Consumers are not spending with their feelings, but with their wallet

The National Retail Federation’s (NRF) 2024 Consumer Data Panel brought together leading industry experts to discuss the evolving landscape of retail. With Suzy Davidkhanian, Jonathan Silver, Mark Mathews, and Katherine Cullen sharing their insights, the panel provided a comprehensive overview of the current state and future trends in retail. This article delves into key points from the discussion, offering a holistic view for C-level executives exploring AI strategy, digital strategy, data strategy, and cybersecurity posture.

Retail’s Resilient Growth Amidst Evolving Consumer Behavior

Holiday Sales and Sector Growth

The retail sector witnessed a 3.3% increase in holiday sales, with a significant 25% surge in online sales compared to brick-and-mortar stores. Notably, personal care products saw a 2.9% increase over the previous year, while restaurants enjoyed a 5% growth. This indicates a shifting preference towards online shopping and a growing interest in personal wellness and dining experiences.

Influence of Gas Prices on Consumer Behavior:

Gas prices have a psychological and practical impact on consumer spending. Despite being a relatively small portion of the overall household budget, fluctuations in gas prices can influence consumer confidence and discretionary spending. When gas prices are low:

1. Disposable Income: Consumers have more disposable income for other purchases, potentially increasing spending in other categories.
2. Consumer Confidence: Low gas prices can improve consumer sentiment, making people feel more comfortable with their financial situation, which can encourage more spending.
3. Retail Spending: Retail sectors such as automotive, home improvement, and leisure could benefit as consumers might be more willing to drive to locations, undertake projects, or go on road trips.
4. Sector-Specific Impact: Certain sectors, such as fast-casual dining and brick-and-mortar retail, might see an uptick in sales as consumers feel less pressure from transport costs.

Influence of Cyber Events on Retail:

Cyber events, such as the ‘Cyber 5’ days leading up to major online sales like Amazon’s Prime Day, have significantly impacted the traditional retail calendar:

1. Sales Calendar Shift: These events have shifted the sales focus away from traditional peak periods like Black Friday and the Christmas season, spreading out consumer spending throughout the year.
2. Consumer Expectations: Consumers now expect deals year-round rather than at specific times, which can lead to more consistent shopping patterns.
3. Competitive Response: Retailers must adapt by offering their sales or risk losing out to online giants. This can lead to a more competitive pricing environment throughout the year.
4. Inventory and Supply Chain: Retailers may need to adjust inventory management and supply chain logistics to accommodate these shifts in consumer demand patterns.

Both low gas prices and cyber events underline the complex interplay of economic factors. They show how a change in one area, such as the cost of a basic necessity like fuel or the timing of sales events, can ripple through consumer behavior and the broader retail industry. As a result, companies must be agile and responsive to these changes, using strategies like dynamic pricing, year-round marketing, and flexible supply chain management to stay competitive.

The “Return Conundrum”

Many retailers post the 2023 Seasonal Holidays are faced with an increasing number of product returns, which can become particularly acute during the post-holiday season when the volume of returns traditionally spikes. As we look beyond 2023 and into 2024, several factors will influence how businesses handle returns and the strategies they might employ:

1. Profit Margin Impact: Returns can heavily impact profit margins due to the costs associated with processing the return, restocking the item, and the potential loss of revenue if the item cannot be resold at the original price.
2. AI and Sizing Technologies: The use of Artificial Intelligence (AI) to provide more accurate sizing recommendations, especially in the apparel and footwear industries, can help reduce the number of returns. Virtual fitting rooms and AI-based size prediction tools could become more sophisticated, using machine learning to improve their accuracy as they gather more data.
3. Refined Return Policies: Companies are expected to refine their return policies to balance customer satisfaction with the need to maintain profitability. This could mean more stringent return windows, restocking fees, or incentives for customers to opt for exchange or store credit over refunds.
4. Enhanced Return Experiences: A smooth return process can increase customer loyalty even if a return is necessary. Retailers might invest in making the return experience as hassle-free as possible, with easy-to-print labels, convenient drop-off points, or even in-home pickup services.
5. Sustainable Returns: As environmental concerns become more pressing, retailers may look for ways to minimize the environmental impact of returns. This could include local resale of returned goods, recycling, or donating items that cannot be resold.
6. Data Analytics: Leveraging data analytics to understand the reasons behind returns can provide insights for product development and customer service improvements, potentially reducing future return rates.
7. Retail Resilience: Retailers will likely need to develop resilience strategies to absorb the impact of returns without affecting the customer experience. This may include financial buffers or insurance products designed to mitigate the risk.
8. Circular Economy Model: A focus on sustainability might encourage a circular economy model, where returned products are refurbished, recycled, or resold, rather than disposed of. This approach can help recover value from returns and is increasingly expected by eco-conscious consumers.

For the 2024 outlook, businesses that adapt to these trends and successfully manage the return conundrum will likely see stronger customer retention and improved margins. Innovations in technology and policy, along with a commitment to sustainability, will be key to navigating the complexities of post-holiday returns.

Understanding the Customer: AI and Basic Retail Principles

The Importance of Overall Experience in Retail:

The retail landscape has shifted, with a growing recognition that the overall shopping experience is a critical determinant of consumer loyalty and spending. While AI and digital tools have transformed many aspects of retail, they serve to complement, not replace, the fundamental principle of customer experience. Here’s how this could influence consumer spending in 2024:

1. Holistic Customer Engagement: Retailers that offer a seamless, omnichannel experience—integrating in-store, online, and mobile platforms—are more likely to engage consumers effectively. A positive experience at every touchpoint can increase customer satisfaction and spending.
2. Personalization: AI enables deep personalization, from product recommendations to individualized marketing messages. As AI technology evolves, consumers will expect even more tailored experiences, which, if met, could translate to increased spending.
3. Increased Spending Power: With higher levels of savings, consumers have more discretionary funds. If the overall experience meets or exceeds their expectations, they may be more inclined to spend rather than save.
4. Experience-Based Spending: Consumers might prioritize spending on experiences over products. Retailers that can offer an engaging experience, either through experiential retail, exceptional service, or community-building events, may benefit from this trend.
5. Customer Retention: A superior customer experience can lead to higher retention rates. Satisfied customers are more likely to be repeat buyers and to recommend a retailer to others, which can have a multiplicative effect on sales.
6. Competitive Differentiation: In a market saturated with choices, the overall experience can be a key differentiator. Companies that invest in creating unique and compelling customer experiences are likely to stand out and capture a larger share of consumer spending.

For 2024, the intersection of increased consumer spending power and the imperative of a superior customer experience points to several potential outcomes:

• Higher Competition: Retailers will compete fiercely on customer experience, knowing that consumers have more spending power and higher expectations.
• Innovation: We may see continued innovation in how experiences are delivered, with technology being used to create more immersive and personalized interactions.
• Experiential Investments: Businesses might invest more in their physical locations to make them destination experiences, as well as in training staff to provide exceptional service.
• Sustainability and Ethics: As part of the overall experience, consumers may also weigh the sustainability and ethical practices of companies more heavily in their purchasing decisions.

The importance of the overall experience in retail, coupled with consumers’ increased spending power, suggests that retailers who can create an emotionally resonant, convenient, and value-aligned experience are likely to see a positive impact on their sales in 2024.

Assessing the Impact of Elevated Consumer Savings on 2024 Economic Prospects

The $2.5 trillion increase in deposit accounts relative to pre-pandemic levels is a significant indicator of potential consumer spending power. Here’s an elaboration on the implications of this trend:

1. Pent-up Demand: The accumulation of savings suggests that there is considerable pent-up demand. Consumers may have delayed purchases during the pandemic due to economic uncertainty, restrictions on activities, or supply chain disruptions. With increased financial reserves, they may now feel more confident about making those delayed purchases.
2. Discretionary Spending Surge: Consumers may be more willing to spend on discretionary items, such as luxury goods, travel, and entertainment. This could lead to a surge in spending in sectors that were hit hard during the pandemic, boosting overall economic recovery.
3. Economic Stimulus Effect: An increase in consumer spending acts as an economic stimulus. As people spend more, businesses see increased revenues, which can lead to job creation and further investment, perpetuating a positive cycle of economic growth.
4. Inflation Considerations: If this spending power leads to a rapid increase in demand, it could outstrip supply and contribute to inflation. The Federal Reserve may need to monitor this closely and adjust monetary policy accordingly to manage inflationary pressures.
5. Shift in Consumer Behavior: The pandemic has altered consumer behaviors and priorities. There may be a shift towards spending on health and wellness, remote work setups, and home improvements. Retailers and service providers will need to adjust their offerings to align with these new consumer preferences.
6. Increased Investment in Assets: With more funds available, consumers may look to invest in assets like real estate or stocks, which could further stimulate economic sectors related to financial services and housing.
7. Digital and Online Commerce Growth: The pandemic accelerated the shift to digital commerce, and consumers are likely to continue using online platforms for a significant portion of their increased spending, benefiting e-commerce businesses.
8. Debt Reduction: Some consumers may choose to use their increased savings to pay down debt, which could lead to a more stable long-term economic outlook but may temper short-term spending growth.

For 2024, the outlook is one of cautious optimism. If consumers choose to unleash their increased spending power, it could lead to robust economic growth. However, this will depend on the broader economic context, including employment rates, inflation, and consumer confidence. Businesses and policymakers will need to track these trends closely to respond to shifts in consumer behavior and to ensure that the potential economic benefits are realized without overheating the market.

Economic Indicators and Consumer Confidence

The panel highlighted an interesting shift: wage growth now outpaces inflation, a reversal from previous trends. Remarkably, lower-income earners, experiencing the most significant salary growth, are driving retail growth. This segment is actively contributing to the economy, challenging the traditional reliance on consumer confidence indices. The adage, “Consumers are not spending their feelings, but their wallet,” aptly summarizes this trend.

This graph “Real Personal Consumption Expenditures” percentage shows the change year to year at a Seasonally Adjusted Annual Rate (SAAR).

Key insights that we can draw from the graph are:

1. Sharp Fluctuations: There’s a significant spike followed by a sharp decline around the year ’20, indicating a volatile period for consumer spending, possibly due to the COVID-19 pandemic.
2. Recovery and Stabilization: Post the initial spike and fall, there appears to be a period of recovery and stabilization, with the percentage change leveling out.
3. Long-term Trend: Despite the volatility, the general trend from ’21 to ’23 suggests a gradual decline in the growth rate of consumer spending.

The graph implies that while the economy experienced a period of extreme fluctuation in consumer spending, likely due to the pandemic’s impact, it shows signs of recovery, albeit with a slow growth rate in the following years. This could suggest cautious consumer behavior and a slow economic recovery phase.

Political and Economic Outlook

Amidst political tensions and economic uncertainties, the panel remained optimistic, citing increased spending by lower-income groups. However, with $1 trillion in credit card debt, the sustainability of this spending spree is under scrutiny. The low delinquency rates offer some reassurance, provided wage growth continues.

The image illustrates the actual and projected number of jobs (presumably in thousands) over a timeline from August 2019 to August 2023.

Key insights from the graph and implications for economic recovery:

1. Sharp Decline and Recovery: There is a sharp decline in the number of jobs around February 2020, likel due to the impact of the COVID-19 pandemic, followed by a significant but partial recovery.
2. Projected Growth: From the lowest point in 2020, the actual number of jobs has been trending upwards. The projection suggests continued growth, albeit at a slower pace than the recovery rate.
3. Comparison to Pre-pandemic Levels: The projected job numbers by August 2023 do not appear to reach the pre-pandemic level indicated by the trendline from August 2019, suggesting a long-term impact of the pandemic on employment.
4. Economic Recovery: The upward trend in job numbers indicates a recovering economy, with job growth being a positive sign. However, the fact that the projection does not meet or exceed the pre-pandemic trendline could imply a cautious outlook for the speed of recovery.
5. Policy Implications: The data could be used to inform policy decisions regarding unemployment benefits, job creation programs, and other labor market interventions to support a full recovery.

In the context of the 2024 economy, the trends suggest a recovery in progress but also highlight potential challenges in returning to pre-pandemic employment levels. Decision-makers may need to continue or adapt supportive measures to facilitate job growth and economic stability.

Diverse Consumer Behaviors and Retail Strategies

Shifting Purchasing Patterns

er behavior varies significantly across income levels. Lower-income consumers tend to focus on essentials, while higher-income groups allocate more to travel and luxury items. This divergence illustrates the complex relationship between income, inflation, and consumer choices.

Data-Driven Retail and Customer Journeys

Retailers are increasingly leveraging external data sources, like census data, to anticipate demand and optimize supply chains. Understanding the customer journey beyond the store premises is critical. For instance, while many consumers start their shopping on platforms like Amazon, they turn to social media like TikTok for inspiration.

In-Store Experiences and Gen Z Engagement

Physical stores are adapting to enhance customer engagement. Strategies include improved product displays, end caps, and interactive experiences, particularly to attract Gen Z shoppers who value in-store interactions with friends.

The Future of Retail: AI, Operational Excellence, and Consumer Options

AI’s Growing Role

AI is revolutionizing retail operations and customer experiences. From optimizing inventory management to personalizing shopping experiences, AI’s applications are diverse. An example is AI suggesting recipes based on items in a consumer’s kitchen, enhancing the retail experience.

Workforce Transformation

Automation in retail doesn’t imply a reduction in workforce but a shift towards higher-value tasks. Retail jobs are evolving, with employees now focusing on more complex and customer-centric roles.

Historical Data: Elections and the Olympics

The panel also discussed the influence of external events like elections and the Olympics on consumer spending. Regardless of political or economic sentiments, durable goods tend to see a fluctuation in demand.

The Impact of Work-From-Home Trends

The shift to remote work has implications for retail, especially in real estate. Retailers are capitalizing on changing commute patterns and leveraging additional space for experiential marketing. E-commerce growth has led to a hybrid model, with stores doubling as fulfillment centers.

Consumer Confidence and Economic Indicators

Despite various economic variables, consumer spending remains robust as long as disposable income is available. The panel emphasized that economic indicators and consumer sentiment don’t always align perfectly.

Here some key insights from this CNBC projection and for companies to consider that are looking a t ways to grow in this market and economic climate.:

This graph shows two lines and data that we are going to analyze further for CDO TIMES readers. One line indicates the percentage change year to year and the other the actual size of the civilian labor force aged 16 years and older, seasonally adjusted (SA), in thousands. The percentage change is shown in red and the labor force size in blue, plotted over years from 1950 to about 2020.

Key messages and insights from the graph include:

1. Labor Force Growth: The size of the civilian labor force has grown steadily over the decades, as indicated by the blue line’s upward trend. This suggests a growing economy with more people entering the labor force.
2. Cyclical Nature of Growth: The red line shows the percentage change fluctuates, indicating the cyclical nature of economic growth and contractions. Sharp declines are noticeable around known recession periods.
3. Recent Trends: There is a significant drop in the percentage change around 2020, likely indicating the impact of the COVID-19 pandemic on the labor market.
4. Economic Recovery: The red line shows a strong recovery following the sharp drop, which could be indicative of economic recovery efforts and a rebounding job market post-pandemic.
5. Long-term Resilience: Despite fluctuations, the overall upward trajectory of the blue line demonstrates the resilience and long-term growth of the labor force.

CDO TIMES Bottom Line: Navigating the New Retail Landscape for 2024

The National Retail Federation’s 2024 Consumer Data Panel has shed light on the dynamic and rapidly evolving retail environment. With the unique perspectives of experts like Suzy Davidkhanian, Jonathan Silver, Mark Mathews, and Katherine Cullen, the discussion unveiled critical insights into the interplay of emerging technologies and fundamental retail strategies.

As the retail sector navigates a 3.3% increase in holiday sales and an impressive 25% jump in online sales, it’s evident that consumer behavior is shifting towards digital platforms and experiences that resonate on a personal level. The surge in areas like personal care and dining points to a broader trend: consumers are investing in their well-being and experiences over mere products. This shift presents an opportunity for retailers to reimagine their digital strategy and data strategy to capture the evolving market.

The impact of gas prices on consumer behavior highlights the nuanced relationship between microeconomic factors and overall consumer spending. Retailers, especially in sectors sensitive to transportation costs like automotive and fast-casual dining, need to be agile, adapting to these shifts with dynamic pricing and marketing strategies that align with consumer sentiment and purchasing power.

The influence of ‘Cyber 5’ days on the traditional retail calendar is a testament to the power of AI and digital platforms to disrupt established patterns. Retailers are now challenged to maintain competitiveness year-round, demanding a refined approach to inventory management and supply chain logistics.

The “Return Conundrum” post the 2023 holiday season is a critical issue impacting profit margins. The panel’s emphasis on leveraging AI for accurate sizing and enhancing return policies and experiences is a call to action for C-level executives to integrate advanced AI strategies into their operations. This integration is not only a measure to protect the bottom line but also an opportunity to drive customer loyalty and retention.

The increased savings in consumer deposit accounts signal a potentially substantial unleashing of consumer spending power as we move into 2024. This could have a multiplicative effect on the economy, driving growth across various sectors. Retailers must be prepared for this surge, balancing the risk of inflation with the opportunity for increased sales.

Understanding the customer and prioritizing the overall experience remain at the heart of retail strategy. In 2024, companies that offer a seamless, personalized omnichannel experience are poised to thrive. AI’s role in enhancing customer engagement and personalization will be pivotal, and retailers that leverage this technology effectively will likely see a positive impact on their bottom line.

Lastly, the panel’s insights into wage growth, especially among lower-income earners, and the impact of external events like elections and the Olympics on consumer spending patterns, provide a broader economic context for retail strategy. The resilience of the labor market, despite political and economic uncertainties, suggests a cautiously optimistic outlook for 2024. Retailers must remain vigilant, adaptable, and consumer-centric to capitalize on the opportunities ahead.

As C-level executives strategize for 2024, they must consider the complex interplay of AI advancements, digital and data strategies, and the fundamental need for an exceptional customer experience. Those who can successfully navigate this multifaceted landscape will be well-positioned to lead in the new era of retail.

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