Consumers May Expect More Return to Normalcy

Coming off a season of better-than-expected holiday spending, consumers can utilize recent pricing trends and consumption patterns to think about the state of the broader economy and plan their savings and spending. To look deeper at consumer spending predictions, William Blair Research Analysts Jon Andersen and Phillip Blee discussed pricing trends and what consumers may expect going into 2024.

Client Focus (CF): What current trends are you seeing in consumer spending?

Jon Andersen (JA): Over the past year, as most consumers have migrated back to pre-pandemic routines and reengaged in leisure and entertainment previously put on hold, they have been spending more on experiences like travel and other away-from-home activities. Regarding products, we have seen the consumer slow purchases in categories helped by the pandemic, such as larger-ticket home goods including furniture or outdoor living, where demand was pulled forward, and purchase cycles were longer in duration. Conversely, post-pandemic, the consumer going-out cycle has resulted in stronger consumer demand for products that serve social and away-from-home occasions, such as cosmetics and personal care, as well as portable foods and beverages.

With respect to consumer staples, consumption (in dollars at retail) in 2023 has reverted toward a long-term trend since peaking in the pandemic year of 2020. Over the past year, consumption has been price-driven, with volume down across the store. Relatively soft volume trends are likely a result of the cumulative price increases of the past 24 months and financial discipline on the part of consumers managing a household budget. We are seeing tradeoffs made by the consumer, including working down pantry levels, making smaller, more frequent purchases, trading down within a preferred national brand franchise, or purchasing more private labels; the latter has gained market share.

Still, as we look to 2024, we believe volume may inflect positively for several reasons. First, the volume declines of the past three years have volume approaching pre-pandemic levels of 2019. Second, with most price increases having been completed early in 2023, consumers have had time to adjust. Third, as the operating environment improves and cost inflation moderates, we expect manufacturers and retailers to bring more innovation to market and invest more in marketing and in-store merchandising, activities that should result in greater consumer traffic and basket.

Phillip Blee (PB): The consumer has been resilient over the past year, but they are also extremely cautious. They’re being very thoughtful about the dollar they’re spending, and in this environment, consumers need to feel like they’re getting a deal—they want a promotion, and they need great quality for the price if they convert. Consumables have been the primary area of growth in 2023. While there’s been more of a pullback on discretionary items, we are starting to see green shoots in some categories, which could support an inflection in 2024.

Within my subsector, we saw exceptionally strong demand in home and outdoor categories during the pandemic. However, we have seen demand fall off quite a bit over the past two years, partly driven by a normalization exacerbated by the uncertain macro backdrop and sustained declines in the housing market. Despite our incrementally better outlook for broader discretionary spend in 2024, we expect there could still be pressure in the home and outdoor category over the next year; consumers can typically delay these larger-ticket purchases until we see an improvement in housing trends and the broader macro-environment. Unsurprisingly, value has also been king in the home and outdoor category. Retailers are leaning into a more promotional environment, and consumers are waiting for discounts, with higher peaks during typical markdown periods such as Labor Day weekend or Black Friday, with lower troughs in between. Consumers still plan on spending money, but they’re more cognizant of what, where, and when.

Within the discount and value space, the lower-income core demographics that typically shop at discount retailers may fall off a little in a tough economic environment, but usually, they stick with staple items. Then, there’s the value trade from middle- and high-income consumers looking for new areas of savings. We saw a little delay in the value trade during this cycle because those consumers were better positioned financially coming out of the pandemic, whereas the lower-income consumers were immediately pressured by high inflation.

This year, we saw the value trade come back in a more meaningful capacity. In this environment where uncertainty has been at the forefront of minds, value is a great area to be in, as inflation-weary consumers are always looking for additional ways to save. Typically, when higher-income customers begin to shop at discount retailers, they are impressed by the value distortion, the broad, in-stock assortment, and the level of product quality. That relationship ends up being very sticky, which benefits discount retailers for years, even as the macro environment improves. The consumer is smart—they have many options at their fingertips and can immediately research those with the lowest price offerings. People are looking for value and are increasingly discerning about the dollar they spend and how they can seek out savings. This is where value-based retailers can really gain some share and hold onto it.

CF: What is the outlook for pricing power?

JA: In consumer staples, particularly foods and beverages, prices have cumulatively risen to double digits in many categories over the past couple of years. It is important to note that while the magnitude of this increase was unique, it was similarly warranted by significant input cost inflation—raw materials, packaging, transportation, and labor—borne by industry participants. Now, we are seeing significant improvement in the cost dynamic with a combination of disinflation and deflation in major parts of the input cost basket. In effect, we believe industry pricing has risen enough to offset the dollar impact of the input cost inflation experienced in the past two years. As such, looking forward, we see much less rationale and appetite for additional pricing in 2024. Still, some input costs are elevated, the labor market remains tight, and wages are likely to remain a point of pressure for manufacturers and retailers. I would also point out that many consumer staples brands possess significant equity with retailers and consumers and, as such, enjoy a meaningful degree of pricing power. We expect list pricing in consumer staples to be relatively stable, with the potential for selective reinvestment in promotion frequency and depth to help facilitate a transition from price-led to volume-driven growth during 2024.

PB: With discretionary items, pricing is coming down, and we’re seeing broader disinflation and pockets of deflation in certain categories. Many retailers faced steep inflation in supply chain and commodity costs in prior years. Now, these have largely normalized back to pre-pandemic levels, and the lower-cost inventory is beginning to cycle through; they’re passing some of that price to the end consumer. Retailers are leaning into promotions to spark more demand and maintain some stability on the top line, and we’re seeing a bit of pressure on that end where price is being used to drive traffic and conversion. Since retailers are generally in a much better inventory position than in prior years, I don’t think we will see any overly irrational promotional behavior starting this new year, but I do believe pricing, in general, will come down as retailers realize the benefits of lower freight and raw material costs with a relatively stable foreign labor market. We should start to see the benefits of that soon.

CF: What do you anticipate being a major spending trend in 2024?

JA: We expect consumers, in aggregate, to remain relatively resilient but also for some to exhibit a greater degree of discipline in their spending. This will likely be caused by, among other things, the ongoing work down of pandemic-related savings and the lagged effect of higher interest rates. We expect consumer spending in staples to be discerning and favoring categories of need, brands with clear and demonstrable differentiation, and products that offer good value—which could mean opening price point products but also those that contain enhanced benefits or feature sets that warrant a price premium in the market. Separately, we have seen signs of a pickup in industry M&A, with a few large companies acquiring businesses and brands in recent months. Such transactions can sometimes help bring in innovation and reduce costs to better align product portfolios with consumers’ quest for newness and value.