Forecasts and Takeaways From NRF’s Big Show

At this week’s National Retail Federation’s Big Show, retailers, industry experts and economists preached the same sermon: manage inventories and costs conservatively and cautiously and be ready to pounce on whatever shopping trends and hot items emerge.

They see 2023 as a tale of two halves for retailers. The first will be tough, with a rebound in the second half of the year.

They see a consumer who’s becoming tapped out on savings and building up credit, shifting spending toward experiences and away from stuff, but say retailing generally held up through last holiday, but will be softening soon.

And there was a consensus on the inevitability of a recession, albeit one with most likely a soft landing.

They said the key to long-term success is to:

“If you’re not offering the best customer experience, your customers will just move on to someone who is. And with the pace of change that we’re seeing now across the industry, it’s more important than ever that we keep changing,” said John Furner, president and chief executive officer of Walmart U.S. and chairman of the NRF.

Nevertheless, “Through it all — the macro environment, the pandemic, natural disasters and historic inflation — retail has had positive growth now for 30 consecutive months,” Furner added. “And back in March of this last year, retail sales were forecast to grow between 6 and 8 percent for 2022. We expect that (the industry) will wind up right in the middle of that range for the year. And that’s on top of nearly 14 percent growth back in 2021.”

On Wednesday this week, NRF will release its tally on retail holiday 2022 sales in the U.S.

On Sunday, Furner officially opened up the conference, which ran from Sunday through Tuesday and was packed with more than 35,000 attendees from 75 countries, marking a near-record-high head count for the annual event and casting a positive reflection on the state of the industry. There was a mood of optimism, though one mixed with uncertainties about the economy and amazement over the accelerated pace of changing consumer shopping behaviors.

“This past year was a historically challenging time,” Furner said. “We did see some relief from the pandemic, though we also saw extreme challenges with global supply chains. And that collided with surging demand, a shift in sectors from goods to services, inflation levels that we haven’t seen for decades, and the start of a war.

“But we should be really proud of retailers all around the world, who rose up to meet those challenges head-on. We did what we do best. We serve customers. We got them what they wanted, and what they needed, amidst all those macro challenges. Second, we innovate. We moved fast to meet the customers’ changing needs.

“Looking at that self-purchase data, looking at our credit card data, and then just looking at the macro influences of what’s going on in the economy, we’re at a point to say be cautious, but be ready to pounce when opportunities and signals present themselves,” said Jeff Gennette, chairman and CEO of Macy’s Inc.

“We don’t see that in our data but we certainly see it tangentially through market data how much people are spending on experiences. When you look at the amount of inflation that’s going on in services right now, it’s quite high. Goods are starting to stabilize, which is good,” though experiences, services and goods are “all part of that household open-to-buy. That has to be considered,” he said.

“Absolutely, people are returning to the office,” observed Paige Thomas, president and CEO of Saks Off-5th, noting it’s a trend that’s positively impacting sales of sport jackets, tailored clothing, dress up and footwear. “We absolutely see shifts in category performance. The trend lines are happening so much faster than what I’ve ever experienced,” said Thomas.

Signaling out luggage, Thomas said, “When you think about going into the global pandemic, talk about a crash of a category. Nobody was traveling. Airplanes were empty. And as quick as [luggage] dropped, it came back just as quick…And so consumers really changed their shift in wallet back to entertainment and travel again. So that [luggage] is definitely a category of business that we’re chasing.

“It is time for us to to be a little bit more conservative, and chase the business as we see it,” said Thomas. “And luckily, it’s quite an opportunistic market for our buying team. So customer engagement absolutely is key to be thinking about in a choppy environment. Think about the customer journey and every friction point that might come into play. How can you solve those problems? And make it a seamless experience for the customer.”

Moving forward and letting go can be hard, particularly with technology, which is always a major focus of the Big Show, and part of the Innovation area at the event featured technologies including product authentication, sustainability, providing transparency in materials that go into making products, unmanned delivery, and 3D shopping in the metaverse.

“Change management is an enormous part of adopting new technologies that can move things forward,” said Tim Baxter, CEO of Express Inc. “Even when we have invested in technology that should make things quicker, easier, more personalized, we’re still hanging on to the legacy way of doing things,” said Baxter, when asked onstage about the challenges of dealing with existing tech systems. “Change management is likely the greater challenge we face.

“We as leaders are very, very good at introducing new technologies, new things, new ways of doing things, but not very good at saying, ‘Don’t do that anymore,’” he said. “We’re not good at taking old tasks off the table.”

“We are in a slowing consumer environment. It’s more expensive to attract new customers. You have to get more out of your current customers, and find ways along the consumer journey to treat them better with a better experience. At the point of sale, how do you provide a personalized experience, a better checkout experience,” said Steve Sadove, senior adviser for Mastercard and former CEO and chairman of Saks Inc. “Whether we’re in a recession or the consumer is acting as if it’s a recession, it’s gonna be a difficult and trying in 2023.”

In terms of what will be the winning and losing categories, Sadove suggested a “normalization” happening, explaining, “Early in the pandemic, certain categories way outperformed: electronics, athleisure, home. “As we began moving out of the pandemic experience, restaurants started doing better, people were going out to parties,” sparking dress-up categories. “Now, we’re lapping both of those, and you’re in a more normalized environment where the growth versus pre-pandemic 2019 is about the same for all of these categories.”

A somewhat more upbeat outlook on the U.S. economy came from Jack Kleinhenz, the NRF’s chief economist, who said, “If we think about the rate of inflation it’s kind of a positive,” since it’s slowing. “On the other hand consumption was relatively strong. Consumer confidence is on the mend. The unemployment rate is at 50-year low. We’re still growing in terms of jobs. Initial claims are still well below the break-even level.

“Another point of reference, I would just say is the Federal Reserve, which raised interest rates 425 basis points in the second half and the economy is still doing OK,” Kleinhenz said.

“So I get a lot of questions on what’s the whole story on recession? I’m regularly asked about it. I can tell you, we’ll have a recession. The question is when will it be. Next year? Business cycles repeat themselves. Recession is a normal part of the economic fabric. It will be a challenging 2023. I do expect a meaningful slowdown. I am still constructive about the consumer. There still remains a significant amount of cash out there. And right now, I don’t believe that job security is a big issue for 96 percent of people in the economy.…I would say that we’ll have to take our indications from the consumer. And then finally, I do not know what the Fed will do. I know they want to avoid fits and starts with the economy, like we saw back in the ’70s. I think the evidence currently suggests that we are slowing. But ultimately, my view is that we’re not in recession. At this point, you just have to wait and see.”

“We do not forecast a recession in our outlook,” said Sarah Wolfe, economist at Morgan Stanley. “But we do have growth falling to about 0.3 percent in 2023. I think that’s a very painful year that’s well below potential, which is about 1.7 percent growth, and is definitely slower than some of the very strong growth that we’ve seen over the last two years.”

There will be pockets of the economy that “feel recessionary,” she continued — like housing, the tech sector and the financial services sector. “But really the silver lining for 2023, we think it’s going to be the consumer. We have consumer set spending slowing down to about a third of what we saw in 2022. But if you look under the hood, the consumer is still in pretty good shape. Household balance sheets are still very healthy, people have built up a tremendous amount of equity in their homes. Over the last couple of years, we have seen a sell-off in equities and people have lost a lot of stock market wealth that’s very concentrated amongst the wealthiest households.”

And people still have excess savings, she noted.

“There’s a bit more to pull consumers through 2023, but really what it comes down to is the labor market and if you think you’re gonna have a job, you’re gonna continue to spend. People are becoming increasingly concerned about the labor market outlook this year, though layoffs have been very concentrated in the tech sector, which is only about 1 percent of total nonfarm payrolls in the U.S. with a very small share of the U.S. economy. But it’s in the headlines a lot,” Wolfe said.

“Our viewpoint from KPMG economics is that we believe the U.S. economy (could) enter a recession in the first half of 2023,” said Kenneth Kim, senior economist at KPMG, offering a different outlook from Wolfe’s. “We don’t know whether the recession might arrive within a couple of months, or it could still be a year out. So that is a long time span. We do expect to see negative GDP [gross domestic product] in both Q1 and Q2. For Q1, down 2 percent; Q1, down 1.6 percent. So a 1.8 percent decline for the first half, but in the second half, we see a recovery.”

On inflation, Kim said, “The most recent CPI report for December was for a 6.5 percent annual rate, which is down from 7.1 percent in November, and then the peak was 9.1 percent in June of last year. So we’ve made measurable progress. For the balance of this year, let’s say December 2023, we’re probably looking somewhere at 3 or 3.5 percent CPI.”

Mark Mathews, the NRF’s vice president of research development and industry analysis, said U.S. consumers powered through the COVID-19 pandemic with the help of some $10 trillion in fiscal stimulus from the government — money that is still influencing consumer spending. 

The savings rate, for instance, rose to as much as 34 percent during the pandemic, letting consumers build up what Mathews described as a “war chest of over $2 trillion of excess savings” that helped carry the industry. 

But that’s coming to an end. 

“Inflation has been eating into [those savings], but rather than cutting back, consumers have chosen to continue to spend,” Mathews said. “They haven’t cut back on retail, they’ve spent on services and on retail and the way that they’ve funded this is by spending those excess savings. 

“There’s still a trillion dollars left of excess savings, but we’re burning through that at a pretty high rate,” Mathews said. “We’re going to get to a point in 2023, if inflation remains high, you are potentially going to see consumers running into a wall because they won’t be able to maintain that level of spending.” 

The economics of the moment are only part of a very complex equation needed to understand the current psychology of consumers, who are buffeted by a host of other forces, from the ripple effects of the pandemic to the rise of technology. 

Michelle Evans, global lead of Euromonitor’s retail and digital consumer unit, highlighted what she described as “authentic automation” as an important trend. “This is about finding the balance between human versus bot,” Evans said. “Machines offer more convenience and speed, but we really shouldn’t underestimate that emotional connection with a brand.”

The right balance is often “tech with a human touch. Consumers are becoming increasingly comfortable with tech interwoven with their daily lives,” Evans said, noting that 80 percent of shoppers under the age of 29 are comfortable with consumer experiences that include technology. 

Machines have not taken over, at least yet. Consumers are “pumping the breaks” when companies move closer to “automating a purchase,” said Evans. 

She also pointed to the rise of Gen Z as a consumer force, noting the cohort accounts for a quarter of the population. “They’re expressive, progressive, they take matters into their own hands,” Evans said. “Their financial freedom is starting to ramp up. They’re increasingly becoming decision makers you need to reach.”

While navigating the economy and the rapidly changing consumer shopping patterns, it’s also about managing your portfolio, as Nick Woodhouse, president and chief marketing officer of Authentic Brands Group, outlined. The company navigates brands as varied as Brooks Brothers, Juicy Couture and Shaquille O’Neal in categories ranging from traditional wholesale and retailing to lifestyle and entertainment, the latter of which now accounts for a quarter of its sales.

Woodhouse used Authentic’s largest acquisition, Reebok, which it purchased from Adidas last February for 2.1 billion euros, as an example. Calling it a “superbrand” that was one of the originators of the sports marketing revolution, it has managed to straddle fashion, athletics and technology over its life span. 

“We make very technical running shoes, but we also have permission to play in the street,” he said. And there’s proven demand from a consumer “who loves the legacy of a brand they know and have trusted for a long, long time.”

The acquisition was also “transformational” for Authentic and showed the company could effectively digest a “gigantic transaction.” At the time of the purchase, Reebok had sales of $3.5 billion, a number projected to hit $5 billion this year and $10 billion within three years, Woodhouse said. 

Turning to entertainment, Woodhouse said diversifying Authentic’s portfolio was the primary reason the company moved into the entertainment realm. Even though apparel still represents 40 percent of the corporation’s sales, there’s more to life than clothing, he believes. “People love to shop in malls or online, but they also love to go to events and listen to music.” 

So whether it’s a Sports Illustrated resort or virtual collection for Forever 21 on Roblox, Authentic seeks to reach all consumer touchpoints.

The same type of thinking led to Authentic purchasing the estates of some iconic celebrities such as Elvis Presley and Marilyn Monroe, where it could control how the brands are presented. With Marilyn Monroe, that ranges from collaborations with Walmart as well as Chanel. And with stars who are still alive such as O’Neal, Authentic bought a 50 percent stake in his company so it could ensure it could “control the narrative.”

Woodhouse advised the audience, “Be a micromanager. I wouldn’t worry if someone says that’s not the way to manage people. You need to know what’s going on in all facets of your business. So don’t be afraid to micromanage and don’t break the promise to the consumer: be in stock, be friendly, and don’t make people wait to take their money.” 

“The mood at NRF was optimistic and clouded at the same time,” said Shah Karim, CEO of Saferock, a strategy and analytics consulting firm. But the NRF’s objective was clear, “to ignite desire and guide businesses safely through these challenging times,” Karim said.

“It’s not a calm sea ahead. You need management to be vigilant and to guide businesses safely, and you do want the team to be broader. They got to look to the outside to learn,” Karim said. “Vendors and retailers came here to look for some inspiration, and they want to inspire their customers. Through the duration of the convention, we saw a very good retrospective of where we have been through the year. But what we are all hungry for is to learn where we are going in terms of operations, customer engagement, their tastes are changing and what’s also really important is that we (retailers) have to gain back the trust of investors into the sector. Management has to learn and understand where the investors are at.”