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Continuing with our retail series, today I revisit an earlier newsletter that looked at the challenge retailers would see for the upcoming holiday season. Well, it looks like those challenges have arrived, as consumer confidence continues to dip, supply chains remain chaotic, job openings remain high, and transitory inflation continues to rise. We are in a perfect storm of challenges, that will build on top of one another and create the most chaotic Q4 in recent memory. I want to help everyone understand what these challenges are, and how a retailer might overcome them.
And as well, I feature a couple of great things I’ve read or started reading this week.
And as always, download my 130 slide consumer research deck looking at the future consumer in 2021, It’s a ton of primary research, and you can download it for free.
3 Stories
US consumer confidence falls in August to 6-month low - AP News
Consumer confidence has been improving at a pretty steady clip from February until this past August when it dipped to 113.8, which is 11% lower than what we saw in July. The drop in confidence makes sense as everyone hears the bad news about rising gas and food prices, housing supply constraints, plastic shortages caused by Ida, and the resurgence in cases because of the delta variant. As unemployment benefits ending soon, questions about school and back-to-work uncertainties make sense consumers are feeling uneasy. As the holidays are coming, consumers expect inflation to rise, which is a good indicator that shopping behavior will look quite different for Q4.
Labor Day 2021: When will the worker shortage end? - USA Today
Everyone has talked about the 235K jobs gained for August. A poor figure considering that the previous month saw 943K jobs. The job numbers indicate that there is still a severe worker shortage, even though everyone was expecting a more significant number because schools would reopen, and unemployment benefits are ending. But as we’ve discussed, things are never that simple, as schools around the country are reacting to the delta variant, making it harder for mothers and parents to rejoin the workforce. Even with rising wages, the new policies enacted by certain municipalities around the country are causing restaurant owners and events planners to pause their hirings because of the uncertainty of operating. So with employers halting their hirings, schools are postponing their reopening, and the delta variant looming, the incentive to get back to work may not be sufficient for many workers. And with reduced unemployment benefits, we’ll most likely see the unemployed change their buying habits more so than go out and get a job.
Holiday shopping 2021: Shipping delays, out-of-stocks and inflation are roiling retailers - WaPo
I had written earlier that there would be many holiday problems, but we’re now seeing it come to fruition. With items sitting in storage in China due to port closures, or items sit on boats as they wait to dock, or as things sit in limbo as they wait for a truck or train to ship them to their final destination, the inventory nightmare for the holidays are here. Companies are trying to figure out how to get their inventory to their stores and warehouses, and they’re looking for different ways to do this, from getting their boats or using air freight. The only way inventory can get to retailers on time will be if they’re willing to pay extra to expedite shipping times. As shown by the low consumer confidence, businesses will pass those price increases onto consumers, who are already changing their buying habits. Buckle up, as the holiday season will be a bumpy ride.
Takeaways
Plunging consumer confidence will drag down retailer’s revenue
A weak job report that came out last week was another thread that echoes what the University of Michigan reported from their consumer confidence index. Consumer confidence dropped 11% in August. A drastic drop makes sense when viewing that in line with a weak jobs report, rising prices, and the rising spikes of infection across the country. In that jobs report, more telling is that Black men and women’s unemployment rates rose, while they went lower for white men and women. More telling is that of the meager jobs created, only 12% went to women. Women’s labor force participation rate has decreased, dropping to 57%, the lowest since 1988.
Across the board, business owners of all sizes are also getting decimated by labor shortages and inventory management. The bigger businesses just continue to outspend their competitors, leaving the smaller companies out in the sun. As product shortages continue to affect business owners, those price increases trickle down to the consumer. Many argue that inflation isn’t a concern. Still, with expiring unemployment benefits and transitory price increases coming to different industries at different times, most consumers are insecure about their current spending. All of that is happening, excluding the constant terror that might come from more lockdowns if the delta variant doesn’t come under control. All of this combined doesn’t let many consumers have a lot to be excited about, which may change how they spend their dollars.
Supply cannot meet demand. Store shelves will be emptier
We’ve discussed in the past the need to be proactive this holiday season due to delta throwing the global supply chain into a frenzy. That reality is now confirmed, as shipment times from Asia to the United States have doubled, making it the longest it’s ever been during the pandemic. And with air freight 10x more expensive than traditional methods, even businesses that can have inventory will have to pass on more of their expenses to consumers. Even the factories where products are getting made cannot fulfill demand, as the pandemic lockdowns have forced so many factories to shut down and affect the retailers’ ability to have items in stock for Q4. The lack of domestic workers, where there are immense needs for warehouse workers, freight workers, truck drivers, etc., means consumers will only see longer shipping and fulfillment times. The trucking industry is down 33K jobs, which is 2.2% below the pre-pandemic numbers from February 2020, meaning that when total freight is 27% higher than last year, we have fewer drivers than ever to fulfill that demand. This workforce and inventory problem means that most retailers won’t know what they’ll have available to sell because of all these freight hold-ups, affecting the volume of items they buy. Many manufacturers are unaware of their client’s products, whether at the factory, in the warehouse, on a boat, or in transit. As both retailers and shippers are trying to meet the demand, they’re hiring from the same smaller pool of potential employees. The collection is smaller because mothers and parents still can’t work if schools lockdown, immune comprised individuals may be too fearful of working, etc. The only upside is that we know they’ll be paying their workers higher wages.
1nsight
Higher prices, less supply, retailers are running out of time to have a successful holiday. The retailers that can have a successful Q4 won’t be the companies with the best Plan A or Plan B, but most likely Plan C.
Prices this season will be higher for consumers. From the higher costs of paying employees to the air freight to the higher cost of products due to rising material costs, many retailers this year cannot afford to have the low prices consumers are used to seeing for the Holidays. With lower consumer confidence, this becomes problematic, as we’ve seen they’re already changing their buying habits, and higher prices will only give momentum and speed up those changes. Overall inflation is up 5.4%, with an expectation that it will continue to rise as the year closes out, given all the transitory inflation that continues to grow. Small businesses will suffer because of the unpredictability of inventory and the risings costs of running one’s business. Larger retailers, including franchises, will continue to recruit from the same pool of workers and cannibalize one another, creating more significant problems for every merchant or seller.
For example, suppose Amazon hires a potential worker that UPS, USPS, or trucking company was also seeking to hire. In that case, that employee will now benefit Amazon but hamper the ability of other sellers to have their items reach their customers on time or even get the inventory they need. As Walmart, USPS, UPS, and every other large employer seek to secure their needs, because of the limited supply of workers, the ramifications of these hires will trickle down and hurt every other business that doesn’t have the same cash as the most prominent players.
This combination of shipping delays and risings costs guarantee that consumers this year will have unfamiliar patterns. When their inventory arrives, some retailers may move their sales to January, and shipping demand may be lower. Other retailers will use this as an opportunity to market their loyalty programs and identify how useful some of those perks may be. Some consumers may choose to pay more for expedited pandemic shipping. Everything for retailers right now is up in the air, from their inventory to their sales, workers, and operations. If anyone thought retail was hard before, only the strong would make it out of this Q4.
And as retailers deal with these realities, brands will still build their audiences, making products and selling them. But retailers will now more than ever have to understand what they bring to the table to brands that can capture the interest and engagement of their audience. Being a lousy retailer will no longer be an option. So as retailers balance this new reality, they should consider the following, why should a brand let them carry their product? Does the retailer have a particular cultural cache that can elevate or deepen a brand’s relationship with its consumer? Does the retailer entertain customers so that brands want to be a part of that experience and top of mind as consumers get their dopamine hits while shopping? Does the retailer have expertise in a particular area that makes it easier for customers to purchase a specific product that a brand has or purchase more products from the brand? Does the retailer have a defining feature or product that will attract customers when looking for something?
As Q4 looms and the inventory realities become apparent, we can see those niche retailers and the most prominent retailers will most likely make it to the other side with fewer scratches because of their differentiation or ability to maintain a certain level of service. The dollars will be limited this year, and most retailers will not win with their initial plan, so you must set forth contingencies. And more than ever, it’s extra essential than your worst-case contingency is as good as your best plan. Having a Plan C that’s just as good as your Plan A will be the only way to succeed as the year comes to a close.
Other things I’m Reading:
A former HS English teacher writing for Berkleyside, Ally Markovich wrote an interesting piece covering a very Berkley story. This story highlights how a private school fired a beloved English teacher after some upset parents criticized the teacher’s vocabulary game. The game used students' names in outlandish sentences with hard words, proving to be very effective. This teacher, who had taught at the school for 25 years, was fired, and in protest, trustees resigned, and half of the eighth-grade parents threatened to leave. This story is a Berkley story at its finest.
This other story, from the Cut, looks at Naomi Campbell’s next act. It was written beautifully by Michaela Angela Davis (she has a great instagram), and explores all the current nuances and intricacies of black women’s fashion. Also, the photography by Campbell Addy makes it an excellent read.