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Consumer Research

2018 Holiday Spending Expected to be Strong

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U.S. consumer confidence rose to an 18-year high in October, per The Conference Board. The index reading of 137.9, driven largely by a robust labor market, indicates that consumers expect the current strong pace of economic growth to carry over into early 2019.

The NRF estimates that holiday spending will increase 4.1% this season compared to last year, for an average of $1,007.24 spent by each consumer. The research firm cites high consumer confidence, lower unemployment, and higher take-home pay as factors driving high demand. Despite tariffs on Chinese goods taking effect in September, most retailers had imported goods earlier and tariff impacts are expected to be minimal.

The top three spending categories per the NRF: gifts ($637.67 each); non-gift holiday items such as food, decorations, flowers, and greeting cards ($215.04); and other non-gift purchases that take advantage of the deals and promotions throughout the season ($154.53).

Meanwhile, Deloitte estimates that total holiday spending will reach an average of $1,536 per household. Most of the budget ($611) will be spent on holiday entertaining and socializing outside the home and the rest ($525) on an average of 16 presents and gift cards, up 20% from 2017. Over half (51%) of shoppers planning to buy something for themselves.

Looking at distribution channel, per the NRF, an equal number of shoppers (55%) will shop online and in department stores, while 51% will go to discount stores, 44% to grocery stores, 33% to clothing stores, and 24% to electronics stores. Meanwhile, the NPD Group estimates that 60% of U.S. consumers plan to shop at both brick-and-mortar stores and online this holiday season, according to the NPD Group. In addition, more than 70% plan to shop online only; 42% at mass-merchant and discount locations; 24% at national chains; and 23% at department stores. And Deloitte shows that consumers plan to spend 57% of their budget online and just 36% in stores (down 10 percentage points from 2017).

According to a U.S. Industrial & Logistics Figures report conducted by commercial real estate services firm CBRE, the overall industrial availability rate for warehouses and distribution centers dropped to 7.1% in Q3 2018—the 33rd consecutive quarterly decline and the lowest since 2000 (the longest span of time since CBRE began tracking data in 1988). The growth of ecommerce, consumer spending and an overall strong U.S. economy are credited for this unprecedented demand and resulting logistical nightmare. Initial data shows that about 63 million sq. ft. of industrial spaces were occupied in Q3, and in the past year, demand has exceeded supply by 35 million sq. ft.

At the same time, imports at major retail container ports are expected to reach near-record levels (in spite of the China tariffs), according to the NRF. The firm forecasts that the month of October will handle 1.87 million TEU (20-foot-equivalent units), up 4.3% from September, and the fifth month in a row to top last year’s record-breaking peak of 1.83 million TEU.

With the warehouse shortage entering crises levels, it remains to be seen how retailers will address such a logistical nightmare as consumers increasingly expect instant gratification. Separately, the NRF reports that for holiday online shoppers, free shipping is most important, with 94% planning to use it, 16% saying they’ll use expedited shipping, and 11% planning on same-day delivery.

A Deep Dive into the American Consumer Class

Most of the industry researchers, think tanks, and little birds we consult seem to have adopted a universally sunny view of consumer spending. But our analysis of the health of U.S. consumer demand is a little more strained—maybe even stretched to the point of unrealistic—and we should share why.

On the face of it, things certainly look good: Per the U.S. Census Bureau, middle-class income rose above $61,000 in 2017, the highest-ever level recorded (even if it’s not statistically significant from highs reached in 2007 and 1999). The national poverty rate also declined to 12.3%, the lowest level in over a decade. Average hourly earnings are now up 3.1% over last year. And the unemployment rate has reached a 50-year low of 3.7%.

But this extra income is mostly coming from families having another person in the home employed again or working additional hours, explains the Census Bureau. (Note: The average U.S. household has 2.6 people.) Income inequality remains near the highest levels in the modern era, and the share of Americans without health insurance refused to go down from 8.8% in 2016. Wages have remained stagnant and any gains have been sluggish and mostly wiped out by rising prices for gas, rent, and other necessities.

Separately, the Bureau of Labor Statistics estimates that 41.7 million laborers (or a third of the American work force) earn less than $12 an hour, and almost none of their employers offer health insurance. A recent study from Third Way reveals that just 38% of all jobs available nationally pay enough to afford a middle- or upper-class life for a dual income-earning family with children; 32% of jobs pay a “living wage”, or enough to get by but not take vacations, save for retirement, or live in a moderately priced home; and 30% pay a so-called “hardship” wage, which is less than what a single adult needs to make ends meet.

A slight majority of Americans (52%) do live in middle-class households, according to the Pew Research Center. And another 20% or so live in upper-income households. But Pew explains that that’s because they’re juggling multiple jobs or relying on investments, an inheritance, or other household members who may have higher-paying jobs.

In short: The opportunity simply isn’t there to sustain meaningful economic growth over the next two, three, or even five years. Whatever consumer demand exists is either unstable, overvalued, or (more likely), if it’s being accurately measured, just a hint of vast, untapped potential. Obviously, this is nothing new; in fact, today’s consumer class is the largest we’ve ever seen in human history—even as “emerging economies” like India and China have not finished lifting billions into our collective plane of economic activity.

What we have is enough to maintain flattish momentum until a crisis point hits. After all, when consumers are working more for less, they do in fact “splurge” more on expensive, shorter-lived consumer goods/experiences instead of big-ticket items like a vacation, or a house. That is one of the real reasons licensed retail sales will not drop in the same time frame. But it’s hardly a reason to breathe easy.

OTOH: The Chinese Consumer

Alibaba is taking Single’s Day to the next level. The shopping holiday generated over $25 billion in sales last year, based on 2017 gross merchandise value. Known as the 11:11 shopping festival because it takes place on Nov. 11, Single’s Day is entering its 10th year. In contrast, according to Adobe, online sales for Black Friday in the U.S. generated $5 billion in 2017. For the first time, Singapore-based ecommerce site Lazada will help draw in Southeast Asia consumers and, Alibaba’s food delivery platform, will provide delivery services for select Starbucks stores across 11 Chinese cities.

Chinese luxury consumers are the fastest-growing consumer segment worldwide, but the traditional demographics—age, gender, location, and income—have proved inefficient for brands. In a new report, Euromonitor Intl. suggests five different personality types marketers can use to target this consumer class instead:

  1. Secure traditionalist (27% of the Chinese market). One of the hardest demographics to address, this consumer avoids shopping for strongly branded products and prefers saving money over defining themselves through labels.
  2. Inspired adventurer. Driven by experiential marketing, they like trying new services and traveling overseas to do so.
  3. Undaunted striver. An image-conscious consumer that demands branded purchases, luxury, and the latest tech gadgets. Influencers are a particularly useful strategy to target this class, but personalization is key.
  4. Balanced optimist. One who values healthy living and well being, but is nevertheless extremely plugged-in and uses tech to make their lives easier and enable their lifestyle choices.
  5. Cautious planner (13% of the Chinese market). The only consumer that prefers to make purchases using traditional methods (i.e., not mobile payments). Exclusive, heritage brands will get a positive reception from this demo.

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