What to Watch: Retailers Guarded, Prudent and Primed
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Modest sales gains. Improved margins. Greater data dependence. Tightening the reins on inventory and costs.
In a nutshell, that’s much of what retailers foresee and plan for 2024.
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After getting through COVID-19, supply chain challenges, and sudden swings in consumer shopping habits, retailers yearn for less market volatility. But they’ve become more agile and equipped to navigate the uncertainties of macro-economic, social and political developments. Inflation is coming down. Some prices have dropped. The stock market ended 2023 strong, and interest rates will likely be cut, facilitating borrowing, investing and M&A activity. A soft landing for the U.S economy is seen, and industry research points to consumer spending staying resilient for the most part. With inventories, they’re all playing it safe, and insist they can still “chase” emerging hot items and trends.
In addition, retailers anticipate freight and raw material costs continuing to come down, though some of that will be offset by higher labor costs. Several major companies — Gap, Kohl’s and Macy’s — are working to simplify price promotions and discounts so shoppers can readily understand final, out-the-door prices and the value behind the products, without using a calculator. Unless you are a luxury high-fashion consumer, “value” continues as the reigning marketing message.
That’s the bright part.
The dimmer side revolves around softening consumer spending on discretionary items and luxury products; consumers building up debt and credit card balances; brands retreating from wholesaling, meaning retailers must pump up their own in-house brands, and declining quality-of-life conditions in downtown America. Crime in stores exacerbates turnover among associates fearing for their safety. And all the anxiety and uncertainty over the wars in the Middle East and Ukraine and the divisive politics in a U.S. presidential election year don’t put people in the mood to shop.
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“We are taking a pretty measured approach to 2024. It’s an election year, which is certainly distracting. I don’t see the macro headwinds dissipating in the next six months,” Marc Metrick, chief executive officer of Saks, told WWD.
“There are a lot of unknowns, but the beautiful thing is we have our strategy. Strategically, we are focused on luxury,” said Metrick. “It’s a customer that will be there when we need them to be there. It is a very resilient consumer. We don’t worry about next year or the year after. We are focused on the long game.”
At Mytheresa, “On the supply side, we expect a much healthier balance between demand and available merchandise in the new year, which should improve the health of business for luxury brands and platforms,” CEO Michael Kliger told WWD.
“On the demand side,” Kliger added, “we do not expect a fast return of the aspirational customer. Maybe in [the second half] and particularly in the United States, that part of luxury demand could grow again. Given our focus on high spending wardrobe-builders we expect a continued good performance in the coming months and further improved results for [the second half] of fiscal year ’24. For the industry overall we expect a continued strong polarization between true luxury and aspirational luxury both for brands and platforms. Recent events clearly show that our sector is consolidating and that will continue.”
In the mass sector, deflation could hit the bottom line. “As we look ahead to next year, we could find ourselves in Walmart U.S. with a deflationary environment,” Doug McMillon, president and CEO of Walmart, told investors during his third-quarter conference call. “We think we may see dry grocery and consumables start to deflate in the coming weeks and months.
“If we end up where both sides, food and general merchandise, are deflated, then we just need to focus on driving even more units,” McMillon said. “But if they’ve got dollars to spend, they’ll spend them.”
“The combination of loyalty and value will be key drivers for the consumer in 2024,” Rob Brooks, CEO of Saks Off 5th, told WWD. “With this in mind, we’re doubling down on our personalization efforts, powered by data and analytics, to enhance our loyalty program, app experience and overarching end-to-end customer journey. We’ve learned a great deal about our loyal customers through our Off 5th Rewards program this past year.”
“Fitch continues to expect discretionary category volumes to decline through 2024 given consumer response to cumulative inflation, reduced savings, higher interest expense, and the recent resumption of student loan repayments,” said David Silverman, senior director at Fitch Ratings.
Michelle Meyer, chief economist and head of the Mastercard Economics Institute, said, “In the U.S., we see continued momentum in spending on experiences and self-care, but while consumers will prioritize spending on the ‘need’ and the ‘want,’ there will be less of the ‘impulse’ purchases that marked previous years.”
She said Mastercard’s 2024 outlook “shows next year’s economy is one that is seeking equilibrium, with a careful balancing of high interest rates, wages and prices compared to pre-pandemic levels. The most important factor to underscore is that we believe the consumer, globally, is in good financial shape, owing to labor market health. 2024’s consumer remains empowered, deciding how and when to make their purchases and shopping for the best promotions. While consumers will continue to make in-store purchases, particularly in sectors like grocery, many will continue to shift their purchasing to online, perhaps buying multiple sizes and styles to try on at home.”
TD Cowen, the full-service investment bank, sees the emergence of “a new, higher margin retailer that combines their existing strengths with a new nexus of media networks and marketplaces that would generate additional revenues.” TD Cowen also expects retailers to begin to utilize “pervasive A.I.”
“Looking ahead, we’re expecting retail sales to be especially high surrounding holidays and major retail moments in 2024,” said Kristina Elkhazin, head of North America for Klarna, citing Prime Days and the “Cyber Five,” which are the five days from Thanksgiving to Cyber Monday. Interest-free payment options like Klarna, a buy now, pay later system, grew in popularity in 2023, and Elkhazin expects usage to further grow in 2024.
Count Dollar General, Mango, TJMaxx, Walmart, Academy Sports + Outdoors, Lululemon, Athleta, Ulta, Target, Primark and Nordstrom Rack among the retailers continuing to open stores in 2024. Also, look to Macy’s to open additional stores under its new, scaled-down concept, while there could be some full-line department store closings.
Target is rethinking its store design to localize product offerings to better suit individual communities. New stores and many remodels will feature the approach. Kohl’s is also striving to localize its mix through its entire fleet over the next two years and will lean on data science to accelerate changes.
Abercrombie & Fitch sees multiple opportunities to open smaller, more efficient, localized “neighborhood stores,” which are about 3,000 square feet in size compared to its average 4,000-to-5,000-square-foot mall stores. Only about 10 neighborhood units are operating so far.
“We definitely see Rack as a growth vehicle,” CEO Erik Nordstrom said in a recent call with analysts. “The goal is to deliver a more robust assortment of great brands at great prices.” The company has pumped up Rack’s team in buying and other areas to position the subsidiary for growth.
Look for changes at Gap Inc., where Richard Dickson joined in August 2023 as CEO. In a November interview with WWD, Dickson said the mission calls for “reigniting the Gap brand in the context of its cultural conversation and its relevance, and returning Old Navy more to a branded narrative representing fun, fashion, family and value, versus a retail narrative.
“Over the years, Gap (brand) has lost its precision around those brand attributes breaking through, and to some extent, it became more of a traditional retailer focused on price and promotion, and less about the clear and distinct brand positioning that made it all so great.” Specifically, “very reliable basics have sustained the business for decades. What we need to do is a better job creating more of a fashion appeal as well,” Dickson said.
He said the company will work on a “store of the future” for Old Navy, and then “pressure test that for all of our brands. Each brand will have an absolute revision of their experience. In large part, our retail fleet is in need of revision. Old Navy still has a strong fleet with opportunities to continue to expand. However, the focus is going to be on ensuring our footprint reflects a better brand persona and a better brand experience before we continue to expand more doors.”
Talking technology, Melissa Gonzalez, principal and founder of The Lionesque Group, said for 2024, “There’s the continuous impact of AI, from pre-purchase to post-purchase. This will evolve how brands and retailers understand and interact with consumers” in such areas as product design, visual merchandising, marketing campaigns and post-purchase recommendations. Retail environments, she added, will become “more digitally integrated, with new boxes being smaller to allow for more optimization and curation of merchandising and experiences, and wellness gaining prominence.” She also sees mass brands having more robust programming around communities than just focusing on product sales and stock keeping units per square foot.
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