A look at how the K-Shaped Economy is impacting holiday shopping.
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The National Retail Federation reported a record number of shoppers and spending over the five-day Thanksgiving to Cyber Monday weekend. Sunday alone drew 32.6M in-store shoppers. A 27% increase year-over-year. So, where’s the doom and gloom, economic uncertainty that everyone has been projecting for months now? Well, sadly, the holiday shopping season is tighter for many. It’s just being hidden by the impact of the K-Shaped Economy.
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In 2020, amidst the pandemic, economists were roaming the alphabet trying to find the perfect letter to describe what they predicted the economy would do. Would it be a “V” with a sharp decline followed by an equally sharp upswing? Would it be a “U” where the decline and upswing were more gradual? Or would it be an “L” where the bottom would fall out and then we’d stay in recession?
Peter Atwater, an economics professor at William & Mary, made the letter “K” stick. It captured the disparity of the upper-income, white collar professionals who were able to easily adjust and work from home, while unemployment grew to nearly 15% as middle- and lower-income employees lost their jobs.
Broken down, the upper arm of the “K” refers to the strong spending and healthy income of upper-income Americans. While the lower arm, represents the multiple strains facing middle- and low-income consumers. Continued inflation, expensive homes, surging credit card debt and high health insurance costs.
Heather Long, chief economist at Navy Federal Credit Union, sums up the impact of the K-Shaped Economy on the holidays nicely, “I would call it a K-Shaped Economy on steroids this holiday season. If you look at the gross spending and gross growth, it looks good. But if you break it down by average spend per cardholder it’s a totally different picture.”
She’s absolutely right. When you look at the numbers from the NRF, the holiday season looks bright. But when you dig a little deeper, you see not everyone is equally merry and bright this holiday. According to Salesforce, order volumes fell 1% as average prices rose 7%. Consumers purchased fewer items at checkout, with units per transaction falling 2% year-over-year.
What these varying outlooks point to is the consumer behavior driving it all: Upper-income shoppers are spending more, especially when it comes to luxury goods, tech and experiences like travel. Things are going well in their world. They own high-yield assets, work in high-growth sectors and are seeing wealth appreciation, solid wage growth and are spending freely.
Meanwhile, middle- and lower-income are cutting back or becoming more selective with their purchases. Many delayed purchases on essentials like appliances and clothes, only to take advantage of Black Friday deals to finally purchase those items. They are feeling the economy, and it hurts. These shoppers are struggling with persistent inflation, stagnant wages and high interest rates are hurting them in the housing market and with mounting credit card debt. They continue to pull back, be more selective and are feeling very little confidence with the uncertain economy.
But regardless of income bracket and spending habits, the deal is still the deal maker or breaker. Every household has its own definition of expensive, experiencing their own unique pain points. This drives everyone, regardless of income, to search for the best deal in town. Shoppers want to feel like they got the value they were looking for either by paying up for premiumization or saving money through savings and substitutions. Upper income shoppers are doing all of the above.
There is no crystal ball telling us how long we can expect the K-Shaped Economy to stick around. Economists have many opinions. There’s optimism that brighter days are ahead with anticipated higher tax refunds for many and a new Federal Reserve Chair coming in May. But there’s also the potential that lower interest rates could worsen inflation.
No matter what the economy does, shoppers will still need to purchase goods and services. Understanding what motivates these purchases is paramount, particularly if looking for lifetime value and repeat purchase. BR works to understand the unique mindset of our clients’ customers in order to understand how they define value and ensure the brands we work on deliver that value.
