Retailers brace for tougher times and more frugal customers in 2023

January is usually an overlooked month for retailers.

Buyers make returns and exchanges. They come to the store with gift cards in hand. And maybe wear sportswear or other items to keep up with your New Year’s resolutions.

But this year, January brought higher stakes. The next few weeks, which close out many retailers’ fiscal year, could help determine whether the holiday season is a win or a bust. This is an important time to help stores clear excess inventory. January could also set the tone for 2023 – when some economists and retail industry observers expect the US to enter recession.

So far, early holiday results have been better than some economists and retailers had feared. Sales from November 1 to December 24 rose 7.6%, according to data from MasterCard SpendingPulse, which measures in-store and online sales across all forms of payment. The figures include restaurants and are not adjusted for inflation, which rose 7.1% year-on-year in November.

But there are signs that shoppers may be running out of gas. Your credit card balance is ticked up. Personal savings rates have fallen. And sales of big-ticket items like jewelry and electronics have weakened.

Moreover, Americans’ shopping spree in the early years of the pandemic, fueled by stimulus money, boredom and savings, has made comparisons difficult.

Retailers entered 2023 counting on store traffic already in the peak week of the holiday season.

At six retailers – Walmart, Target, Best Buy, Nordstrom, Kohl’s and Macy’s – foot traffic dropped an average of 3.22% year over year for the week from Black Friday to Christmas week, according to data from Placer.ai, an analytics firm that uses data anonymously from mobile devices to estimate overall visits to the location. It also declined by almost 5% when compared to the pre-pandemic pattern.

Now there are more retailers.

“It seems like a lot of brands are expecting a bigger thud in January,” said Stacey Widlitz, president of SW Retail Advisors, a consulting firm.

He’s seen more retailers dangling gift cards to drive sales. For example, Urban OutfittersThe store chain s-owned by Anthropologie is offering $50 towards a future purchase for online purchases that spend $200 or more. But the bonus cash must be used by January 31, when the company ends.

Widlitz said the offer is focused on nudging shoppers to buy when there’s often a post-holiday break. It is also the retailer’s last chance to sell through excess inventory and start the new fiscal year in a clean position.

“It looks like they’re trying to push people to come into the store after the new year,” he said.

But for some, more budget-sensitive consumers it could be an opportunity.

In last month’s earnings call, Walmart CEO Doug McMillon said he expects sales to drop as consumers feel less about holiday spending. Like many other retailers, Walmart’s holiday quarter includes January.

“Sometimes this quarter can be done in late December and January is stronger when people are price sensitive,” he said. “So that’s what I wanted.”

Already, discounters have attracted more affluent shoppers with cheap groceries and household staples. For the past two quarters, about 75% of the market share of food from home that generates more than $ 100,000 per year.

But it’s like competing Target and Costcohave a harder time selling discretionary merchandise that tends to drive more profit than selling milk or paper towels.

Economists closely monitor consumer indicators as the year begins.

On the positive side, said Michael Zdinak, an economist at S&P Global Market Intelligence, unemployment is low and the job market is still tight. There are signs that inflation has cooled, with prices rising less than expected in November, the most recent month of federal data available.

On the other hand, he said food prices are still high, retail demand is weakening and savings are not looking strong.

Personal savings rates have fallen dramatically. The percentage of income people were able to save was 2.4% in November, according to the US Bureau of Economic Analysis. That’s down from a pre-pandemic average of 6.3%, according to S&P Global Market Intelligence, which reduced the figure from 1991 to 2019.

Zdinak said low rates are unsustainable, especially since consumers have been spending money they put into their savings accounts in the months and years before the pandemic.

Economists at the market data firm expect the recession to start in the first quarter of 2023 and last for two quarters.

Zdinak said the decline will be driven by cut orders and less manufacturing as many retailers clear unwanted inventory after consumer preferences change abruptly in 2022.

Then there are headwinds for consumers. The reality may soon hit families who have blown the budget on gifts or holiday travel, said Widlitz from SW Retail Advisors.

“Everyone will go through the holidays in denial and February 1st, when you get it [credit card] statement, or Jan. 15, when it comes, it’s like, ‘Oh!'” he said.

— Caitlyn Freda contributed to this report.