The National Retail Federation (NRF) is out with its holiday 2021 forecast and it’s a doozy. November and December retail sales are predicted to grow between 8.5% to 10.5% over 2020, excluding automobile dealers, gas stations and restaurants.
This comes on the heels of last year’s spectacular increase of 8.2% after consumers threw off the restraints of the pandemic shutdown and tried to return to some semblance of holiday normalcy.
“There is considerable momentum heading into the holiday shopping season,” NRF president and CEO Matthew Shay said.
NRF chief economist Jack Kleinhenz added, “The outlook for the holiday season looks very bright. The unusual and beneficial position we find ourselves in is that households have increased spending vigorously throughout most of 2021 and remain with plenty of holiday purchasing power.”
After hedging their bets in 2020 with a prediction of a 3.6% to 5.2% rise, last year’s actuals gave NRF confidence to announce this year would see the highest holiday retail sales on record.
However, in parsing the NRF statement, they gave themselves some wiggle room in the 2021 prediction. It said holiday spending had the “potential” to break previous records.
And in response to the much-publicized supply-chain issues that are making product shortages a certainty, Kleinhenz qualified his predictions by stating, “If retailers can keep merchandise on the shelves and merchandise arrives before Christmas.”
Overall, there is widespread consensus among other retail forecasters, like Deloitte, Mastercard, NPD, and AlixPartner, that the tailwinds of strong consumer demand will push retail to unprecedented heights this year.
While none discount the economic headwinds pushing back – supply shortages, low unemployment and inflation – forecasters remain optimistic that the high levels of demand will overcome them, at least for now.
“I expect to see a strong holiday season,” says Aleksandar Tomic, Ph.D., associate dean for strategy, innovation and technology and program director for master of science in applied economics at Boston College.
“But these ultra short-term forecasts are not that big of a deal. Longer-term forecasts get more interesting because, at some point, it’s not about the numbers. It’s what’s happening outside of the numbers that matters,” he adds.
Things get murky when looking beyond the next two months. The demand tailwinds propelling this holiday’s growth may well push retail to new heights, but the headwinds are growing stronger and stronger by the day and will only get worse. Retailers had better make the most of this year because the bill will come due next year and beyond.
“This holiday season is retailers’ ‘Hail Mary,’” says BDO’s Natalie Kotlyar. Looking out further, she says, “Retail is facing a trifecta of challenges that are not going to be easily or quickly resolved. You have supply chain issues. You have employment concerns and hanging overall is inflation. None of these are short-term issues.”
Supply chain must be reinvented
Much has been written about the supply-chain issues and the consensus is they will not be easily or swiftly resolved. Unclogging the ports and getting goods moving across land again is only the immediate problem. There are complex structural problems requiring not just a fine tuning of existing systems but in many cases a complete reinvention of retailers’ supply logistics.
“We see capacity utilization at levels we have not seen in living memory,” Tomic shares. “It means that everybody’s stretched as tight as they can. A lot of businesses are hesitant to increase capacity, like building bigger plants or moving sources.”
Reshoring or near-shoring supply is going to be the next big hurdle, notes Simon Geale, executive vice president of procurement at Proxima, a supply-chain consultancy.
“After we get through the current crisis, people are going to turn their attention to why we are shipping things all around the world and adding to the carbon footprint,” he says. “I’m talking to lots of organizations about decarbonizing their supply chain and 99% percent don’t know how to do that. They don’t even know where to start.”
BDO’s Kotlyar expects supply-chain shortfalls to carry over through 2022’s back-to-school season even potentially impacting next year’s holiday season.
As for the most impacted product categories this holiday season, IBM’sIBM Haller reports his company’s most recent consumer expectation survey indicates strong demand this year for digital electronics and home products, including furniture.
By contrast, consumers indicated plans to reduce spending on clothing, shoes, handbags, jewelry and beauty products. However, since they also reported increased plans to reengage in holiday activities and travel, consumers may well shell out more for these goods as self rather than gift purchases.
Desperately seeking workers
The NRF confidently reports retailers will hire 500,000 to 665,000 seasonal workers this year. But the experts I spoke to beg to differ. What retailers want and need in terms of manpower may not match what is available.
In August 2021, some 857,000 retail workers walked off the job, according to the Bureau of Labor Statistics’ unseasonally-adjusted data. Despite the rate of hiring in retail has doubled monthly from January through September, according to cloud-based recruiting firm iCIMS, there were still 1.3 million retail job openings in August, the BLS reported. Add the half-million or more needed now and the chances of retailers filling their open slots are slim, given that iCIMS also finds retail applications are down 14%.
And it’s not just a problem of finding bodies for the retail floor, there is a worker shortfall throughout the supply chain. “The problem is widespread in the entire ‘consumer supply chain,’” says IBM’s Haller. “It’s not just in retail stores. It’s in distribution centers, food processing and meatpacking facilities and truckers. The labor shortage is something we are hearing from all of our clients.”
After being sidelined by the pandemic, some workers feel less motivated to get back into the rat race, explains Ryan Severino, JLL’sJLL chief economist and adjunct professor at Columbia University.
“It’s been difficult to get people back to the workforce for a variety of reasons,” he shares. “Some don’t feel safe yet. Some are stuck at home caretaking children or older adults. Some are not enthusiastic about going back to jobs they perceive as a dead end. And then, many older workers simply have checked out, retired and are not coming back.”
Boston College’s Tomic suggests fundamental changes in how American’s approach work may signal even bigger challenges ahead.
“It’s not just difficult to find workers, but it’s even more difficult to find people who show up regularly,” he says. “People will check in to a job, get some cash, then disappear for a week until they need money again. People are getting used to the gig economy. They are feeling more power and free to work on their own terms.”
He adds that retail scheduling systems designed to match retail staffing levels to store sales on an on-going basis may have aggravated the problem. Workers may come in expecting to work an eight-hour shift only to be sent home after two hours because they aren’t needed.
Casting another pall over the long-term prospects for retail is the threat of inflation, which currently stands at 5.2% seasonally-adjusted. At least for holiday 2021, consumers seem ready to accept it. “Yes, inflation is twice what it has been historically, but I wouldn’t call it behavior-altering inflation,” Boston College’s Tomic says.
But looking into next year and beyond, Tomic cautions that this year’s five-percent inflation rate could be headed into double-digit territory. “If it’s 5% on the way to a permanent 5% inflation, we can deal with that. But if it is a way station to 10% or 15% or 20% inflation like we saw in the 1970s, that is another matter entirely.”
E-commerce retailers aren’t off the hook
Unlike last year when many retailers were able to quickly shift the balance to e-commerce, this year retailers don’t have such a straightforward path. Shipping costs to get e-commerce deliveries to consumers is rising just as fast as the costs to get products delivered to the warehouse.
“Last year retailers could promote e-commerce assuming they had a full set of employees in the warehouse,” BDO’s Kotlyar says. “But this year that could be a dangerous play since the costs for packaging materials and shipping to the customers are rising fast. Consumers have come to expect free shipping, so that will lead to further erosion.”
“Retailers have learned the need to be nimble over the last two years. But after all the shifting required over that time, retailers are tired,” she notes. “Should they promote more e-commecrce or more in-store experiences? How do they balance both? The answer will be different depending on where they are in their supply chain and with their employees.”
Holiday 2021 is set but retail 2022 is a big question
As for now, each retailers’ prospects for holiday 2021 are pretty well fixed. If they ordered right and the products can get to them in time and they have the bodies to get them up on the shelves in the store and warehouse, they should be propelled forward by the still strong demand tailwinds.
“People have an overwhelming desire to have a normal holiday and get back with friends and family. That’s the psyche of the country,” explains IBM’s Haller.
But as happens in nature, the winds can turn and blow even stronger in the opposite direction.
“What happens next year is a big question mark,” he adds. “People have to pay the bills and those bills are likely to be higher next year. Every individual household has a balance sheet, an income and cash flow statement. Their intentions may not match those, especially for middle and lower-income households.” He also notes the upper two income segments in the IBM consumer intention survey account for most of the uptick in holiday spending foreseen.
“Consumers generally are not good at thinking two or three moves ahead,” he says. Retailers, on the other hand, should be able to do that. But given the remaining uncertainties surrounding the supply chain, employment status and inflation, there are still many variables that make 2022 retail impossible to predict.
“We’re in the ‘new normal’ where we’re experiencing some inflation, continued supply constraints and a really weird labor market,” Haller concludes. “These seem to be characteristics of the new normal and we’d better get used to it. How long it lasts we don’t know, whether it is a six-month or twelve-month new normal or an extended new-normal economic cycle, nobody can tell.”