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Will holiday shopping shine a light (or cast a shadow) on the future of retail real estate?

James Bohnaker • 11/17/2022

The holiday season is already in full swing as shoppers gear up for the biggest shopping event of the year. But with this excitement comes perennial challenges for retailers, including inventory management, seasonal hiring, promotional pricing and consumer satisfaction. The pandemic experience of the last two years only compounded these anxieties as stores scrambled to ensure a safe shopping experience while simultaneously expanding online delivery and store-centric fulfillment options at rapid speed—and it’s safe to say that these investments paid off as holiday retail sales grew at the strongest rate ever in 2021. Now, in 2022, the pandemic and supply chain concerns have faded in significance while inflation and the economy cast a cloud of uncertainty over the ever-important holiday season. How will retailers and their customers address these issues, and what might it mean for the future of retail real estate?

Holidays put the future of retail stores on display

The holiday shopping season is crucial to the near-term success of retailers for obvious reasons. Sales over this period account for roughly one-third of annual revenues on average, and far greater for certain brands. A few ill-timed decisions can distress financial earnings, lose the trust of investors and potentially lead to a wave of store closures and bankruptcies similar to the fallout from the financial crisis in the late 2000s. But if they get it right, retailers have a massive opportunity to solidify brand loyalty that will allow them to strategically invest for the long haul.

This year seems to be of particular importance given the degree of transformation retail real estate has undergone. Retailers have been expanding into storefronts at a rate not seen in years, seeking to engage with customers in new ways with a greater emphasis on sustainability, technology, personalization and community. We have also seen a surge of new brands entering the physical retail space, many of which originated online and have their first (and maybe only) chance to make a good impression on customers face-to-face.

Consumers have adapted as well. They crave a shopping experience that offers streamlined flexibility between ordering online, shopping in stores, hassle-free returns and everything in between. We also learned that people need a good reason to take trips to shopping centers and malls, and more often than not, that means a carefully curated tenant mix and requisite experiential retail are mandatory. Landlords recognize that offerings like unique dining, entertainment and fitness can bolster visits from new demographics and increase dwell times, improving the overall health of the retail real estate industry. We will be keeping an eye on which tenants and landlords take advantage of these trends over the holidays.

Inflation: the ghost of Christmas past

The rate of inflation in the U.S. is near the highest it’s been in 40 years, and consumer confidence is near an all-time low as a result. At this point last year, real retail sales (adjusted for inflation) were growing at an annual rate of around 10%, and now they are flat. Household incomes are rising but not enough to keep up with higher prices, meaning consumers are more reliant on savings and credit cards to maintain their spending lifestyles. Meanwhile, the composition of spending is also shifting back toward pre-pandemic norms as travel, entertainment and other experiences come roaring back. This all suggests a tempered outlook for the gift-buying season, but the pandemic also taught us to think twice before writing off the resiliency of U.S. consumers in the face of uncertainty. Indeed, the job market is boasting an unemployment rate near record lows and the majority of consumers have more money in their bank accounts than pre-pandemic, which may be enough reason for retail to once again surprise us this holiday shopping season.

‘Tis the season for price promotions

Value shopping has been a mainstay of the holiday shopping season since the early days of Black Friday doorbuster events, and this year will only accentuate the focus on pricing. According to Coresight Research, 71% of consumers say that inflation will factor into their gift-buying decisions this holiday season, far and away the number one factor. Consumers are unlikely to abandon shopping plans altogether, but more likely to be hyper-focused on promotions, trading down to discount brands or purchasing gift cards at a price point. Research from Morning Consult suggests that alternative payment options will also rise in popularity this year, as almost 30% of U.S. adults are considering financing their purchases with “buy now, pay later” services. Since deal-conscious shoppers are armed with limitless information at their fingertips to price compare and do extensive research online before making concrete purchasing plans, this should be a high priority consideration for retailers.

This does not necessarily mean that shoppers can expect steep discounts across the board, nor should brands capitulate uniformly. Certain discretionary goods–including home furnishings, appliances, electronics, athleisure apparel and sporting goods—will need to have an attractive price tag to move off shelves, while other highly coveted items such as toys, occasional apparel and footwear, luxury goods and experiential gifts are likely to exhibit more price resiliency due to higher demand. It’s not just gift buyers dealing with inflation; retailers face significantly higher cost of goods and operations, adding new pressure to deliver strong profit margins if they wish to have a truly successful holiday season.

Shopping festivities off to an early start

Retail stores have been unveiling holiday displays earlier and earlier each year and that trend has accelerated recently amid ongoing inventory concerns, supply chain issues and labor shortages. A survey by the National Retail Federation finds that 46% of shoppers planned to start browsing or gift-buying before November, which was down marginally from last year but still well above the 40% average in the previous five years. Urgency spawned by last year’s widespread media warnings about product shortages, as well as shoppers’ desire to avoid large crowds amid the spike in Omicron cases, has dissipated somewhat as supply chains begin to untangle and health concerns ease. But inflation is now the primary motivating factor encouraging shoppers to spread out their purchases across a longer period to help manage budgets. This is of particular importance to lower- and middle-income households, who are reporting heightened anxiety about inflation compared to high earners.

Retailers are similarly keen on a more dispersed season as they are eager to offload excess inventories before the rush between Thanksgiving and Christmas. Amazon, Walmart and Target, for example, have cautioned about their inventory situations, and each rolled out large-scale promotional events in the first half of October this year. Despite the advertising hype around these events, sales results have been mixed and tend to skew online. In-store shopping remains the foremost channel for gift buying, so events like Black Friday and Super Saturday (which happens to fall on Christmas Eve this year) will continue to draw shoppers into centers and malls throughout the season. What they do when they get there depends on how well the experience matches consumers’ demands for a cost efficient, convenient and engaging shopping trip. 

Holiday outlook by the numbers

To quantify what these cross-currents might mean for retailers this season, we outline below our forecast that assesses overall holiday retail sales, online sales vs. brick and mortar and performance by category, based on our projections for retail spending and inflation.

  • Overall holiday sales are forecast to rise 5.5% from 2021, reaching $1.32 trillion. This rate of growth is down from 12.6% in 2021 and 10.3% in 2020.
  • Online holiday sales are forecast to rise 9.1% from 2021, totaling $367.7 billion. Online is expected to account for 27.8% of holiday sales, up slightly from 26.9% last year.
  • Brick and mortar holiday sales are forecast to rise 3.8% from 2021, totaling $889.4 billion. Roughly 73% of holiday sales will originate through retail stores.
  • Average prices for core retail goods (excludes food and energy) are expected to be 5.1% higher this holiday season compared to the same period in 2021. In other words, “real” sales volumes would be marginally positive at +0.4% year-over-year.
  • Retail categories with projected growth above 3.0% include home improvement, food/beverage, health/personal care, apparel/footwear/accessories and general merchandise/department stores.
  • Furniture/home goods, electronics/appliances and sporting goods/hobby stores are expected to be the weakest sectors, but still expect to see positive growth on a sales basis.
  • These forecasts are based on retail sales data from the Census Bureau through September and Cushman & Wakefield’s projections for sales and inflation over October-December.
  • Given that the data cover a wide range of retailers, there will undoubtedly be brands that exceed or underperform the forecasts based on their customer demographic and ability to resonate with customers through pricing promotions, product mix and other factors.

The 2022 holiday season will ultimately be filled with challenges for retailers and the results will set the tone for consumer spending in the first quarter of 2023. Retailers have shown incredible resiliency over the past two years and this year will be no exception. While there continues to be challenges with supply chain, costs and the overall economy, retailers remain focused on their top priorities: re-engaging consumers and re-imagining the landscape.

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