What to Make of ‘Contradictory’ Consumer Spending

“Contradictory” consumer spending patterns have emerged as people deal with inflation, rising interest rates and a tumultuous job market where layoffs conflict with strong labor demand.

According to McKinsey’s latest survey of roughly 4,000 U.S. shoppers, many are “worried about rising prices and job security” though “they’re optimistic and still spending“ and will “splurge” when the moment is right.

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Nearly three-quarters (74 percent) of Gen Z and 62 percent of millennials say they’re “slightly worried” or “extremely worried” about their employment, given all the headlines about massive nationwide job cuts and layoffs. At the same time, “many consumers who left the workforce during the Great Resignation are now looking to rejoin it,” according to April’s Consumer Pulse Survey report authored by Tamara Charm, Nancy Lu, and Kelsey Robinson.

While two-thirds of respondents pointed to inflation as a top-three worry, 26 percent are concerned about sustainability and climate change, up from 19 percent last summer. “Nevertheless, consumer confidence in general has bounced back,” with 27 percent more people feeling optimistic than summer 2022, McKinsey found. Higher-income respondents reported feeling most hopeful about the future, and while Gen Z reported feeling most worried about employment, 46 percent believe the economy will bounce back in two to three months.

Despite the uncertainty, consumer spending seems to be holding up. “Conventional wisdom holds that consumers get skittish and pull back on spending if they fear a recession coming, but respondents to our survey have continued to spend, despite economic headwinds,” the trio wrote.

Today’s consumers are trying to make their dollars stretch. Eighty percent are trading down on expensive name brands for cheaper options (up 6 percent from July 2022), benefitting wholesale clubs, as well as private labels. People are also buying fewer items save money.

When looking at inflation-adjusted dollars, spending has slowed down, though it’s still stronger than 2019. That’s due in part to an emerging “spending dichotomy,” meaning some people show a “willingness to splurge” even when trading down on how much they purchase, McKinsey found. A full 40 percent of shoppers still plan to treat themselves this year despite inflation.

Higher earners are more likely to spend, while optimistic young consumers who believe the economy will perk up also plan to spend. While 88 percent of Gen Z respondents said they’re trading down on certain items, 64 percent also said they’re happy to pay for others. “Gen Z and millennials show a particular willingness to splurge on fashion, with 61 percent of both age groups saying they intend to treat themselves by buying apparel, footwear, and accessories,” according to the authors.

Nearly half of all shoppers were “cocooned at home” in casual clothing during the pandemic, and spending on clothing only began to normalize during 2021 as they “reemerged into society,” according to Circana director and apparel industry analyst Maria Rugolo. The firm—a joint venture between market research company IRI and NPD Group—released research alongside CivicScience showing that 2021 kicked off a period of “wardrobe replacement” that ran through 2022. Last year, high-income shoppers and department store sales contributed the most revenue to the apparel sector thanks to spending on workwear and occasion-wear.

“The apparel industry’s revival took time because it was dependent on need,” Rugolo wrote Monday—and nearly 80 percent of shoppers queried in the company’s latest omnibus survey said they only buy clothes when necessary. “Now, with full closets, what clothing needs can we expect consumers might buy this year?” While industry revenue was 12 percent higher during the first quarter of 2023 than the same period in 2019, apparel unit sales were essentially flat when accounting for inflation.

According to Rugolo, the 2023 landscape gives retailers and brands “an opening to grab both attention and share of wallet” with the right assortment. While people bought “dresses, suits, woven shirts, and blazers” last year, sweatshirts, sweatpants and dresses were the top three best-selling categories during Q1, demonstrating year-over-year sales growth. Circana’s survey revealed that 70 percent of women wear sweatshirts at least once a week, while 30 percent wear dresses at least once a week. It would seem that shoppers are pulling from opposite ends of the dressy-versus-casual spectrum, but “there’s more to the story,” Rugolo said.

“In 2023, the blurring lines of active and fashion apparel are becoming clearer,” she said. Winning brands helps consumers expand their wardrobe while appealing to their lifestyles by mixing and matching versatile pieces. Blazers with shorts a la Hailey Bieber and active pants paired with more polished tops have taken hold with young shoppers. Meanwhile, former teen screen siren Katie Holmes recalled the 2000s by wearing a Y2K-style mini-dress-over-jeans ensemble.

“Here, education on the part of brands and retailers will also be key, to guide consumers in pairing and pulling their wardrobe together in this interconnected way,” Rugolo wrote, urging brands to focus on expanded lifestyle needs. Consumers “transformed” by the pandemic are shopping differently today than they have in the past.

“As consumers look to bring their wardrobes full circle, brands and retailers can grow by delivering on this evolution of need,” Rugolo wrote.

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