Just as larger indicators, like grocery food prices, show signs of easing, consumers have apparently decided to throw in the towel. Of course, the past four months have been a litany of consumers saying they’re pretty much done with high prices and high interest rates, and yet still spending, so it’s hard to take it seriously, but there are definitely bigger signs of weakness out there now than we saw earlier in the year. Couple that with a few reminders that we’re still in the midst of the giant social experiment that is tech’s impact on humanity, and you have this week’s take on retail and technology news. Let’s dive in.
Retail Economic Indicators
UK non-food prices entered deflationary territory in April, hitting -0.6% and down from 0.2% in March. Food inflation was higher, but also down to 3.4% from 3.7% in March, both according to the BRC-Nielsen index. And Catalina’s Shopping Basket Index reported that annual inflation had decreased in the US in April across 10 major grocery categories, including coffee, frozen vegetables, soft drinks and waters, and even yogurt. However, there were also some increases in inflation and Catalina’s commentary highlighted that consumers aren’t necessarily feeling the impact of slower inflation yet. I guess whether prices are rising fast or more slowly, they’re still rising, and that’s what consumers are feeling.
Which might explain why consumer confidence took a hit in April, according to The Conference Board. Overall confidence fell to 97.0 in April from 103.1 in March, which had already been revised downward. TCB, which has been a bit more negative about the prospects for 2024 in general, felt motivated to point out that while this is a retreat, it’s still movement within a relatively narrow band that has stayed consistent over the last two years. The present situation part of the index is much higher, though it still declined – to 142.9 in April from 146.8 in March. Consumer expectations for the future are much lower, and have been for a while – down to 66.4 in April from 74.0 in March. Consumers seem to feel like the job market is slowing too, with fewer consumers saying that jobs are plentiful and more saying that jobs are hard to get.
I try to keep company-funded research in the “research” section vs. using them as economic indicators, but given the consumer negativity coming to the fore, it made more sense to throw in two more consumer survey results here. Numerator research found that consumers are increasing the number of grocery trips they make in a month, traveling to more places in cheaper zip codes in order to check all the boxes of what they want for less. Between March 2023 to February 2024, consumers visited 20.7 different grocery retailers in a month, up 23% over the same period in 2019-2020. AlixPartners additionally found that consumers are buying fewer items at each stop, reinforcing the theory that they’re bargain hunting across multiple retailers, and also found that store brand purchases are up 15% in the 52 weeks ending March 2023 vs. the previous year.
Linda Lisanti, Editor-in-Chief of Convenience Store News, pulled together commentary from NRF and their own research to point out trouble in consumer spending in the convenience store market as well. I would consider convenience store spending to be more discretionary than grocery, or at least more sensitive to consumer pullbacks. And CSN found that the percent of shopper visits to convenience stores dropped 4 points versus a year ago, and the shoppers who said they visit convenience stores “all the time” fell 10 points. This coincides with consumers citing the need for more affordable prices as a must-have for a positive convenience store experience.
Finally, in trying to understand why consumers are still spending even though they don’t seem to have a lot of discretionary income available, I’ve covered the “wealth effect” in the past – the idea that high home values and stock market portfolios, even though it’s not cash in pocket, make consumers feel like they can spend money. But the latest news focuses in on who exactly has all those assets – and given that we’re on the cusp of one of the greatest wealth transfers in history, from Boomers to whoever they decide to leave it to – it should not be a surprise that it may well be Boomers who are sustaining consumer spending, even to the point of making it more difficult to bring down inflation.
Inflation and high interest rates keep interest-bearing accounts and stock portfolios high, and Boomers are at a point where they’re realizing you can’t take it with you, which means continuing to eat out and take vacations. The article behind this points out that Boomers are not a monolithic generation and there are plenty who are living on Social Security and not driving all this consumer spend, but at the same time, the Fed says people ages 55 and up now own nearly three quarters of all household wealth, up from 68% in 2010.
Retail Tech & Research Data
Returns continue to be a huge headache for retailers, and Retail Brew pulled together (registration wall) pretty much the only strategies that retailers have for trying to minimize the expense of returns. Retailers can:
- Charge for returns – almost 2/3 of retailers in a recent survey charge for returns, and among those almost half (44.5%) have added it in the last year
- Push consumers to use buy online, return in store (BORIS) – often offered as the “free” alternative to shipping returns back to the warehouse, it also has the benefit of driving an incremental trip to the store, with the opportunity for incremental purchases
- Get more items back into inventory – apparel brands typically can only sell 75-80% of what gets returns, usually due to wear or some sign of damage, so if they can improve this, possibly even by looking at the resale market, they can at least recover some of the cost
- Head off returns in the first place – by leveraging fit technologies (those these have not been highly adopted by consumers still), or at least identifying patterns of behavior for specific items and investing more in addressing high return behavior, either by providing more in-depth information, or as Amazon has been doing, even warning consumers that the item is a “high return” item
- Cut their losses – use predictive behavior to determine if you should tell the customer to keep it vs. return it
And that’s pretty much it. Not much else you can do to rein in returns.
I promised a reminder that we’re in the middle of a giant social experiment when it comes to the impact of technology adoption on humanity. The first of two items that help explore this topic is a study released by WebPurify that found children 8 and younger spend an average of 2.48 hours per week shopping online. This is based on interviews with 1,001 parents of kids 18 or younger.
It was actually the most of any of the 3 age groups – more than 9-12 year olds (2.16 hours per week), and more than 13-18 year olds (2.27 hours). 16% of parents interviewed believe their children are “addicted” to online shopping. Almost 20% say their child has bought an item inappropriate for their age while shopping online. But before you think that’s all bad, 19% of parents said their child intervened to prevent them falling for a scam, and more than 1/3 of parents said their kids’ online shopping has taught them money management skills.
On the one hand, this behavior really isn’t that different than my elementary school days of grabbing the Sears catalog and making a shopping list of everything I would buy if I had unlimited funds (dating myself, I know. On so many levels). It’s just that the buy button is a lot closer to hand for today’s kids. And just like you would hand your kid some money and make them pay at the register in a store in order to build life skills, it’s not that far to say that kids need the same experience online these days. And yet there are still open questions to be answered – social commerce, combining the addictive nature of social media with a buy button, might not be good for developing brains, in the same way that schools are starting to seriously consider banning phones outright. We’ve talked in the past about digital natives – I don’t think that term has fully applied until what we’re seeing now with Gen Alpha.
AI & Retail
The other great social experiment is, of course, GenAI. On the consumer side, we’ve seen the rush to try it, but now the numbers are starting to show that consumers have not sustained their adoption over time. Ben Evans starts by saying he falls into that category, that he really hasn’t found a killer use case for GenAI adoption, and then digs into why with an analogy to the difference between operating systems and applications like spreadsheets.
LLM’s like ChatGPT are really more like operating systems, and it may be what gets built on those models is where the problem solving and unlocking of value really happens. Much like you could get an OS to add and subtract with some programming, why bother when a spreadsheet application can do that and so much more besides, it may be the agents and the GPTs that people build on top of LLM’s are what actually unlock value. My favorite quote – one that I constantly remind myself of: “[LLM’s] are now very good at making things that look right, and for some use-cases this is what you want, but others, ‘looks right’ is different to ‘right’.” I would also recommend the article as a great insight into how a very successful VC thinks about how software solves problems. Just in this article alone, it’s a pretty thorough overview of product/market fit in the software world.
Retail Winners and Losers
In more signals that consumers may, finally, be pulling back, Starbucks reported consumer headwinds and lower than expected earnings and revenue in Q2. Same store sales and traffic fell across all regions, and the company lowered its outlook for the full year. CEO Laxman Narasimhan said that consumer spending headwinds were “sharper and more accelerated than we expected”. They’re retrenching, with new drinks coming, and more sugar free options, but expected revenue growth is now forecasted at low single digits vs. the original forecast of 7-10% growth.
Walmart Health is closing its doors in a surprise move that impacts 51 locations in 5 states and a virtual offering. The company cited an “unsustainable business model”, however with the Change Health ransomware attack still impacting providers with slow or non-existent reimbursements, it’s not clear if this is because the business model isn’t working, or if the resolution of Change Health’s problems look distant enough that Walmart is cutting its losses sooner than later. The company mentioned “the challenging reimbursement environment” and “escalating” operating costs. But just a few months ago it had announced expansion plans. Just a good example of making sure that a company’s performance (or lack thereof) is because of economic conditions, or because of their own choices.
Getir has become another case of “is it because of consumers or because of their own choices”. The company is pretty much retreating to its home market of Turkey. It built significant market cap on the promise of grocery deliveries in 10-15 minutes, and at its peak was operating in 5 countries. It acquired FreshDirect from Ahold Delhaize in December 2023 – which was not that long ago – but even before then it had exited Italy, Portugal and Spain and cut its workforce by 10%. FreshDirect will continue its operations in the US as a subsidiary of Getir. The delivery market is the epitome of the challenge of eCommerce. More business does not necessarily mean more scale, and you need a LOT of infrastructure in place before you can even start to contemplate economies of scale. No amount of VC financing can change that basic math.
On the positive side of retail, Nordstrom announced a digital marketplace. I was skeptical at the headline, but more positive about it by the time I got through the article. You wouldn’t think that Nordstrom would really have enough market to be able to sustain a digital marketplace, but we’re not talking about competing against Amazon or Walmart, we’re talking more about luxury brand discovery in a model where Nordstrom leverages its customer base to provide access to up-and-coming boutique brands seeking discovery. Most importantly it is an “unowned inventory model” for Nordstrom. So think of it more like a Retail Media Network designed for boutique luxury brands, rather than a marketplace.
Also in the digital world, Walmart had previously announced that it was making its commerce APIs available to developers in the metaverse, and now it’s proving the point with the “Walmart Discovered” experience on Roblox. Users can buy items for in real life delivery, while also acquiring their digital twin for use in Roblox. The experience is being run as a pilot through May, and is just one option for how to bring its commerce API’s to life, as the company has partnered with Unity to expose them to developers for use across 20 different metaverse platforms.
And Amazon is doing just fine, thank you, but look more to the surge in its AWS business as it catches up on the GenAI frenzy, rather than its owned retail operations. Revenue rose 13% to reach an all time quarterly high in Q1 2024. AWS saw sales rise 17% in the first quarter, and operating profit rose nearly 84%. To keep it in perspective, AWS sales contributes about $25B out of the $143B in the quarter. Advertising revenue, helped along by adding ads to Prime, rose 24%, to $11.82B in the quarter.
Amazon also posted some stats about its shipping speeds, setting new records in Q1 after a record-setting year in 2023. Nearly 60% of Prime member orders arrive the same day or next day across the top 60 largest US metro areas. I, for one, wish that when I select the “7-10am” time slot instead of the 4-7am time slot, they would not come early, as it sets my dogs into a frenzy way too early in the morning, but I guess that also goes to show that there’s a difference between “fast” and “in service level”.
Not to be outdone, Walmart announced that it is expanding its delivery services to midnight with the launch of “ultra late-night delivery”. This follows an expansion in March to a 6am start for morning deliveries. Getir is getting out, but Amazon and Walmart – who both have achieved enormous scale – are turning up the pressure on any other competitors out there.
Finally, only because I trashed it so hard not that long ago, I have to mention Poshmark’s foray into live shopping. The company launched the effort in April 2023 but it is now “beginning to take off”. Several boutique brands like Cleobella, Pact, and Rothy’s have given it a try. What I like about this article is that it does a good job covering what these brands actually got out of the experience, and it wasn’t really about sales. In China, an influencer can move 100,000 units of a t-shirt in an hour. The fact that this is so far away from what we see outside of China is part of the reason why expectations seem to be totally divorced from reality. But maybe we’re expecting the wrong things in order to gain traction in the west.
At Poshmark, the focus has been primarily on charity items, or samples. The brand being featured hosts with a brand representative, but the twist is that Poshmark users can also sell their pieces from the brand at the same time. Their videos pop up in a split screen view. The benefits aren’t necessarily in immediate sales, but in breaking through consumer attention to get on the radar in the future. Pact said searches for their brand increased 95% after they hosted an event. Rothy’s held an event just this April, and said that 2,000 people participated. One benefit they had not anticipated from the event was that of having fans talk about the products and bringing up their own ways of showing off the products. The brand learned a lot. And raised money for a charity while they were at it.
Store Innovations
These innovations are all fun and interesting, but they’re not things that capture or enhance the value of the store. So for store innovation this week, the mention goes to Forever 21 and Happy Returns, who have partnered to enable the return of Shein products to Forever 21 stores.
For Happy Returns, this is the first third party retailer who can accept returns outside of its 9000 “return bar” locations. A few key details: Happy Returns is owned by UPS, and Shein is a one-third owner of Sparc Group, which operates Forever 21 stores in North America. As part of that deal, which was inked in August 2023, Forever 21 began selling Shein products in stores, so the whole “third party” angle isn’t as third party as it looks on the surface. There is some integration with Happy Returns to validate the return, which does not require a box or label. Once the item is accepted, the consumer gets a coupon for use in the Forever 21 store. The items go back to a Shein warehouse via UPS parcel. I think if you were looking for evidence that returns can drive store traffic and incremental sales, this might be it, even if these relationships are a lot more cozy than they look on the surface.
The Bottom Line
In December, I covered comments from Dollar Tree about the impact of the loss of pandemic era SNAP benefits – that it took about six months to really show up in consumer spending impacts. I don’t know why it took six months, and Dollar Tree didn’t really know either, only that they had been seeing the impact snowball over about two quarters.
Coincidence or not, it was about six months ago that student loan repayments resumed – and here we are seeing a big dip in consumer confidence. Whether it’s coincidence or causal, I have no idea. But it’s enough of a coincidence that in this retail world of conflicting indicators, it’s worth taking a closer look. But the question still remains – six months after SNAP benefits vaporized, consumer spending seemed very shaky, even though there were as many indicators of consumer confidence as there was a lack of. But in January and beyond, consumers kept spending. It certainly didn’t fall off a cliff.
Here we are six months after student loan payments returned with a vengeance, and consumer spending seems shaky once again. Will consumers shake it off again? There are enough signs to say that they could. But sheesh, who knows at this point.