Q3 Preview: Discretionary Spending Decreases As Consumers' Finances Remain Tight

Despite some recent cooling of inflation, consumers are still being careful about their spending, according to EnsembleIQ's Chief Retail Analyst Elizabeth Lafontaine, who discussed the retail landscape at the recent Store Brands’ Q3 Retail State of the Industry Webinar.

In the second quarter of the year, Lafontaine said that total retail sales were up 1.6% compared to 2022, and that e-commerce sales were up 10% year-over-year (YoY) in June 2023. Total inflation only rose 0.2% in June 2023, but in-home food inflation remains high at 4.7% compared to last year.

"That [inflation] is something that is impacting the consumer's psyche," said Lafontaine. "The one area of retail that has started to become more challenged is that discretionary category, things within the general merchandise sectors. Specifically we saw department stores in Q2 slow down a little bit."

Lafontaine pointed to several factors that could continue to hinder consumer spending: federal student loan payments are set to soon begin for many, increased credit card debt, rising interest rates and those on SNAP benefits continuing to grapple with decreased benefits.

"We thought that we would be entering a period of 'retail recalibration' in 2023, and I think that has come true," she said. "We are definitely seeing that retailers that have had high-flying growth for so many years are kind of starting to cool off a little bit. We've had some bankruptcies, we've had some store closures, and we've kinda had the retail industry shift its thinking a little bit."

With food prices remaining high and consumers less eager to spend, Lafontaine noted that retailers are continuing to deploy strategies like private label product promotions and price-point marketing, hoping that increased promotional activity will spur demand.

"There's so many different levers that retailers can pull to meet that demand, but consumers ultimately want their wallet to go further these days," she said. "They want to make sure that whatever they are doing, that it is adding value to their life, and not decreasing it."

The full webinar can be viewed on-demand here.