Amid Inflation, Retailers Brace for Strapped Holiday Shoppers

In 2020, it was pandemic closures and social distancing. Last year, it was the supply chain. Now, the problem is demand.

For retailers, that may make this holiday season their biggest test yet.

The holidays are the most important time of the year for retail. November and December can account for up to a quarter of the annual sales of department stores and specialty retailers. Companies place orders for seasonal and holiday merchandise months in advance so that they have enough stock on hand. The primacy of the holiday season has pretty much held steady, even during the turbulence of the pandemic. Whether through curbside pickup operations or a pivot to more expensive air deliveries during last season’s crunch, retailers still benefited from people ready to spend on all manner of products.

Now, as Americans head into the season when they’re prodded to spend with abandon on holiday gifts, they aren’t showing the same willingness to do so.

“You’ve had consumers that have had to weather a lot,” said Vivek Pandya, a lead analyst at Adobe Digital Insights, pointing to higher prices for gas, groceries and everyday services that have defied the Federal Reserve’s efforts to control inflation.

Overall consumer demand for everyday goods and services remains robust and prices continue to increase at a faster-than-expected pace, but nearly 60 percent of U.S. shoppers say finances are factoring into their holiday shopping decisions, according to a survey by Sensormatic Solutions released this month. That’s up from 14 percent last year. One in five holiday shoppers will spend less this season because of a changed economic situation, a recent survey from the NPD Group, a marketing research firm, found.

This holiday season, retailers “have to think about and pivot a little bit more to win the consumer compared to only thinking about the profit margin from the purchase,” Mr. Pandya said. “Now, with demand being weaker, they really have to go out of their way to advertise to consumers and get consumers with the highest likelihood to spend.”

But discounts eat into retailers’ profit margins, and they have been able to employ that strategy only sparingly in recent years. During last year’s holiday season, in particular, retailers recorded bigger margins thanks to supply chain logjams. Inventory was low, and shoppers were clamoring to get their hands on products. The result: fewer discounts.

“A lot of that is going to reverse, if not more than reverse, across department stores and specialty apparel,” said David Silverman, a senior director at Fitch Ratings. “Consumers are less compelled to buy, and they’re going to need the call to action.”

It’s a very difficult time for any company that sells things. The Fed has spent this year trying to combat near-record inflation by raising interest rates to tamp down consumer spending. Retailers have too much merchandise that shoppers no longer want. Consumer spending on durable goods has been easing over the past couple of months, according to data from the St. Louis Fed. Many retailers have recently revised their full-year financial outlooks, halted hiring and closed stores.

Amazon is freezing corporate hiring for its retail business for the rest of the year. Peloton is laying off about 12 percent of its work force in its fourth round of job cuts this year. FedEx is halting hiring and closing stores as demand falls. Walmart plans to hire fewer seasonal workers this year. The Gap is cutting 500 corporate positions.

A disappointing holiday season could lead retailers to further reconsider business strategies, resulting in restructurings and layoffs in 2023.

“They’re trying to reset, just like the entire world is,” Liza Amlani, the founder of the consulting firm Retail Strategy Group, said of the industry.

Foot traffic in stores has yet to rebound to prepandemic levels. In September, it was down 8.8 percent in department stores, and 8 percent in specialty apparel, from last year, according to Placer.ai, which tracks foot traffic through mobile phone data. Compared with 2019, department-store foot traffic was down 24 percent and specialty apparel down 14.5 percent.

And online sales growth in November and December is expected to be anemic compared with the past two holiday seasons. According to Adobe Analytics, online sales are expected to increase just 2.5 percent, to $209.7 billion, this year. That is a far cry from the 33 percent growth in 2020 and the 8.6 percent growth last year.

The holiday season is always characterized by proclamations of lower prices and can’t-miss deals, but executives have said in earnings calls and interviews that they anticipate more discounts than usual this year across the industry.

“We expect the broader marketplace to be more promotional through the end of the holiday season,” Harmit Singh, the chief financial officer at Levi Strauss, said in an earnings call this month.

Dave Kimbell, the chief executive of Ulta Beauty, said his company would be pushing its customer loyalty program and promotional events like Holiday Beauty Blitz, which includes weekly sales prices on makeup and skin care of up to 50 percent.

“This year, we have some competing influences versus the last couple of years,” Mr. Kimbell said in an interview. “We know that consumers are adjusting to economic changes and inflationary pressures more broadly. We think that’s going to be the case this holiday.”

Apparel-based retailers are testing out new ways to persuade people to spend, and through deals that are often even earlier than normal. Some of this is because of the excess inventory that has been worrying both executives and investors. But shoppers have also indicated that seeing a huge discount on an item they want is paramount when considering whether to make the purchase.

Last week, Amazon held a second Prime Day, the first time it has offered the site-wide sale twice in a year. Target extended its price match guarantee longer than usual, when it rolled out its early holiday deal event this month. Walmart is offering members of its subscription program the option to have their returns picked up at their doorsteps, and it lengthened the window for when a shopper can return an item.

Kohl’s created a “Bricktober” event, which aims to double the amount of Lego toys it sells and includes up to 20 percent discounts on some toy brands throughout the month. On Oct. 6, the department store chain also began to put a different item on sale every day, something it will do through Christmas. Best Buy will launch its Black Friday deals on Monday.

Earlier holiday sales are not new, but retailers have had different rationales for using them. In 2020, when social distancing was top of mind, the October deals were billed as a way to prevent a mad dash to stores on peak shopping days like Black Friday. In 2021, as the reality of the supply chain logjam grew more apparent, retailers implored the public to shop early to avoid the possibility that gifts wouldn’t make it under the Christmas tree in time.

This year, the early deals could help retailers get rid of some of their excess inventory and give them insight into what is selling during the season, said Mr. Silverman of Fitch Ratings. Retailers also want to sell to shoppers earlier because they are aware that wallets may tighten as the season goes on.

There are indications that shoppers are using the deals to start purchasing gifts. Forty-two percent of consumers said the timing of promotions was affecting their holiday shopping schedules, according to Sensormatic Solutions. The holiday season will also influence the way retailers are thinking about the coming year, which may present a new set of challenges.

“It’s a crucial year for brands and retailers to make their numbers, especially as most brands and retailers have re-forecasted,” said Ms. Amlani of the Retail Strategy Group. “If they don’t make those numbers, then drastic measures will need to happen.”