As consumers pull back on discretionary spending, what’s next for retail?


One of the key trends of this retail earnings season has been a pullback in discretionary spending as consumers refocus their budgets amid an uncertain macroeconomic environment. 

Against this backdrop, retailers are ramping up their efforts in other, cheaper, areas.

On Thursday, retail giant Costco Wholesale Corp.
reported fiscal second-quarter results and highlighted weakness in big-ticket discretionary items, particularly major appliances, home furnishings, small electronics, jewelry and hardware. However, Costco increased its penetration of private-label food sales.

Related: Costco still showing strength despite discretionary-spending pullback, analysts say

Other companies are seeing a similar trend in discretionary spending. Best Buy Co.
cited pressure on the consumer-electronics industry when it reported its fourth-quarter results Thursday. Earlier this week, Target Corp.’s  
chief growth officer, Christina Hennington, said the company was planning “more cautiously” on discretionary items. The retailer, which reported fourth-quarter results Tuesday, said it would roll out more private-label products and other less expensive goods this year.

Also this week, Macy’s Inc.
CEO Jeff Gennette said discretionary spending is expected to be “under pressure across income tiers” this year, while upscale department-store chain Nordstrom Inc.
announced plans to strengthen its off-price Nordstrom Rack stores.

Carol Spieckerman, president of the advisory firm Spieckerman Retail, described the pullbacks in discretionary spending as an “ongoing headache” for retailers. “For multicategory retailers, it can take the form of disproportionately high sales in low-margin categories like grocery,” she told MarketWatch, adding that inflation is among the factors exacerbating the problem. “Retailers from dollar to drug stores have been pushing into the grocery business under the logic that grocery drives more frequent visits, thereby increasing sales in higher-margin categories.”

Related: Jasmine rice sales are surging, Costco says, in example of where receding inflation is boosting demand

However, retailers have arguably made it too convenient for shoppers to grab groceries, according to Spieckerman. “Shoppers are checking produce off a list but not browsing the pillows,” she said.

The broader macroeconomic environment is clearly affecting retailers. Consumer spending actually rose 1.8% in January, buoyed by strong car sales, although household spending weakened as a result of high interest rates and inflation. However, spending on recreational goods, food services and prescriptions all increased, according to Bureau of Economic Analysis data.

Spieckerman said the retail sector has been contending with a backlash against “conspicuous consumption” and concerns about sustainability. “Retailers are taking steps to reverse the trend and solve category imbalances through store remodels, category and format expansion and private brand development,” she said. “Retailers will be pulling out all the stops in brick-and-mortar as shoppers return to stores and digital innovations promise to enhance physical shopping experiences.”

Related: Consumer spending posts biggest gain in almost two years. Don’t expect it to last

They are also, she said, trying to “soften” category silos online, thereby encouraging shoppers to browse in the digital environment. “Collectively, these efforts should pay off for the long term,” Spieckerman added.

While retailers are dealing with a decline in discretionary spending, some companies in the travel sector are seeing the opposite trend. On Tuesday, Norwegian Cruise Line Holdings Ltd.
reported its fourth-quarter results and said its affluent target customers are opening their wallets for travel both now and in the future.

Last month, shares of Royal Caribbean Group
hit a nine-month high after the cruise operator reported bookings “significantly” above prepandemic levels.

Now read: Norwegian Cruise Line’s bookings and capacity are heading in the right direction, analysts say

According to the latest data from the U.S. Travel Association, travel spending continues to steadily increase and was 4% above 2019 levels in January. Additionally, as of mid-January, just over half of all Americans and 79% of leisure travelers were planning to travel for leisure in the next six months, it said.

Additional reporting by Bill Peters, Jeffry Bartash and Tomi Kilgore.




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