In this episode of William Blair Thinking Presents, consumer analysts Dylan Carden and Phillip Blee discuss their team’s latest Consumer Pulse report, including holiday shopping trends, anticipated consumer spend, the popularity of gift cards, and the resilience of value and convenience retailers.
Podcast Transcript
Chris T
Hey, everybody. Welcome back to William Blair Thinking presents. Today is December 6th, 2024. Hope everybody had a great Thanksgiving.
On today's episode, we're joined by consumer analysts Dylan Carden, who actually we just spoke with about tariffs on the latest Monthly Macro alongside Richard de Chazal. He is joined by consumer analyst Phillip Blee. So, Phillip Blee, for those who follow the podcast, joined us a few months back talk through trends in the furniture and home renovations sector.
And by the way, Phillip’s specialty is not only home and outdoor. We have him on this one because he also is focused on the discount and convenience space, which of course, I'm sure we'll talk about today at length.
Philip and Dylan's team, alongside the rest of the consumer equity research team, recently released their 61st edition of Consumer Pulse, which puts a focus on the holiday shopping season, which is really in an effort to understand overall consumer sentiment and impacts on planned spend, product categories likely to benefit or suffer from changes in consumer behavior, and the brands and retailers that are best positioned to gain share during the holiday season.
And being that the holiday season is now in full swing, figured it would be a report worth digging into, along with, of course, some of the high-level demand trends and promotional activity that occurred over the holiday sale period a week or so ago, which Dylan put a report out about a little earlier this week.
So, with that, Philip, Dylan, to kick things off, Dylan, maybe you can start. I figured you'd briefly explain what the Consumer Pulse is, and then let's go from there and talk through some of the highlights.
01:51
Dylan C
Sure. Thanks for having us. To give you the full history, the Consumer Pulse started in the middle of the pandemic to try to kind of I think at that point, it was a monthly survey of just kind of, you know, where we were in time and space from a consumer sentiment standpoint. We transitioned it coming out of the pandemic to a quarterly bit, where we again kept kind of the survey format and really just used it as a vehicle to try to kind of get at, you know, things that our respective consumer analysts, are curious about for their, you know, coverage.
For the holiday, we do have some that are repeating, holiday being one, where there's some value in trying to sort of assess the year over year trends.
02:30
Chris T
The survey itself, which had a number of findings, one of the first key takeaways, found that holiday spending is expected to rise by 5% to $1,055 per respond in year over year. From your perspective, you know, what does that say about the consumer and what retailers maybe experiencing or expecting this season so far?
02:51
Dylan C
Sure, I can kick us off. The overarching benefit that you run into this holiday is that you're now two years into real wage growth, right? So, the wage inflation that incurred coming out of the pandemic has lasted. Obviously, people haven't clawed back that dollar dollar wage. And then inflation is easy. Right. So, you're in a much higher spending power position than really you have been in a long-time pre-pandemic.
And so that's flowing through to periods of strong demand. The overarching caveat is that it's just a noisy year. Right. You had massive weather disruption in September and October was extremely warm. You had obviously the hurricanes. The election tends to suck a lot of oxygen out of the room as relates to marketing dollars.
And you've just seen all sorts of different results from a lot of retailers. And that also sort of relates to some companies are inflecting and some are rolling over periods of stronger growth themselves. Right. So, there's just a lot of idiosyncratic performance out there, which obviously makes for a good environment from a stock picking standpoint.
But the underlying demand trend seems positive. And that's, you know, when you do get a positive normalize weather or you do have Black Friday, all the numbers coming out of Black Friday, Cyber Monday are, you know, decidedly positive in sort of high single digit growth neighborhood. I think that's sort of generally what's behind those numbers.
04:17
Phil B
I mean, I think it's, you know, consumers are still very resilient. Our survey showed, you know, broad based gains across the board across most demographics. And I think what's most encouraging here was around, you know, pretty significant gains were on the lower income consumers that they've been the most under pressure over the past few years from inflation and necessities, eating away at their available share towards discretionary. So, to see some growth in plan spend there was particularly encouraging.
And I think, you know, one of the most encouraging pieces from our survey as well was consumers are feeling better about their financial situation compared to a year ago. And financial health is one of the number one drivers of holiday spend. So, you know, if people are feeling safe in their personal finances, they're going to spend a lot more in this year, our survey indicated that 60% of people felt better about their financial health versus last year. When we ran our survey in the prior year, less than 20% indicated some sort of improvement. So, I think that that's all very encouraging. We've seen that so far in preliminary Black Friday and Cyber Monday numbers. And so, I think that that certainly will provide some sort of a tailwind on spend. I think we've seen that across the board as well as broad base.
And, you know, higher income households felt very positive about their financial situation, particularly the big reversal from last year when they were more pessimistic. So, I think all those things are very encouraging.
On the retailer side, I think retailers seem to be still conservative around planning for inventory. I think to Dylan’s point, the election season, is always a bit of an uncertainty.
And then we have a structurally shorter holiday season this year. We have five less shopping days between Thanksgiving and Christmas, so that's causing a little bit of stress on planning, especially for more impulse buy retailers. But otherwise, I would say retailers are going into the season cautiously optimistic, which I think is definitely an improvement from the past two years, which felt more of a doom and gloom scenario.
So overall, I think consumer still very resilient. Preliminary encouraging numbers heading into the season.
06:09
Chris T
What are the types of gifts and sectors best positioned this season?
06:14
Phil B
Yeah, so our survey indicated, I mean gift cards seem to be reigning supreme. So not much creativity among the consumer, I guess.
06:20
Chris T
Kind of doing the same thing for my sister. But yeah.
06:23
Phil B
Exactly. But, you know, I think gift cards have been, you know, a huge bright spot here. Other than that, we've saw a lot of growth in our survey among outdoor goods like coolers, grills, home and kitchen, small appliances and furniture and home decor. So, you know, I think what's most encouraging here is all those categories were at the very low end of the list last year. They've been struggling the most. They had some of the lowest retail sales over the past two years as a factor of Covid related hangover. Consumers are pulling back on some of these larger ticket discretionary, more discretionary purchases, a lack of, you know, any sort of home mobility and high interest rates certainly aren't helping either. These categories seem to have found a bottom this year and are starting to kind of, we're starting to see a little bit more green shoots here where they are emerging, which is very encouraging.
Higher price point of these items also goes to show the consumers maybe has a bit more appetite for that now that inflation's cooling, interest rates are coming down. So, sentiment seems to be moving in the right direction there. But yeah, I think that we're particularly excited about those categories starting to show a little bit more a little bit more growth after two years of your very, soft demand.
07:32
Dylan C
You're seeing recovery in pet, you know, normalizing trends in pets and Philips point about home, that was another category that was lost in the wilderness for a couple of years.
And beauty, people are calling out fragrance and skincare are having a moment here. I think we're in the early innings of the denim cycle. Denim should benefit the teen space and, you know, all the way on up. We're going away from skinny jeans now to these, you know almost bell bottoms.
07:54
Chris T
Let's talk a little bit about value and convenience. You know it's it's the survey show that it's it's likely to reign supreme. What do you think is driving that. And then is this showing up also in in the Black Friday, Cyber Monday trends? I think you said this or talked about this a little bit.
08:07
Dylan C
One thing that's happening, I just talked to a company about this just a second ago is you're seeing a lot of people buying around Black Friday, Cyber Monday for their own needs, right? Not necessarily gifting. Right. In the example, this one company and it was that their dressing rooms are as crowded as they've ever been on Black Friday, which, you know, you're not trying on something for someone else.
So, if you ask your question, well, why are you doing that? It's quite clearly because you have a lot sales to go on at this time. Right? We've noted continuously in the in this Pulse and others, the resilience, the resounding favorability of off price right in my coverage and Philips. You know, I think the consumer generally for a long time has just been attracted to deals and value. And I think that sort of just holds in any period that you're talking about.
08:49
Phil B
Yeah, absolutely. I mean, it's it's been a trend for, you know, it seems like the past decade where consumers are more or less shifting towards value discount. And I think part of it is the consumer’s just more cognizant of price, particularly over the past few years.
But I think it's also a bit where, you know, discount stores aren't bare bones anymore. Right? Off price stores aren't bare bones. You can get quite a bit of quality. They have the national brands. There's better service levels. So, it's not just kind of the bare bones offering that it used to be. A lot of these companies are really stepping up their offerings, offering omnichannel capabilities. Great delivery time. So, I think that we'll see value players continue to lean into this. And I think it just adds to the convenience of the offering.
Consumers are getting it all now. And and they want it all. And you know, they're not just offering low prices. And so scale players are really going all in on this concept. And so I think that that'll be, you know, continue to drive traffic there.
And we were out in stores of our Black Friday weekend and traffic was certainly heavier in value centric retailers. I think that that's going to be particularly prevalent for gifting especially. We saw, our surveys suggested that discounted price was high priority for gifting, or maybe consumers for themselves were a little bit more, had a bit more appetite for some premium brands or full price. But discount convenience off price was was very, very popular for the ideas of gifting.
10:12
Chris T
The survey found too, that I saw, you know, 81% of consumers expected better holiday deals regardless of where they were shopping, which is up from last year, which showed, I think maybe even the year prior, which showed 53% and 51% of consumers expecting better holiday deals, respectively. So that's a pretty big jump. Obviously you’ve got 81% of consumers, regardless of whether shopping, expecting these holiday deals. What do you think drove that leap?
10:36
Dylan C
So, in 2023 a lot of companies bought light, bought inventory light. Because if you take yourself all the way back to the early part of that year, we were more or less certain Jamie Diamond was positive we were going to go into recession. Right? So, a lot of companies hedged their bets and bought light in the demand environment. You know, back to my prior comments about real wage growth was still relatively solid. And so, you had, in our view, kind of an artificially high full price sales environment throughout the year. Right. And that obviously sort of led into expectations coming into holiday inventory purchasing was more normalized. If you looked at sort of the beginning of this year, and inventory levels have been kind of trending more in line with sales, which would suggest more normalized promotional levels to the year.
You know if these surveys are reflective of the current environment or sort of recent behavior. I think that's probably not an insignificant piece of it.
11:15
Phil B
Yeah. And I think right now the consumer seems to need a big purchase occasion, something specific, something either or something very exciting or innovative. Otherwise, they're looking for discount. They're looking for value. And so, a lot of these retailers or brands have been increasingly relying on promotions discounts.
We've even seen them on luxury players. Right. And you know, very premium offerings that never historically never promote their leaning into discounts as a means to really drive value drive volumes. And so, I think that it just goes to really speak to how important perceived value is right now, and that the consumer really needs that in order to convert.
And so, they're leaning on this as a, as a demand tool where demand in some of these categories is a little bit softer. They're going all in on discounts in order to drive traffic and drive conversion. So, I think it's, you know, partially that and where we've seen promotions really be elevated across the board, across a much wider set of brands this year.
And so, I think the consumer's cognizant of that and, you know, is increasingly looking for that for this holiday season.
12:22
Chris T
So, another takeaway is that few respondents expect to finance part of a holiday gift, I guess overall, holiday gift spending compared to last year. And then yet consumers feel this increased need to pull back on everyday spend, such as restaurants and home improvements to afford the holiday gifts, which I guess does make sense if you're pulling back on on financing, you're going to pull back on some of these everyday spends.
Are you able to dig into those findings a bit?
12:44
Dylan C
Interest rates, right? I mean, that's got to be a big piece of it. It's interesting in light of people feeling better about their financial situation.
12:52
Phil B
I think that's the biggest piece. Right? Or one of the biggest piece, other than interest rates. If you're feeling, you know that much better about your financial situation, maybe you feel a little bit more comfortable taking on debt, less interest being paid.
But, you know, I think that consumers are always still a bit hesitant, are cognizant of what they're spending, how much they're spending. It's a huge expense. Holidays are a huge expense for the every day. I feel like they're always a bit more willing or plan to pull back, particular on some of the large ticket discretionary items that are easily deferrable until after holiday.
Right? So, if you think about home improvement is one thing, not a lot of people are taking on a giant home improvement project in the middle of the holidays when you have family and friends coming over, whatnot. So that's one of those kind of items that people like to pull back on during these kind of time frames in order to get a little bit of reprieve or easily deferrable to January.
13:39
Chris T
And then, you know, finally, this this ties into the question. So, it may be irrelevant, but if there's anything else to add, you know, despite the heightened expectations to cut back on non-holiday spending, the elevated appeal of promotions, consumers still indicated they felt better about their financial position. You said that that should provide a nice tailwind to sentiment heading into the peak shopping season. Did that show up in the trends last week at all as far as Cyber Monday and Black Friday go?
14:02
Dylan C
I think absolutely. I mean, just the headline numbers that you saw were incredibly strong. Again, sort of high single digits. I think there even some low single low double digit quotes out there as far as sort of total year over year demand. And again, some of that has to be taken in the context of just a wonky calendar. And, you know, some headwinds that you saw kind of coming into the period.
But certainly, I think the underlying takeaway that I have at least, is that you still have a relatively resilient, fully wage, less inflation constrained consumer out there.
14:31
Phil B
Yeah, I agree, and I think some of the pieces where we saw in larger ticket increased demand for larger ticket, I think that's you're particularly supportive of this better financial situation. Right?
Consumers are usually cutting down, going on smaller ticket items if they're feeling a bit more stressed or pressured. We've seen that a lot in some of the broader general retailers. Talking about just basket sizes has been down. Order value has been down, units per transaction have been down. I think all that's starting to reverse a little bit. And so that's, you know, preliminary trends from Black Friday is shown.
And I think that's, you know, a great green shoot for what the holiday season could end up being or end up delivering. And then I think that that's also pretty encouraging heading into 2025 where maybe we're going to see a bit more of a normalized year across the a different categories.
15:19
Chris T
Well, Dylan, Philip, that's all the time we have for today. The conversation today has inspired me to finish my holiday shopping early, which has been difficult given that we have very little time between Thanksgiving and the holidays.
For those interested in reading this holiday shopping decision of consumer policy, you can request a copy of both by reaching out to us at William blair.com/contact us.