is bloated right now and distribution centers are popping at the seams. There has been a slowdown in movement of product. October is going to be the start of Christmas promotion, before Halloween ends. The same thing happened last year but one big difference last year was that while there was a tremendous amount of advertising and promoting, it wasn’t at deep discount because retailers were experiencing high regular-price sell-through or slight discount. This year discounts are going to need to be larger.
“The feeling right now is that revenue should be good,” but the degree of profitability is questionable, added Jelinek. “Part of the profitability equation lies on two big cost factors: the labor market is still very tight. There is a much higher cost on hourly wages and bonuses to attract talent and we have not seen a let up on transportation costs, both in inbound to stores and outbound on direct-to-consumer orders.”
“For holiday this year, the crystal ball is very hazy at this stage,” Johnson said. “The economy is teetering on the precipice of going into recession. We may already be in a recession. On the other hand, if jobs keep growing, and if wages pick up, we may actually find this to be a fairly shallow recession. There is a good chance by the time we get to quarter four, we find ourselves into a recovery with a slightly positive holiday. Right now, retailers are guarded. We think it’s going to be flat. That’s our early prediction. Given the strong results last year, the bar is set pretty high. We just don’t see the momentum to increase on top of a very strong last year. If the economy recovers in fourth quarter, it could be a low-single-digit holiday, but right now it looks flattish. But you never want to bet against the American consumer.”
CGP forecasts a healthy, 5.5 percent retail industry sales gain for the back-to-school season, coming off a 13 percent gain last year, though Johnson cautioned that b-t-s activity is only an imperfect predictor of subsequent holiday sales. “They are generally in the same direction up or down, but the magnitude can change,” he said.
“Consumers are generally healthy, but most of the incremental spending is only from the higher two income quintiles. The lower three quintiles have been basically flattish, and purchases are migrating to essentials. People are cutting back on discretionary spending,” Johnson said.
“Last year, the challenge was all about supply chain, and keeping it up to meet the demand and in some cases retailers were over-ordering. Now we’re in a period where retailers are overcompensating for a slowdown,” said Sam Hafif, president and CEO of Concept One, which designs and produces licensed cold-weather accessories, handbags, backpacks and luggage. “There are a lot of pullbacks and cancellations. Frankly, the planning is too conservative and in many cases there’s not enough buy-in inventory to meet their plans. Business is soft but not dead. We are finding most of our customers are planning down against fourth quarter between 5 and 10 percent. They have cut so much they’re not going to have enough merchandise. A month ago, everybody was over inventoried for the first and second quarters, but they turned off the spigot.”
What should help retailers in the fourth quarter is lower container prices. “They have come to below $7,000,” Hafif said. “At one point from China to Los Angeles, they were north of $15,000. The freight coming in now, for third and fourth quarters, will land at a lower cost. That will help everybody — retailers, importers and consumers.”
“No one has a crystal ball that can predict what’s going to happen,” said Bob D’Loren, chairman and CEO of Xcel Brands Inc., which owns the Halston, C. Wonder, Judith Ripka and Longaberger brands, and a minority stake in Isaac Mizrahi. “We have inflation. There’s lots of inventory in the market. Retailers are still flushing out inventory and will probably be doing it through the third quarter. Retailers are canceling orders in about every category, and vendors are canceling factory orders where they can. We are sailing into an economy with interest rate increases and employment gains are less than expected. It will be interesting to see how consumers will behave.”
“December 15 to 19 will be the biggest digital days,” Jelinek said. “If you don’t get in your order by [Dec.] 19, you probably are not going to get it for Christmas.” In the stores, “December 23 and 24 should be huge, since Christmas falls on a Sunday.”
Retailers with successful holiday seasons, Jelinek said, will be those “prepared for the complete omnichannel experience, providing buy online, pick up in store, ship from store and other inter-channel services and conveniences. Personalization of offerings is also key, as an industry, we have been talking about it for the last three, four or five years or more but very few are doing it. They have either not been taking the time or made the capital investment around systems to be able to really apply the technology correctly. Department stores have a great opportunity to really serve the customer well in [the fourth quarter]. They’ve done a better job at personalization, conveniences, getting product assortments right.”
Salesforce predicts in its holiday 2022 report that shoppers will buy even earlier than last year, which would help them avoid price hikes and stockouts; 42 percent more shoppers worldwide, and 37 percent more in the U.S. plan to start buying gifts earlier.
The software firm also predicted that half of all shoppers will switch brands this holiday due to pricing. Some product categories — including luxury brands, grocery and department stores — are more susceptible to waning loyalty due to price sensitivity.
“With stores fully operational once again, we’ll see consumers gravitate to the physical store in even greater numbers,” Salesforce reported.
In addition, 83 percent of shoppers will seek out sustainable brands and products this holiday; retailers will test NFT drops, and 46 percent of shoppers said they would consider purchasing NFTs. About half a million NFTs are expected to be purchased from retailers between November and December, translating to a total market value of $54 million, according to Salesforce. Garf compared NFTs to the popularity of savings bonds in the 1980s, with people giving bonds with the intention that they’d grow in value over the years. “Think of NFTs as a high-tech spin on that,” he said.
Salesforce’s holiday predictions are based on its shopping index analyzing the activity and online shopping statistics of more than 1 million shoppers across more than 51 countries, with a focus on 12 key markets including the U.S., over the last nine quarters and the current state of digital commerce. The calculations blend first-party and third-party data, as well as several market assumptions. The report’s findings also incorporate Saleforce’s consumer sentiment index based on a May survey of more than 3,000 people in nine countries.
The economic headwinds impacting shopper traffic now, said Chernofsky, “are likely to continue six months from now and are going to impact the holiday season.…When looking ahead to holiday, maybe the most applicable thing is to look at back-to-school. Visits are down compared to a year ago, thus far in July,” he said a week ago. “It’s not apples to apples, but it’s not apples to oranges. Back-to-school does gives us a window into some elements of consumer confidence.”
Holiday 2022 predictions
A cacophony of price promoting
Earlier shopping stretching out the season
Flattish sales overall due to tough year-ago comparisons and consumer jitters over the economy
Nimble off-pricers and department stores positioned best
Fashion for occasions/evenings out and related footwear, jewelry and beauty categories reap gains
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