EY’s Future Consumer Index this year found that 93 percent of U.S. consumers are feeling concerned about the economy, but 69 percent predicted they would still spend more on gifts this holiday season compared to last year — and with a record high of $9.12 billion spent in online shopping on Black Friday, it seems they have done just that.
According to Isaac Krakovsky, EY America’s retail leader, it’s all a matter of changing shopping habits.
Looking at the gap between concern for the economy and consumers’ response, Krakovsky told WWD it’s likely due to the American consumer’s ability to compartmentalize, believing that Americans will continue to spend their way out of a recession, confronting obstacles with habits as they’ve done in the past. Some of the way consumers have changed include stress spending, reevaluating how and where they spend and shopping like their grandparents did.
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“The dynamics between the consumer and the economy have created a complex environment for companies eager to drive loyalty and brands have a higher bar for success than ever before,” said Krakovsky. “World-class companies not only innovate at the front-end customer experience touch point, but they also look at the experience-led consumer journey as an end-to-end engagement to be deployed by every operating lens of the company.”
Here, Krakovsky speaks to WWD about the gap between consumer feelings and actions while sharing insights into what this means for retail.
WWD: Given what we know about consumer sentiment about inflation, how would you explain the record high spend on Black Friday?
Isaac Krakovsky: Record-high sales on Black Friday can be attributed to the fact that, despite a potential recession, consumers will do what they do best: spend. Further, this year’s Black Friday revealed that Americans are still feeling somewhat confident as they are able to compartmentalize — they do express worry over the uncertain economy but that doesn’t mean they’re changing their behavior.
While consumer confidence has fallen a little, it’s nowhere near crisis levels and has shown signs of resiliency, with retail sales stronger than expected in October and November. In fact, according to EY’s latest edition of the U.S. Future Consumer Index, which explored the tension between the reality of today’s economy and the consumer’s response to it, 94 percent of consumers are concerned about the U.S. economy but only 49 percent say they’re spending less on nonessentials. In other words, there’s a notable gap between feelings and actions.
There are a few factors contributing to this gap. Perhaps consumers are giving in to the “illusion of the markdown” where this year’s discount is last year’s full price because of inflation. Another factor is that the excess savings and pent-up demand of the last two-and-a-half years hasn’t fully run its course. Or perhaps the worry is only in the short term and consumers are optimistic about the future, with 85 percent believing that their financial situation will be the same or better a year from now (according to EY’s US Future Consumer Index).
WWD: What does it mean for retailers that the American consumer is compartmentalizing when spending despite economic concerns?
I.K.: Luckily for retailers this holiday season, this disconnect is showing in the near term, as macro anxiety isn’t impacting consumers’ holiday spending — this year’s Black Friday turnout is proof. In fact, 69 percent of U.S. consumers think they’ll spend the same or more this holiday season than they did last year. Of those, 24 percent plan to spend more, up 9 percent from this time last year.
However, to prepare for ongoing uncertainty, retailers and brands should revisit recessions past to see what they can learn from consumer response and how they might apply those learnings to today. They must rethink the traditional shopping season and align discount and inventory strategies to help consumers stretch their dollar all season (and year) long.
WWD: You’ve said that American consumers have changed shopping habits in the past to overcome obstacles — can you walk us through what these changes looked like and how they are likely to return?
I.K.: We continue to see the American consumer adjust their spending behavior during challenging times. This holiday season, consumers’ ability to spend the same or more could be explained by a “back to the future” approach. Consumers are shopping like their grandparents did — buying gifts year-round and hiding them away or stretching their dollar throughout the holiday season. For some categories, they plan to purchase items ahead of time to avoid missing the opportunity to buy them. In fact, 57 percent of consumers say they’ll purchase packaged food ahead of time.
In challenging times, we typically see consumers become more discerning about the how and the where. While we know consumers are spending despite what’s taking place around them, the real issue for retailers is determining where consumers will cut back.
WWD: As consumers reevaluate how and where they spend, where does EY predict they will become more discerning? How does value come into play here?
I.K.: EY’s Future Consumer Index found that 56 percent of consumers will reappraise how they spend their time on the things they value most, and 59 percent will be more focused on “value for the money” in the future. With a more discerning consumer, retailers and brands must create value both with the consumer and within the organization by providing connected consumer experiences, catering to unique consumer wants and needs, differentiating the customer experience, and delivering on the consumer promise.
Knowing their dollar is worth less, consumers will be particular about where and how they spend. Specifically, we’ll likely see consumers become more discerning when it comes to clothes, shoes and accessories, with 36 percent reporting they’ll purchase less of this category. We also expect consumers to cut costs by cooking more from home (35 percent) and ordering takeout less often (25 percent).
WWD: What is stress spending and how are you seeing the American consumer take on this behavior?
I.K.: Stress spending refers to the consumers’ tendency to spend money when they feel stressed, anxious or overwhelmed. Feelings of anxiety may be higher than usual right now, with the country on the precipice of a global recession. Add on the rising costs of essentials and the result is that consumers are moving almost immediately from post-COVID-19 hangover to macro-economic anxiety.
One of the reasons we’re seeing continued spending despite concerns of the economy is that stress spending makes people feel better. EY found that 44 percent of people tend to buy nonessentials because it makes them feel happy (compared to 35 percent globally).
Retailers need to understand that every consumer has their own unique wants, needs, preferences and journey. Achieving this level of personalization relies on data. Companies that do it right use the insights derived from sophisticated enterprise data models to influence everything from product offers to messaging and imagery, creating deeply relevant and hyper-personalized experiences.
WWD: Does buying remorse come with stress spending? Do retailers need to prepare for heavy returns?
I.K.: At the end of every holiday season, retailers must be prepared for heavy returns. This year it will be especially important for retailers to attain supply chain visibility, which is essential in delivering the experience that customers expect but also in creating a smooth return experience for retailers.
Consumers are experiencing heightened stress levels due to the economy and as a result they may feel compelled to return items because the dollar doesn’t stretch as far anymore, with 93 percent concerned about rising living costs.
WWD: With these behaviors in mind, what advice would you give to companies?
I.K.: Connected consumer experiences will be particularly important in creating consumer value this holiday season. An omnichannel strategy starts by linking back-office operations, such as digital tech stack and inventory management, to front-office functions to build connections between each touch point with the consumer, no matter the channel. That’s when you find your way into the hearts and minds of a consumer who’s required to be particular about where they spend their dollar.
Finally, the end consumer is an important consumer packaged goods (CPG) stakeholder, but so is its customer, the retailer. Retailers and brands have activated their inflation playbooks to find sources of savings across the business and navigating their relationship will be a key source of value creation. CPG brands are in the center of increased raw materials costs, retailers that have said “no more” to price increases, and consumers with a less valuable dollar. Agile pricing strategies and customer incentives can allow CPG companies to build the capability to continuously act and learn in real time, align price offerings with cost-to-serve segments to articulate the total value proposition more easily to customers, and further incentivize customers based on desired outcomes, such as pricing for margin.