The consumer market continued to feel the impact of the global COVID-19 pandemic in 2021, facing supply chain challenges, labor shortages, rising inflation, and a general shift in consumer behavior to online channels. However, the sector also experienced significant growth due to stimulus funding and healthy levels of consumer discretionary spend. How will consumer behavior and trends continue to evolve in 2022?
In this blog series, we explore the trends we expect to see in 2022, including the following changes we may see in the consumer market.
- Comparing 2022 performance to the lift from stimulus in 2021: 2021 was a banner year for the consumer sector as reflected in the performance of the S&P Retail ETF, which was up 47% through mid-December on the heels of record sales and profitability levels across most companies. Healthy levels of consumer discretionary spend was fueled by almost $1 trillion in government stimulus checks, enhanced unemployment benefits and child tax credits in 2021, which follows almost $800 billion in 2020, and the “wealth effect” has been a driver at the higher end. This rising tide lifted most boats in 2021. Now, top of mind for analysts and investors is how companies will fare in 2022 compared to 2021 with rising inflation and interest rates. How many new customers were added during COVID? How successful are companies at retaining these new customers? Those that can effectively demonstrate this are more likely to emerge from the pandemic with enduring benefits that will serve them (and shareholders) well in the years to come.
- Navigating inflationary pressures: Consumer companies are contending with inflationary headwinds across the board with freight and labor being the most notable. The Drewry Composite World Container Index peaked at over $10,000 this fall, and while early December levels are in the $8,500 range, this is up significantly from the $2,000-$4,000 range in late fall of 2020. On the wage front, companies like Costco and Amazon increased their starting wage rates to $17 and $18 per hour respectively, and several more companies publicly announced increases to $15 per hour, including Macy’s, Williams Sonoma and Starbucks. These pressures necessitate price increases to protect profit dollars and even higher increases if protecting gross margin rate is an objective. As a result, a company’s pricing power is a key focal point for investors as well as the efficiency of their operations and supply chain. Dual sourcing and continued focus on last mile delivery options will better enable companies to mitigate factory and supply chain bottlenecks.
- Implication of current benign promotional backdrop and subsequent dissipation: Once supply chain dynamics normalize, so will inventory availability and flow, and the benign promotional environment that has served to somewhat shield gross margins is unlikely to persist. Many consumer-related companies have been the beneficiaries of this favorable promotional backdrop, and what happens to their gross margins with the normalization of industry promotions is top of mind for investors heading into 2022.
- Ecommerce and retail channel dynamics: Midway through 2021, most retailers lapped the strong ecommerce penetration gains from 2020 during the height of the pandemic, when much of brick-and-mortar retail was shut down or operating under heavy restrictions. While trends slowed or declined year-over-year, growth on a two-year basis underscores the strong ecommerce gains achieved over the past 24-months. Heading into 2022, the focus will be on how companies are maintaining and building off these gains, continuing to improve ecommerce channel profitability while facing higher digital marketing costs, and how retailers further integrate stores and online to serve and win consumers.
- ESG: We are seeing more companies highlight their efforts to use organic cotton, polyester and recycled materials, in addition to introducing inclusive product offerings. The resale market is also growing as second-hand buying (thrifting) becomes easier and socially acceptable. Consumers are turning to digital resale platforms to extend the lifecycle of clothing and create a more sustainable future, and companies are embracing this trend not only as a smart business practice but also to satisfy the demands of ESG-focused investors. Gen Z and Millennials are the most environmentally responsible demographic and are at the forefront of this trend, and more brands are now executing a direct resale strategy.
Follow the entire ICR 2022 trends series on the ICR Insights blog.
