The past few years have been tricky for retailers and shoppers. With the pandemic’s onset in 2020, sudden lockdowns worldwide meant consumers could not spend on experiences and therefore spent more on goods. At the same time, retailers were facing broken supply chains, making it difficult to manage inventories ahead of the crucial holiday season. This led to delivery delays, leaving shoppers on edge about whether they would receive orders in time for the holidays. Retailers also faced high costs, which were passed on, in part, to shoppers through price increases. Scarcity and uncertainty, not promotions, were themes of the holiday seasons of 2020 and even 2021.
2022 was different. By the time the holiday season rolled around, inflation was still elevated but coming off its peak, with supply chains normalizing. Shoppers, having lived with increasing prices for the past year, were more price sensitive and concentrated their spending around major promotional periods. Black Friday and the period right before Christmas did very well, while other periods without big promotional moments weakened.
After overspending on goods during Covid, the consumer was eager to spend on experiences and did so in 2022. The chart below shows the share of retail sales (excluding autos and gas) in major categories over the past years. Spending on restaurants made up 15% of retail spending during the October-December holiday period in 2022 vs. a low of 11% in 2020 and the pre-pandemic average of 13%. On the other side, there was less spending on home improvement and department stores and apparel.
While the shoppers of holidays past tried to find their footing in a rapidly shifting economy, the shoppers of holidays present are taking their power back.
The resilient economy in 2023 – which has been a story of positive surprises – has buoyed the shopper. Jobs continue to be added to the economy at a solid pace and the unemployment rate is at record lows. Consumers are currently benefiting from strong income growth, allowing them to continue to spend and engage in the economy productively.
With the 6% inflation of holiday 2022 moving further into the past, the landscape looks different in 2023. Inflation has dropped by almost half to below 4% over the past year, setting an expectation for shoppers that it will continue to drop.1Shoppers have been enjoying promotions -- and they want more. Prime Day’s strong showing in July 2023 was indicative of the present-day consumer looking for those discounts. They have the resources and ability to spend but still want discounts and deals.
Today’s shoppers have choices and can afford to be selective because their purchasing power has improved. While their balance sheet is slightly less favorable than last year’s holiday shopper, it is still a healthy backdrop. Indeed, on aggregate, their debt service ratios are at normal levels now versus very low levels last year. (Debt service ratio measures debt payments as a percent of disposable income).
Shoppers feel positive going into the holidays, with consumer sentiment near a two-year high. Food and gasoline prices, two of the most significant parts of the necessary spend basket, have declined outright compared to last year or have seen slowing price increases. When consumers don’t have to pay as much for necessities, it frees up their ability to spend on discretionary items. As inflation has come down for necessities, real purchasing power has increased.
Inventory management and the ability to move products will be crucial for retailers looking to meet and exceed the expectations of the holidays present shopper. Immediately after the pandemic, retailers struggled with reliable shipping or inventory, and shoppers of holidays past learned quickly that waiting until the last minute meant not getting a gift delivered in time. Now, shoppers can get many items with same-day delivery, so they’re willing to wait to place their orders. With more inventory, there’s more seamless delivery and better delivery options.
The shoppers of holidays present know they can return items for free and easily, which changes how much they buy. Liberal return policies give the shopper more power and freedom but are more difficult for retailers to manage. Unfortunately, this leads to retailers struggling with high return rates.
The shopper of holidays present is still spending on experiences, although in a more measured way than we saw during the 2022 holiday season. In the initial burst of spending on experiences, shoppers faced a market with capacity constraints, whether limited hotel rooms or airfare options. With supply constraints easing, shopper demand is being met. But that also means more choices for shoppers as they’re better able to navigate inflationary pressure. We have also seen targeted spending on experiences – consider the sharp increase in spending on Taylor Swift and Beyoncé concerts and the jump in movie-goers due to several blockbuster releases. Shoppers will deploy their purchasing power when the time is right. And, of course, it is always fun to “gift” experiences, particularly when it is an activity that brings friends and family together. This provides additional support to travel, restaurants and recreation this holiday season.
It won't just be about experiences this season. With price discounting for goods underway, we expect shoppers to be enticed by those promotions. We think this could be a driver specifically for electronics where we may be entering a new replacement cycle for certain items, especially with technological advancements.
The state of the economy will continue to play a significant role in consumer spending decisions. Understanding the shopper of holidays to come means carefully assessing consumers’ health and purchasing power by watching the labor market, household savings and the consumer’s ability to access debt. In addition, insights on the path ahead for inflation and interest rates, which are highly connected, can reveal the types of products shoppers may buy.
Challenges arise when power shifts too far in either the direction of the retailer or the shopper. The more power in the hands of shoppers, the more difficult it can be for retailers – and vice versa. Success in future holiday seasons will depend on balancing what’s best for the shopper and what’s best for the retailer.
The shopper of holidays to come will emerge in the coming months. Just as Ebenezer Scrooge learned to keep the spirit of Christmas in his heart, retailers who keep the shoppers of past, present and future top of mind will spread holiday cheer – for their brands and customers.
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Footnotes
1 U.S. Bureau of Labor Statistics
About the Mastercard Economics Institute
Mastercard Economics Institute launched in 2020 to analyze macroeconomic trends through the lens of the consumer. A team of economists, analysts and data scientists draws on Mastercard insights - including Mastercard SpendingPulse™ - and third-party data to deliver regular reporting on economic issues for key customers, partners and policymakers.
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