The gap between US spending and confidence

Like the rest of the world, Americans woke up the day after Thanksgiving to news of the troubling new Omicron variant. That did not stop them shopping with gusto, in-store and online, on Black Friday, by tradition retailers’ break-even moment for the year. Initial figures suggest consumers were out in shops in greater force than last year, if not yet in pre-pandemic numbers. Online sales, after last year’s big step-up, were flattish. Yet with strong sales throughout November being fuelled by a release of cashpiles amassed in the pandemic, a reckoning was always set to follow. Omicron has now raised new questions over the sustainability of spending.

RetailNext, which tracks shopper numbers in stores, said Black Friday traffic rose 61 per cent over last year, though it was still down 27 per cent from 2019. Adobe estimated online sales slipped from $9.0bn in 2020 to $8.9bn this time — the first such fall since it began collecting figures in 2012. Adobe forecast consumers would spend between $10.2bn and $11.3bn online on Monday on what is known as “Cyber Monday” and is now the biggest online shopping day, against $10.8bn last year.

But relatively flat numbers for the extended holiday weekend reflect the fact that consumers brought forward purchases this year to avoid shortages caused by supply chain problems. Adobe estimates online sales in November 1-28 rose 13.6 per cent over last year to $99.1bn.

Overall, the picture of retail sales this year offers two great contrasts. First is the divergence between booming consumer spending and falling consumer confidence. The explanation for the former is surely the trillions of dollars the US government has inserted into consumers’ pockets through stimulus cheques. Savings built up through reduced travel and spending on entertainment and services during lockdowns have also helped to build up household balance sheets. Much of the release is now going into goods sales.

Consumers tell pollsters they worry about inflationary pressures, but that has not stopped them spending; indeed, some may be shopping now in anticipation of price rises later. The stimulus — and the availability of cheap credit for debt refinancing and buyout groups — means the retail wipeout predicted early in the pandemic, as sales fled online, turned out less severe than feared. Bricks and mortar chains including JCPenney, Neiman Marcus, J Crew, Brooks Brothers and Canada-based Aldo filed for bankruptcy protection last year, but several later exited or were bought out of Chapter 11.

The second disparity is between big-box retailers that have been able to keep control of supply chains — by chartering container ships and even airfreighting goods, swallowing the hit to margins — and smaller retailers that lack the same financial clout. Walmart, Target and Costco reported robust quarterly earnings, but shares of Gap and Nordstrom fell last week when they warned of inventory problems.

Even so, the rising tide of consumer spending in recent months has lifted most retail boats. As savings are drawn down the tide will recede, and some boats will be beached. The groups left struggling will be the same ones doing so pre-pandemic — those lacking a compelling proposition, the number two and three groups in each subsector, and malls in poor locations.

Lower operating costs and effective tax rates will shield even weaker US retailers from the carnage seen elsewhere, such as in the UK. But the gap between spending and confidence already reflected underlying vulnerability. If Omicron turns out as dangerous as feared, the retail reckoning may be sooner, and harder, than it seemed before Thanksgiving.

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