3-2-1nsight: Trick or Treat
Is a strong Q4 due to holiday spending a good sign for 2022, or the last hurrah of an unsustainable recovery?
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As we close out October and head into November and December, aka the Holiday season, I reflect on some of the current assumptions that we see from the market, businesses, and consumers. With GDP slowing down, the bounce back from vaccinations dwindling from Q2, and new behaviors and expectations from workplaces, I want to question now just the current consumer behavior trend, but the implications of what that means going forward. While the pandemic has helped us uncover a lot about how we live and work, the next part of the recovery will help us uncover a lot more about what’s been broken in our system.
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 GDP Up 2% In Q3: 'Very Disappointing' - Insider
Q2 2021 was a surprise for American’s and the economy. As the world grasped with a dire Q1 2021, when vaccine distribution was poor coming off the back of a chaotic presidential election, the world at the end of Q1 looked like a dreary place. But as Q2 came to a close, the world was a very different place. With most of the world getting vaccinated and economies slowly opening back up, exuberant spending springboarded the economy to new heights. As Q3 approached, many believed that the trends we saw in Q2 would only magnify, which they did, but also the gaps in our global recovery. As supply chain issues, labor constraints, and transitory inflation hit our economy; consumer spending could not maintain what we saw in the Q2 trend. Meaning Q3 may be a better indicator of our new normal than the end of Q2, which could be a very concerning sign for the rest of society.
U.S. holiday sales could hit record levels of over $800 billion - NRF - Reuters
We’re seeing overall numbers of new consumers entering the market shows record-level holiday sales this holiday season. However, consumers plan to spend $997.73 on gifts, holiday items, and other non-gift purchases for themselves and their families this year, which is on par with consumer spending last year. Consumers are now seeing the transitory fallout from the supply chain, labor, or wage increases might hamper this trend.
The Facebook Company Is Now Meta | Meta - Facebook
After spending most of 2020 behind Zoom, and a good chunk of 2021 in some kind of video chat, Facebook unveiled a new grand vision yesterday. The day prior, CEO Mark Zuckerberg highlighted how the company doubled down and put a solid bet in their reality labs by splitting out their accounting to reflect as much during their Q3 results. The next day, Zuck could unveil the vision behind the company’s big bet on the Metaverse, including a name change. Facebook’s change matters because if this is successful, it’ll drive a brand new way for consumers to live, work, and play. If 2020 showed us anything, how fast people could adapt to new working behaviors when needed or forced to, without a significant drop-off. Devices and visions like what Facebook presented for Meta represent what our new future could look like, which will dramatically affect the behaviors we bring into the future and consumer expectations.
2 Takeaways
Markets, despite intensifying supply chain and labor costs, are still improving because of solid consumer confidence.
Consumer confidence is at an all-time high, as we see reflected in the opening of new credit cards, and so many more consumers are now entering the market. While individual consumer spending is on track with 2020 Holiday spending, and new consumers are buying for the first time. With 70% of Gen Z looking for IRL shopping experiences at brick-and-mortar retailers for 2021 will have a record year, as seen from the NRF survey.
Zooming out, just under 40% of the S&P 500 has reported earnings, and over 80% of these companies have topped expectations. 79% have exceeded revenue estimates, and many have commented about rising costs for materials and labor shortages, but sales don’t seem to slow down. As the pandemic ends and analysts adjust to the new realities, we see that the market has undervalued the overall economy. The truth is that despite how terrible the pandemic was for many individuals but the collective consumer, the pandemic has been a giant boon.
With Boomers forced to get comfortable with online shopping, the bulk of new sales coming during this holiday season will be online. The NRF expects that online and other non-store sales will increase between 11 percent and 15 percent to between $218.3 billion and $226.2 billion driven by online purchases because more than half of baby boomers (54%) plan to do most of their holiday shopping online.
Businesses are feeling less confident than consumers at the present moment because of competitive challenges, higher costs, and more uncertainty, despite strong consumer confidence.
Many businesses that invested in the right parts during the pandemic feel more confident than ever, as consumers demand more. Yet, underneath this trend are anchoring points of concern for companies and employers. In the latest BLS survey, a record 4.3 million Americans quit their jobs in August, a sign of consumer confidence. Workers are leaving because they believe there are better opportunities on the horizon, which makes sense as we wage growth due to the labor squeeze. Recently, the Philadelphia Fed reported on this wage growth and labor squeeze as it reported that a firm that was offering as much as "$90,000 for a second-year CPA position that might have commanded $65,000 before the pandemic."
Labor constraints, due to wage increases and potential inflation, are hampering all businesses. Even Amazon grew revenue in the third quarter by 15% (down from 37% growth in Q3 2020). Amazon forecasted sales between $130 billion and $140 billion, representing growth between 4% and 12%, expecting to take on $4B of extra costs for Q4 to account for labor shortages, higher employee costs, global supply chain constraints, and increased freight and shipping costs. That growth is much lower than the expected $142B that analysts have pegged to the company. And even with all that investment, they’re still unable to meet expected sales.
The current unemployment spells a more significant concern that American businesses might lose out on productivity gains that have driven our economy over the past two decades. Adding to that concern is that even though quits are high in less metropolitan areas, the US’s densest and most productive areas face the highest unemployment and see the least amount of quits. These coastal cities and metropolitan areas were always growth areas because of the productivity multipliers they always offered. As more individuals quit, move to smaller cities, or leave for better opportunities, we can expect that future productivity levels will take a hit, which begs the question, given the fragile state of the current economy and potential inflation on the way. Can America handle such a hit? The latest Q3 GDP report tells us we can’t... but we’ll just have to wait and see.
1nsight
Consumers are currently dismissing higher prices and spending like they did pre-pandemic and intend to do so for the rest of the year. But as shortages continue and prices continue to rise, merchants will need to differentiate themselves in Q1 2022.
As consumers are coming out of their pandemic cocoons, they’re looking to celebrate, and it reflects the current retail trends. American consumers are spending earlier for this holiday season as half of the consumers plan to start holiday shopping before November, an all-time high for the NRF survey. The trends we saw from 2020 for consumers, more online shopping behaviors, earlier shopping habits, combined with the desire to celebrate, and an influx of new consumers entering the market, make for the perfect cocktail for a record 2021 holiday season.
Yet, why should that be concerning?
Because when we dig deeper into the numbers, we can see some disturbing trends regarding the future consumer. The supply chain and a rebalancing of labor and product for Q3 hampered its growth, allowing many businesses to see consumers willing to spend more on goods. This increased spending continues to feed into the narrative of inflation, which provides for continued wage growth demands and a temporary salve on the increased prices caused by supply chain constraints. While those issues all show transitory inflation, the real growth potential for Q4 rests on an assumption of a return to normal behaviors. That means workers go back into the office, business travel comes back, and shopping behaviors continue to trend as they are. The world is operating under an assumption that all these transitory issues will find resolve, and the world will go back to as it was in 2019.
The problem, though, is what if the world doesn’t go back to normal? If hybrid work situations are the future, business travel doesn’t rebound, online habits remain, wage gaps continue to expand. Productivity diminishes over the next five years because of US office worker expectations. Can the old supply chain work in this new normal? Will the chip shortage ever get resolved in 2022? 2023? 2024? What will happen in the interim as the supply chain try to continue to sort itself out?
Facebook changed its name yesterday to Meta as a bet on the future of the world. Zuck doesn’t imagine a world that looks like 2019, but the future will look far different. The pandemic has showcased a few things: how reliant we are on microchips, how powerful the internet has become for work, how unneeded office spaces are, how quickly consumers can adapt to changes, and how slow businesses are can respond to changes. Zuck’s statement of the future is a double down on a very different world. In the past, these bold, audacious visions were a treat, but the pandemic and the current problems and trends may want us to rethink whether this future might be more of a trick to the established businesses than a treat.
My Readlist: Things I’m Consuming Across the Web
Ellen Cushing, from the Atlantic, writes about the latest tool in the worker revolt playbook and how that’s changed the workplace.
Also from the Atlantic, McKay Coppins writes about the impact that Alden Global Capital, a secretive hedge fund that quickly became one of the largest newspaper operators in the country, is gutting journalism. And how they’re single-handedly driving local newspapers to extinction.
Tim Lewis, from Esquire, profiles Idris Elba, who may just be the most remarkable man on the planet about the last 18 months, before the release of his Netflix western “The Harder they Fall.”