February Retail Sales Show Signs Of Curtailed Consumer Spending

Retail sales slowed month-over-month for February, down 0.4%, and tell a story of consumers leaning into value and curtailed spending. The major retailers discussed the slowdown in spending when providing projections for 2023 which officially starts in February for most retailers as the beginning of the fiscal year. Consumers struggled with higher prices in many non-discretionary categories, negatively impacting their spending in other areas. The widening view of the consumer spending slowdown, the looming recession, and the added concern over bank failures contribute to a shift in consumer shopping habits.

Non-discretionary spending

Grocery and food-at-home pricing was up 10.2% for February’s 12-month rolling index. While this was down from January’s index of 11.3%, consumers still feel the pinch at the grocery store. Specific categories that showed significant price increases include cereal/bakery and dairy, up 14.6% and 12.3%, respectively. Grocery sales did not follow the cadence of grocery prices, only moving up just over half a percentage point.

Kroger KR , one of the largest retailers in America, showed a 10.1% increase in sales of its private-label food brands for 2022, indicating that consumers are turning to store brands as an alternative to higher-priced national products. “Customers can save 7% to 10% by buying Our Brands versus national brands,” said Rodney McMullen, CEO and chairman of Kroger, in the most recent earnings call. The company recently introduced a new lower-price store brand called Smart Way to help shoppers on a budget, and four years ago, it acquired Home Chef, a meal preparation solution for customers. Home Chef surpassed $1 billion in annual sales in October of 2021, showing consumers are looking for more creative and affordable ways of eating at home. Kroger's revenue for 2022 was up 5.6%.

Shelter and energy high prices are impacting non-discretionary spending

Shelter’s 12-month rolling price index was up 8.1%, the most significant increase over 40 years. This category is one of the most significant contributors to the consumer price index (CPI) and includes rent, hotels, and homeowners’ equivalent of rent. Shelter accounted for over 70% of the all-items index increase in February.

Consumers that use fuel oil or electricity to heat their homes continue to experience higher costs, with fuel oil prices up 9.2% for the past 12 months, electricity up 12.9% and natural gas up 14.3%. Despite gasoline prices decreasing 2.0% over the past year, consumers are spending more on these other energy sources associated with sheltering.

Fashion spending slows in February

Consumers are spending less in fashion goods stores and turning to value amidst the constant rise in pricing and tempered outlook of spending cast by analysts and companies. Fashion categories like apparel/accessories, shoes and department stores showed sawtooth performance MoM from December through February. Apparel/accessories were down in December, up 2.9% in January, and then down again in February. Department stores had the most significant swing, dipping by 6% in December and increasing by 18% in January.

Large purchase items impacted by higher interest rates

As interest rates have risen, sales have declined in some categories of larger ticket items. Demand for new autos is waning due to higher prices (up 5.8% year-over-year) and higher interest rates. February automobile sales were down 1.8% compared to January and were flat to last year. Furniture and electronic/appliance sales were down 2.5% and flat to the previous month, respectively.

Value-driven retailers grow year-over-year

The macroeconomic factors impacting slower consumer spending are positive for retailers in the discount and value sectors. Discount stores, including Target and Walmart WMT , warehouse clubs like Costco and Sam’s Club, and extreme value retailers (the dollar stores) are up 12.3% for February year-over-year (YoY). Compared to last February, total retail sales were up 5.6%, slightly below the CPI all-item 12-month rolling index increase of 6%. Nonstore sales were up 8.5%, representing 16.5% of all retail sales in February.

Consumers look toward used merchandise and resale items

As inflation and recession worries are top of mind, many consumers turn to second-hand stores (used merchandise stores) and vintage shopping. The used merchandise store category had its largest increase in sales in 2021, coming out of the pandemic (37% increase over 2020). Sales for 2022 were up 8.3%, and for January 2023, the increase was 23% YoY. National retailers are also getting into the recommerce business by selling pre-owned goods. REI, Lululemon, Levi, Best Buy BBY , Patagonia, and, more recently, IKEA offer pre-owned goods for sale. Nearly three in four retail executives say they have or are open to providing secondhand goods to their customers, and the category is expected to grow 127% by 2026. Research firm Cowen predicts recommerce (including resale, rental and subscription models) will account for 14% of the apparel, footwear and accessories market by 2024.

Retailers are cautiously optimistic about 2023 amidst a trend toward value

Many retailers have predicted small incremental increases in 2023 fiscal sales, and most are cautiously optimistic. Consumer spending in February has shown that many shoppers are leaning towards consumer curtailment and value-driven brands.