After people satisfy their basic human needs for food, clothing and shelter, their safety and security needs take precedence, ahead of higher-level needs for love and belonging, self-esteem, and self-actualization on Maslow’s hierarchy. Given our overall high quality of life, American consumers have been primarily focused on their higher-level needs, taking the basics for granted.
But that was upended by last year’s Covid pandemic. Satisfying the need for basic necessities and personal safety under the threat of catching a potentially deadly and incurable virus turned our world upside down. Everybody and every institution aligned to assure these fundamental needs were met.
Then as we learned more about the virus and took action to limit its spread, things began moving toward normalcy. And with the introduction of the Covid vaccine late in the year, we were offered an almost foolproof way to avoid the most deadly effects of the disease. Infection rates started to fall and 2021 dawned with a renewed sense of optimism and hope, which is always good for business.
But now, after a six-to-nine month reprieve, dark clouds are gathering that once again threaten us. Inflation has reached levels not seen since 2008, caused by a supply chain broken by last year’s pandemic. That, in turn, means the products people need and want are potentially in short supply.
And as if that isn’t bad enough, the coronavirus is mutating, as viruses are want to do, bringing into question the vaccine’s effectiveness against the emerging strains.
Lined up together, these three factors threaten the truly remarkable retail recovery we’ve seen. Retail sales, excluding food services, through the first six months of the year stand at $3.2 trillion, 22.2% higher than $2.6 trillion in the same period 2020.
With the vital fourth quarter looming, consumers have a new set of worries, similar but different from last year. And retailers need to understand the impacts these worries will have on their businesses as they enter the most crucial selling season of their year.
Inflation hits a 13-year high
For the last three months, consumer inflation as measured by the CPI has crept up from 5% in May to 5.4% in June and July compared to a year ago. The last time it was so high was from June through August 2008, after which it leveled off to an average moderate rate of 3.8% and even declined in 2009 by 0.4%.
Many voices are raised to reassure consumers that these increases are only a temporary blip, supported by the fact that the CPI only rose 0.5% in July from the preceding month, which was down from 0.9% in June on a seasonally-adjusted basis.
But that doesn’t feel so reassuring to consumers who are seeing the prices for so many goods rising so fast. While food overall is up only 3.4%, the cost for meats is up 5.9%, eggs 5.7% and milk 6.2%. In addition, particularly hard hit by rising prices are furniture and bedding up 8.8%, major appliances 12.3%, pants 11.2%, dresses 18.8%, jewelry 10.1% and hotels, for that most needed vacation, up 21.5%.
And perhaps the most impactful price increase for many Americans is the rising cost of energy, up 24.4% overall, with gasoline rising 41.8% over the past year.
On a recent FoxNews Neil Cavuto show, former president and CEO of Walmart U.S., Bill Simon warned we need to pay the most attention to gas prices to anticipate inflation’s impact on consumer spending. While prices on an item-by-item basis are moving up only slightly, the cost of gas puts the greatest constraints on consumers’ spending across the board.
Nothing in the near term looks to reduce the price of gas. And nothing in the near term looks to quell the steady rise in prices in other consumer goods either because of what is causing them: the disrupted supply chain.
Supply chain’s disruptive long-tail
“We still have a very challenged supply chain,” reflects Naveen Jaggi, president of retail advisory service JLL. “Many retailers don’t expect any sense of a balanced supply-chain recovery until the summer of 2022 or even later.”
The problem is all about shipping containers. They are stuck in the wrong places with empty containers sitting in ports where they can’t be filled and returned to ports where they can. This container shortage is causing a doubling or tripling in the cost to ship product.
“So everything in that container is going to cost more,” Jaggi says, as he reminds us, “This is a global supply chain disruption. It’s massive from Bangladesh, South Korea, India, China, Europe and the U.S.”
Besides impacting the price consumers pay for goods at retail, the kinks in the global supply chain will result in product shortages, especially for the most in-demand products going into the holiday season, like home furnishings, electronics, seasonal clothing and toys.
“The biggest challenge for U.S. consumers will be that demand will outstrip supply,” he shares. To overcome it, consumers will need to pull forward holiday shopping rather than wait till Thanksgiving and after.
Retailers can help consumers get ready earlier through their messaging. “We are going to see more aggressive fall marketing campaigns to get customers into the stores in September and October with bigger Columbus Day events. Because if people wait until December to find product, it will be too late.”
And because retailers are facing supply shortages, they are having to make hard choices about where to fill store shelves and display racks.
“Most retailers ensure that their products get sent to the most dense shopping markets, so those secondary and tertiary markets will not have the full array of inventory. As a result, product will be available in some places and not in others,” Jaggi cautions. “Shoppers aren’t going to get too excited for the holidays if there is no product in the stores.”
While he foresees the supply chain will eventually work itself out, it won’t be a quick fix so inflationary pressures are likely to continue until it does.
Pandemic is far from over
And hanging over all the other concerns shoppers face this fall and holiday season is the even more contagious Delta variant.
A new survey from First Insight found that the number of consumers “very or somewhat worried” about the coronavirus in July jumped the highest since March 2020, reaching 64%. And more than half (56 percent) expect to cut back their spending as a result.
Looking at the broader picture, Jaggi sees the urban centers will experience the greatest negative impact from the emerging Delta variant.
“The urban cities, like New York, Chicago and San Francisco, aren’t feeling the same recovery as the Sunbelt states and less populated areas,” he reflects. “Combine this with many corporate offices slowing their return to the office. We are going to have a very uneven return to work and we are going to have an even longer return to the shopping habits of yesterday.”
While Jaggi doesn’t expect any federally-mandated closures, states and cities may impose tougher mandates depending upon local rates of infection which are more likely to impact the important urban markets more.
“Urban areas are really important for showing an economic rebound,” he says, and adds, “The Delta variant continues to create havoc in the consumer mindset about getting out.”
Little to cheer about this holiday
And unless shoppers get started shopping earlier, this holiday retail season will be muted compared to last year’s 8.3% rise, which was also bouyed by the government stimulus.
Given the Delta threat, consumers will make fewer and shorter shopping visits to brick-and-mortar retailers, with indoor malls especially facing an extremely challenged holiday season.
And, of course, consumers will stay home and shop more online, which typically has lower-margins for retailers because of the increased costs for product shipping and returns. Online shopping also limits in-store impulse purchases that are such an important part of holiday shopping.
“It is going to be a very different Christmas holiday shopping season,” Jaggi believes.
Getting back to a real, sustainable normal in retail, Jaggi believes waits on when we all can get to the “point of safety.”
“Once people feel safe getting back to work, back to school, back to mass transit, back to the store, then we can get back to a normal balance. Prices and the supply chain will once again meet consumer demand and normal consumer behavior will resume,” Jaggi concludes.
For us all, it can’t come quick enough, but it probably won’t come this year.