On Thursday December 9, 2021 First Long Island Investors held an online web seminar where Marshal Cohen, Chief Industry Advisor at The NPD Group, spoke about the seismic shifts in the retail industry.  Marshal spoke on a wide range of topics including:  which segments of the retail industry are doing well and which are lagging, which pandemic related buying behaviors are continuing and which are starting to decline, the supply chain bottlenecks and how the relieving of those will impact buying and pricing, channels used for shopping and much more. Some of the key points are below:

• In 2021, there will be about $3 trillion worth of US retail spend (including restaurants and grocery) which is comparable to but ahead of spending in prior years which indicates that retail in the US is healthy. 
  •  Dollar growth for the week ending December 4 (this includes cyber Monday week) was up 3% vs. 2020 and up 3% vs.  2019, a more normalized year.
  • 2021 monthly data through the end of November shows 16% higher dollar growth and 7% higher unit growth over 2020.

• Breaking things down by pre-COVID, COVID, and 2021 year to date there are some interesting data points:

• In “normal times” 3-5% year over year growth would be considered good, and more than 5% would be considered great. 
  • The COVID period started with store closures that went all the way through December, including the 2020 holidays. Deep decliners were accessories, apparel, beauty, and footwear while housewares and small appliances, which were a very important part of the COVID lifestyle, were gainers.
  • 2021 year to date, the “COVID decliners” rebounded and many of the “COVID winners” are down but still growing at very healthy rates.

	Dollar Percent Change vs. Prior Year
Category	Pre-COVID (12 months ending Feb 2020)	COVID (Mar – Dec 2020)	Current (Jan – Oct 2021)
Accessories	-5%	-34%	+30%
Apparel	-1%	-19%	+30%
Beauty	+2%	-21%	+31%
Footwear	+2%	-16%	+27%
Housewares	+1%	+24%	+8%
Small Appliances	+3%	+28%	+10%

• There is a seismic supply shift happening.  Marshal remarked many CEOs of large retail companies have shared with him that they are wrestling with how to get all of the merchandise that is out on the waters or on the docks transferred onto railroad cars or trucks and to the consumer. 
  • The current supply shortage is very likely going to turn into a very different scenario – it actually could turn into a supply overage.
  • Three months’ worth of inventory (September, October, and November) are all being received right about now.  For example, you couldn’t get a bicycle last year but now they have more bicycles than they can sell. 
  • Retail sales typically rise throughout the year, peaking in December and then in January there is less demand.  Some retailers are discounting the overages now, a little earlier than Marshal would have expected, because they’ve got more inventory than they can sell. 
• Pricing.  Marshal shared a graph showing weekly data for dollar and unit change going back to February 2020.  The data demonstrated a number of upticks.  He shared that each of the upticks coincides with government stimulus money.  Stimulus money absolutely propped up consumer spending across all major retail industries. 

• In addition to spending more, the average selling price also increased.  Consumers, even at the lower income levels, were driving the growth during the pandemic and willing to trade up and buy better products. In some cases, it was because it was the only choice and in some cases it was because they felt like stimulus money was free money and why not upgrade. 
  • Price increases are somewhat due to fewer promotions, the consumption of higher priced products, and less price sensitivity.  For example, the first time gas crossed the $3 threshold we were shocked, the second time we were “oh this is not good”, yet by the third time it becomes almost acceptable.

• Employment – October had the highest level of people resigning from their jobs, a new record.  Additionally, workers are changing their work environment and working from home in a hybrid or on a full time basis.  Pre-pandemic only 8% of the workforce worked from home.  That climbed up to close to 85% during the pandemic.  It hovered, went down, and then went back up with the delta variant.  The NPD Group feels it is roughly now at the level it will reside at, ~20%. 

• Work from home impacts many different things. 
  • Over the last two-three years we’ve seen a decrease in the female side of the labor force.  The male side has also decreased, but not at the same rate.  As women left the workforce simultaneously the amount spent at restaurants dropped and that wasn’t coincidental. 
  • Wardrobe and footwear is impacted by work location.  The use of automobiles is impacted. 
  • Based on pre-pandemic trends, more than 47 million workers age 55+ were projected to retire.  More than 49 million actually retired.  This acceleration in retirement also impacts retail. 

• Leisure time correlates to retail in how people are spending their time and therefore their money. 
  • People are returning to experiences and some travel.  Amusement parks, sporting events, movie theaters, and bowling are showing recovery.   
  • Fine dining is starting to come back.  Country club dining saw elevated levels in 2021. 
  • Cruise lines have been the slowest to recover.

• There was an expectation that once experiences started to recover we would see a decline in tangible items but that is not happening.  People are not planning as far out and not buying as far in advance due to worry that a trip or an event may get cancelled.

• The consumer is feeling wealthier than they have felt in years.  They’ve been paying off their credit card debt, they’ve certainly been saving more money.  Those rates are coming down in recent times but not quite to pre-pandemic levels.  The personal savings rate peaked at 33.8% in April of 2020 and as of August 2021 it is back below 10%. 

• The number of U.S. households with total household income over $100K has been rising over the last six years and these folks are driving retail growth.  2020 vs. 2019 all of the growth came from the upper end consumer and we are seeing the same in 2021 vs. 2020. 
  • Demographics are shifting as well.  The 55+ generation accounts for nearly one third of discretionary dollar sales.  This age group is also shopping online more.   
  • This is showing you both income and age are the big components driving the consumer, so retailers are recognizing that they should market to the less sexy audience which is that experienced consumer.

• Shift to Digital:

• Marshal shared that in 2015 he was presenting at the National Retail Federation and the speaker before him predicted the death of the retail store with everything sold online by 2020. This speaker also predicted that by 2018 department stores would be obsolete.  Marshal took the stage and explained to the audience, that this was absolutely not going to happen.

• Marshal shared a graph looking at monthly data for the percent of sales in-store vs. online. 

	% In-store	% online
Jan 2019	71%	29%
April 2020	52%	48%
Sept 2021	64%	36%

• The pandemic accelerated the use of the online channel. As we come out of the height of the pandemic consumers are still using digital channels but also returning to brick and mortar stores. 

• Looking at the shifts in channels it is best to look at Jan-Aug 2021 vs. Jan-Aug 2019 (pre-pandemic) and we see that e-commerce, grocery stores, mass merchants, and warehouse clubs, all of which were the high flyers during the pandemic, have continued to maintain growth.  Tech stores, off-price retailers, and manufacturer owned stores are growing but at much slower rates.  Specialty retail is the most challenged, particularly in apparel (e.g. Victoria’s Secret), department stores (i.e. JC Penney), and the restaurant business.  The expectation is that the restaurant business is not likely to catch up to 2019 levels until 2023.

• Holiday Dynamics.  Looking at the five weeks ending 12/4/21, the total dollars spent in retail is exceeding 2020 by 9% and 2019 by 14%. 

• If you go back 20 years you see the same pattern – a decline post-Thanksgiving and then another uptick.  2020 didn’t show this trend because there was not as significant of an uptick for Black Friday.  Marshal is not alarmed by the softening as there are still three usually strong weeks to go. 

• The NPD Group’s survey on holiday purchasing intentions in September 2021 found the following: 30% of consumers plan on spending more than last year, the #1 item people think to give as a family gift is a TV (35%), the number one self-gift is the thousand dollar plus iPhone (55%), free shipping is the most important priority to consumers when choosing a retailer. This beat out the usual number one answer of value. 

• Marshal concluded by sharing that he wants people to think about which businesses are set up to be nimble; to recognize that the consumer is shopping in the here and now; and to sell to a wider sector of consumers.  For example, in the beauty business you can sell the same anti-aging skincare products to different age groups by focusing on a different purpose with each, one is anti-aging and one is preventative.
• The COVID lifestyle was driving work from home, healthy from home, fitness from home, educate from home and entertain from home. 

After sharing his prepared remarks, Marshal took questions from attendees. 

Q:  Can you talk a little bit about the buy now, pay later strategy and how that impacts consumers and the overall economy for both the short term and the longer term?

A: Short term it gives the consumer the ability to buy without the same kinds of constraints and shift some spend. As I showed you savings and credit card debt were coming down, but are now back on the rise. As we get through the holidays I anticipate the consumer basically maxing out their credit cards.  The buy now, pay later methods gives them the ability to expand their horizons, upgrade their products, buy more expensive products, etc.

Q: (from Bob – CEO and CIO of FLI):  The home building and home improvement areas seem to be, from your presentation, very strong.  We invest in Home Depot, Lowes, and Williams Sonoma.  How do you see the trends for those kinds of companies going forward?

A: We certainly know that those companies can’t maintain the momentum of their growth, but they will continue to be a big driver.  Keep in mind a lot of people who moved and bought homes didn’t necessarily have the budget to then upgrade the home, but they have the desire to do it, so there’s still plenty of runway room for the home improvement areas.  We did see a decrease in the “do it yourself side” but “the do it for me” part of the business is growing.  I’ll give you a great example in home décor – last year, people decorated their home to keep it cozy and comfortable, and they would buy throw pillows and blankets, pajamas and slippers because we were staying home. This year is all about expanding the nucleus, inviting more friends and family, so we’re back to decorating to impress.  To your point about Lowes and Home Depot, I don’t think they will maintain the level of growth reached during the pandemic, but they will still be an integral part of the investment that people make in their homes. 

Q: You talked a lot about the supply and then the overages and prices and how that’s going to impact the consumer. At a very high level, where do you see that impacting faster, is it more in the luxury goods or in staples?  We see shelves and stores empty across the board.  Who do you think will rebound first?

A: The biggest rebound is going to be in the commodity side of the equation, where sourcing is distributed across a wider sector of product. Commodities, which includes grocery products but also includes things like underwear and jeans, intimate apparel, etc.  They had a lot of challenges early on, but now they’re the ones that I think that are going to hit retailers with an abundance of product.  Fashion is the one that’s most vulnerable because those goods are perishable and can’t just be put to the side and sold later in the year.  They’ve got to sell them now because they’ve already put into play product for next year.  The thing to look for is who’s got product that they’re going to move quickly?  Which retailers are going to take the hit early?  Think of Old Navy that is selling the product at deep discounts to manage through the inventory.  They don’t want to have to go into 2022 with 2021 merchandise, so they are going to be aggressive which could hurt margins. 

Q:  Do you have any kind of insight or timing as to when the backup at the seaports will kind of ease up and kind of get back to normal.

A: Good luck figuring that one out, but now the answer is we’re already starting to see certain industries have product that is now readily available which is good news.  It’s not going to be a universal answer.  Fashion will be probably one of the earlier ones to get back in position, hard goods like technology will take a little bit longer, video games will take even longer.  I look at tech as one of the slower to recover, and I look at fashion as one of the quicker to recover and toys is another one that’s going to be challenged during Christmas, but right after Christmas there will be plenty of product. 

Q:  The percentage balance between in store and online you shared feels contrary to what we have been hearing in the news.  What do you think is driving the desire to return back to in-store?

A:  Excellent question.  What’s happening is that as the nation was vaccinated to a sizable degree, and even those that didn’t get vaccinated, we certainly saw events start to just fill with people.  In store shopping is not only advantageous because of the touch and feel nature but shopping in store is also a social aspect of our lives. We meet people either in restaurants or we meet people to shop.  Furthermore if you are at a loss about what to buy it’s a lot more difficult to navigate on a site to find a substitute product or a product idea than it is to go shop in a store and get that element of education and impulse and feel.