Consumers are proving resilient despite coronavirus and unemployment
The American consumer is proving more resilient than predicted.
Conventional wisdom, which initially assumed many U.S. shoppers would save their paychecks and stimulus funds until the pandemic subsided, has proved unfounded. The largest American retailers all reported sales in the latest quarter that blew away expectations.
From Wall Street to the retailers themselves to the manufacturers that supply them, it seemed no one was ready for just how brisk demand would be from a consumer base stuck inside with nowhere to go.
Home-improvement chains Home Depot Inc. and Lowe’s Cos., everything stores Walmart Inc. and Target Corp., and online behemoth Amazon.com Inc. each beat analysts’ sales forecasts in the summer quarter — and by billions of dollars apiece.
Companies that have been able to pivot quickly to more online sales or already had established apps for curbside pickup have done particularly well, plus those that cater to a bored American shopper looking to spend.
The “fatal flaw” of economists was assuming that people will always keep their wallets closed during tough times, leading to miscalculations about consumer demand, said Doug Stephens, founder of the Retail Prophet consulting firm.
The recent robust retail earnings have shown the power of consumer resiliency and adaptability. They also reinforce the staggering unpredictability of pandemic times.
The last quarter raises doubts about how seriously to take anyone claiming to have a read on Americans’ shopping habits, especially as Congress remains stalemated over additional stimulus and millions still out of work.
Craig Johnson, president of Customer Growth Partners, said there are common traits among the “big six” retailers seeing record growth — Walmart, Amazon, Home Depot, Target, Lowe’s and Costco Wholesale Corp., which hasn’t yet reported. They have consistent traffic growth, rising store productivity, improved online platforms, a mix of discretionary and nondiscretionary items and a clear understanding of their customers’ needs and preferences.
“On a dollar basis, households are sitting on $3.4 trillion in savings, up $2.2 trillion from last June, indicating that consumers still have a lot of dry powder waiting to spend,” he said in an email. “Retail sales are also bolstered by the steep decline in spending on travel, entertainment and restaurants.”
Lowe’s Chief Executive Marvin Ellison has certainly witnessed that trend. As his company reported same-store sales in the U.S. had increased at a blistering 35.1% rate, he said he’s seeing a behavior change in consumers.
“It’s a shift away from vacations. It’s a shift away from dining out. It’s a shift away from apparel purchases. It’s those dollars that you may have invested in those things that now you’re spending on your home and in some cases out of necessity like trying to create a more functional environment,” he said in an interview.
The government’s retail sales data underscore this adjustment. Sales at non-store retailers, building materials outlets and auto dealers account for greater shares of total retail purchases than they did in February, before the pandemic, while restaurants and clothing merchants represent less.
Ellison’s even changing how he views his own home space. His daughter is an incoming college freshman, whose first few weeks of college will consist of remote learning, so Ellison had to set up a makeshift classroom where she can work productively.
“Are we also seeing discretionary spend? Sure. We are also seeing people get new furniture, upgraded appliances and we’re seeing other things like new kitchens, new bathrooms,” he said. “What was catching everyone by surprise was that all of us were spending more time at home than we ever have in our lives. We’re simply finding more things to do to make our homes more functional.”
Another potential sign that consumer spending fared better than most feared: Even small businesses have been surprisingly resilient so far, avoiding the surge in permanent closings that many expected at the start of the COVID-19 crisis.
Those retailers that haven’t fared as well are the ones closely linked to the American shopping mall, especially department stores and retailers focused on apparel.
Shares of TJX Cos., the owner of the TJ Maxx and Marshalls chains, fell 5.4%, the most in more than four months, after the company predicted Wednesday that sales at opened stores will drop as much as 20% in the current quarter, while those of Kohl’s Corp. plummeted Tuesday as it became clear the business struggled to regain sales as shoppers stay home or flock to e-commerce.
The question is whether these elevated sales last after federal stimulus checks come to an end. A consumer survey from analysts at Stifel found that 3 in 4 Americans have already spent a chunk of their stimulus checks, and Walmart warned this week the effect was already apparent.
Target CEO Brian Cornell said he hopes there is a second round of federal stimulus to put more money in consumers’ pockets during an uncertain and difficult time.
“It’s very important the House and Senate come together and put forward a new stimulus plan,” Cornell told CNBC on Wednesday.
Neil Saunders, managing director of GlobalData Retail, said the ending of enhanced unemployment benefits and other stimulus “is undoubtedly a negative as it will deprive many households of the extra cash they were spending on the home.”
“However, from our data it is still clear that home remains a big priority for most consumers and spending cuts are more likely to be focused on categories such as apparel,” Saunders said in an email. “It is also true that by spending less on things like travel, gasoline and eating out,” households have more money banked for other outlays, such as improving their homes.
“Analysis of the pandemic usually involves talking about retail casualties,” he said. “However, as these results show, the crisis has created success as well as failures.”
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