Retail and restaurant industry outlook: Winter 2022
Consumer flexibility is forcing retailers to focus on agility
INSIGHT ARTICLE |
The U.S. consumer can be summarized in one word: adaptable. Throughout the last 18 months of the COVID-19 pandemic, consumer flexibility has led retailers and restaurants to focus their operations and delivery on agility.
Inside the winter 2022 retail and restaurant industry outlook:
- The speed at which consumers are willing to pivot between sales channels highlights the need for retailers to maintain an omnichannel approach for customers.
- Retailers continue to focus on managing inventory levels as they face supply chain and staffing pressures.
- If retailers and restaurants cannot solve the labor equation in time for the holiday season to provide the experience customers expect, they stand to lose far more than just short-term sales.
- Retailers are addressing early holiday shopping by offering deals throughout November to ease pressure on anticipated lower inventory levels.
During early summer, as states started to loosen restrictions and companies began discussing returning to work by Labor Day, retailers saw a shift from their online platforms back to their physical retail locations, with department store sales increasing 1.9% and 5.8% month over month in May and June, respectively. While department store sales had been on a slow decline overall since January 2001, since April 2020 they have surged back to 2017 levels, reaching $12.31 billion in August, indicating people’s willingness to shop in physical locations.
As consumers and retailers entered the final month of summer and started to prepare for the back-to-school season, the delta variant caused many consumers to quickly pivot back to shopping online, shown in the 5.3% month-over-month sales increase for online retailers in August. The speed at which consumers are willing to pivot between sales channels highlights the need for retailers to continue focusing on an omnichannel approach for customers.
Agility for retailers and restaurants, however, goes beyond sales channels and extends into SKU management. Changes in consumer preferences and increases in product costs are forcing companies to closely monitor and adjust their product mix as consumers respond to inflation concerns.
All eyes have been on the consumer price index as it has steadily increased this year. For durable goods it hit 120.2 in July, the highest since November 2002. Elevation of this rate, which tends to stay between 105 and 115, indicates that most consumers are waiting to purchase larger durable items, with 41% saying in September that now is a good time to buy compared to 54% a year ago. The percentage has hit this level in October of 2008 during the Great Recession and April of 2020, the first month of the pandemic.
While consumers were more willing to pay higher prices after receiving their stimulus checks, they started adapting to the CPI increase by delaying nonessential purchases. Based on University of Michigan consumer sentiment numbers in the accompanying chart, we anticipate a continued slowing for durable goods as consumers turn their focus to service-sector purchases and prepare for the holidays.
The restaurant sector is also facing cost pressures in the short term, with 91% of restaurants saying they are paying more for ingredients and 75% reporting they have changed their menu items due to supply constraints, according to the National Restaurant Association. In what typically is a strong month, 63% of restaurants saw weaker sales in August compared to 2019. Takeaway options continue to be preferred as the delta variant inhibits on-premises consumption.
Retailers continue to focus on managing inventory levels as they face supply chain and staffing pressures.
Shipping rates have climbed as goods from China experience longer lead times. Increased wait times for ships in the Los Angeles and Long Beach harbors have caused larger retailers to take matters into their own hands as they seek agility.
Walmart, Home Depot and Lululemon have all sought alternative approaches in bringing their goods to market. Both Walmart and Home Depot have secured their own vessels, with a focus on smaller vessels able to utilize alternative ports to get around the bottleneck. Lululemon, with its smaller items, is looking to air freight to circumvent the delays and land products closer to where they are needed. Even when ships finally reach the dock, limited staffing at the ports to unload containers or a shortage of truck drivers to get them to their destination all add constraints to the supply chain.
Impact of the labor shortage is not only affecting supply chains; heading into the holiday season, the lack of help in stores and restaurants could create significant challenges on the customer-facing side of businesses. Customer experience remains central regardless of the channel through which consumers choose to shop across a brand’s retail ecosystem. If retailers and restaurants cannot solve the labor equation in time for the holiday season to provide the experience customers expect, they stand to lose far more than just short-term sales.
Consumers are quickly adapting to the anticipated supply constraints around the holidays by starting their holiday shopping earlier. Like last year, retailers are mirroring the elongated approach by offering deals throughout the month of November to ease pressure on anticipated lower inventory levels.
Middle market retailers must look to data analytics to help with pricing and inventory to improve and maintain margins. Many retailers are utilizing their data to automatically adjust pricing based on real-time demand. While the concept of the dynamic pricing model has been used in the airline industry for years, middle market retailers have only recently had systems in place to start to utilize this model.
Consumer flexibility has led retailers and restaurants to focus their operations and delivery on agility to reopen and recover.
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