The U.S. economy provides mixed signals as merchants move into an inflation-plagued 2022 holiday season. And that’s making everyone — online retailers and consumers alike — anxious.
Government data shows retail prices keep moving up. But consumer expenditures increased more than inflation in September, indicating consumers still have money to spend. And consumer confidence went down in October after rising for two consecutive months. Despite the apparent willingness of Americans to keep buying, online consumers say they are budget-conscious this year.
Inflation adds uncertainty
Scott Crawford, chief merchandising officer at FreshDirect, an online grocer specializing in fresh produce, says the economic data is “giving us signals we’re not used to reading.” He compares the level of economic uncertainty to the beginning of the COVID-19 pandemic. At that time, he said, retailers were better off sticking to what they already did well. Crawford said it’s a bad idea for retailers to upend their business models when there is so much economic uncertainty.
“This is not a time for high experimentation,” Crawford said.
At FreshDirect, the retailer raised prices this year at a rate comparable to other grocery merchants, Crawford said, without providing specific numbers. In a low-margin sector like grocery, he adds, retailers don’t have much room to absorb wholesale price increases without losing money.
Crawford said consumers have moved to ordering more private-label products and other “value-centric” offerings. In response to consumer demand, he says the retailer has made promotions and value-for-dollar messaging more prominent on its home page and other marketing.
He added that prices for fresh foods — which make up about 60% of FreshDirect’s sales — leveled off over the past couple of months. Crawford said the cost of packaged goods is still rising, but at a slower rate than earlier.
Some retailers absorb the extra costs, others can’t
Sensing consumers’ skittishness, some small and mid-sized retailers are absorbing, rather than passing along, higher costs to retain existing customers and attract new ones, leading to shrinking profit margins. But some online merchants cannot do that.
Eric Jones, CEO of Couture Candy, which specializes in women’s dresses for special occasions like weddings and proms, says the business has dealt with a hike in the cost of raw materials, overhead prices and manufacturing costs. But he has been reluctant to raise prices.
“To avoid losing customers due to increased costs, we have to deal with the hike in expenses and cut our profits,” Jones said. He did not provide specific numbers.
Meaghan Thomas, co-owner and president of Pinch Spice Market, an online organic spice shop, faces a similar dilemma.
“We’ve not increased our prices even with increased costs on our end. … It’s not great. We’re taking a temporary hit to our profit margins,” Thomas said.
She says increased costs include rising sea and truck shipping costs as carriers pass along higher prices for fuel and other necessary purchases.
Other small retailers have felt compelled to pass cost increases to customers. Among them is Kate Backdrop, which sells photo backdrops, and has raised prices.
“While this may be a challenge for our customers, it has been a necessary and crucial change that we’ve had to make to keep our business running smoothly,” said David Zhang, CEO of Kate Backdrop, without providing details. “We invest heavily in the quality of our products and must ensure that they are priced appropriately to cover the cost of production.”
Many consumers will look for holiday deals
Retailers have good reason to worry about raising their prices. According to September’s survey of 1,088 online shoppers from Digital Commerce 360 and Bizrate Insights, 40% of consumers surveyed said they would comparison shop more due to expected higher prices. And 35% expect that high inflation will cause them to purchase less overall in the 2022 holiday season compared to a year earlier.
Conservative inventory decisions
With consumers feeling jittery, Thomas at Pinch Spice thinks holding the line on prices is the right thing to do.
“I think most people think we’re a little nutty for not raising prices,” Thomas said. “But we’re not going to because one of our core values is that fresh, high-quality organic spices should be priced to be available to as many people as possible, not just for the wealthy.”
But holding the line of prices doesn’t mean doing business as usual. Thomas says Pinch Spice only adds new spices to its product line if it knows consumers want them. She said Pinch Spice is also considering increasing its free-shipping threshold to $49, up from $45. And the retailer plans to boost the rate it charges for shipping when customers don’t reach the free-shipping threshold.
Thomas also said Pinch Spice does not want to make inflation worse for its customers.
“Some big companies are raising prices so much they’re actually growing their profit margins. That seems unethical to us,” Thomas said. “When will all this price increasing stop? In our case, we decided it ends with us — in fact, it won’t even start with us.”
She said Pinch Spice is committed to keeping product prices stable for the rest of 2022. The retailer will also try hard to avoid raising prices in 2023, Thomas said.
Inflation and consumer spending data
In September 2022, prices across the United States economy rose 8.2% compared to a year earlier — the worst inflation rate in 40 years — according to the U.S. Bureau of Labor Statistics (BLS). The higher-than-normal inflation led the central bank to raise interest rates. So, not only did shopping become more expensive, but so did borrowing money to buy goods or operate a business.
But as prices rose, consumer spending grew faster in September, according to data the federal Bureau of Economic Analysis compiled. For the month, inflation-adjusted consumer spending rose 0.3%, matching the August rate.
Consumer confidence dips
The Conference Board’s Consumer Confidence Index decreased in October after two months in a row of gains. On Oct. 25, the Index was at 102.5 (1985=100), down about 5% from 107.8 in September. The business membership and research group also found:
- 45.2% of consumers said jobs were “plentiful,” down from 49.2%.
- 12.7% of consumers said jobs were “hard to get,” up from 11.1%.
- 19.8% of consumers expect more jobs to be available, up from 17.4%.
- 20.8% anticipate fewer jobs, up from 17.8%.
‘This too will pass‘
FreshDirect’s Crawford says the retailer, launched in 2002, has been around long enough to see a variety of economic trends come and go.
“This too will pass,” Crawford says.
In 2023, he added, the retailer plans to “keep eyes wide open” and be ready to take advantage of the nimbleness of its web-only structure. Selling on the web, Crawford says, frees FreshDirect from the need to stock store shelves and commit to in-store displays.
“It’s much easier to move to where the customer is going,” Crawford says.
Zaandam, Netherlands-based Ahold Delhaize bought FreshDirect in a deal that closed in early 2021. Besides FreshDirect, Ahold Delhaize operates more than 1,000 U.S. grocery stores under banners including Giant, Food Lion and Stop & Shop.
Crawford said the acquisition had not changed FreshDirect in many ways consumers would notice. He said one exception is that FreshDirect can now offer its parent company’s stable of private-label brands.
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