Consumers soured on stuff.
For nearly two years, the pandemic has spurred online shopping for everything from home office equipment and furniture to kitchen utensils and gardening tools. Growing demand for goods has exacerbated supply chain problems and sent prices skyrocketing, even as lockdowns have strangled travel and entertainment spending.
But now Western economies are rebalancing towards services and away from goods at a time when inflation fears are high and labor markets remain tight. This change has caught large companies on both sides of the equation off guard and left them struggling to adapt.
Three-quarters of the surprisingly large rise in the U.S. payroll last month, or about 400,000 new jobs, was in services, and Americans’ inflation-adjusted spending on services continues to rise, while spending on goods peaked last year. Even clothing spending, which had seen a post-lockdown surge, has recently started to decline. In the UK, total purchases of furniture, lighting and household goods fell below 2019 levels.
Consumer goods retailers and e-commerce businesses that took advantage of the shutdowns and mistakenly expected the good times to keep rolling have been hit hard. Big-box retailers Target and Walmart, which gained last year by scooping inventory and paying extra for airfreight, must now cut prices and cancel orders to eliminate excess inventory.
E-commerce companies such as British fast fashion site Asos are also coming back to earth as it becomes clear that pandemic-related online shopping has marked a one-time jump rather than a permanent shift to faster growth. Overall, online prices for goods in the United States fell in July for the first time since May 2020, with price drops recorded in 14 of the 18 categories tracked by Adobe. Electronics, the largest e-commerce category, saw a 9.3% year-over-year decline as the bulge caused by home office upgrades begins to fade.
Now it’s the service providers who are struggling to keep up. After two dark years marked by closures and limited demand, their sales are climbing. Walt Disney posted record revenues in its theme park division, the Marriott hotel chain boasted “outstanding” results and American and United Airlines returned to profit for the first time since the pandemic began.
But behind the pink numbers lie deep and worsening tensions. Tens of thousands of canceled flights, understaffed bars and dirty toilets are taking their toll even as customers find themselves paying much higher prices. Satisfaction with US airlines, hotels and fast-food restaurants has all plummeted this year, with polls recording significant drops in ratings for speed of service and cleanliness, among other things. European leisure activities are also loaded, with London Heathrow and Amsterdam Schiphol airports capping passenger numbers, and airlines across the continent slashing cheaper tickets.
Business leaders universally attribute problems to understaffing, despite efforts to attract better-paid employees. Shake Shack’s chief financial officer, Katherine Fogertey, noted with regret on an analyst call last week that “our best-resourced restaurants tend to meet our sales expectations,” but others of the high-end burger chain are falling short.
According to Bain consultant Aaron Cheris, “some of the demand for services has been suppressed in unnatural ways.” Fast food customers report that sales at some locations are lagging because “they literally can’t staff the drive-thru.” This puts travel and hospitality providers in a bind. They want to capitalize on pent-up demand and grab market share, but they also fear being caught off guard, like suppliers of goods, if sentiment changes again.
Surveys suggest that consumers are alarmed by rapid increases in food and energy prices. While these are starting to ease, they have already led to a spending overhaul that bodes ill for providers of non-essential goods and services.
The July edition of McKinsey’s periodic consumer surveys found that 39% of Europeans plan to spend less on discretionary non-food items over the next three months, partly because they rightly expect spend more on food and energy. In the UK, two-thirds of shoppers have already started buying cheaper or less expensive clothing and electronics, according to an EY survey.
Service companies will not be spared. More than half of UK consumers told EY they plan to save money by spending less on home delivery, and growth in US travel spending slowed to almost flat in July , even as total consumer spending rose 2% year on year, according to Earnest Research. .
The next few months will be particularly confusing for consumer-facing businesses of all kinds. Retailers must place their Christmas orders and hotel providers must bet on whether Covid and recession fears will combine to put another damper on the holiday season and travel.
Either way, the risk of some companies getting caught is growing rapidly. After all, there is a reason economists call it discretionary spending.
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