New Economic Realities   //   January 18, 2024

The retail industry fared better than expected in 2023 — but brands aren’t out of the woods just yet

In a year marked by concerns about inflation, interest rate hikes and mounting consumer debt, U.S. shoppers continued to spend on retail goods — especially for personal health and wellness, apparel and online purchases.

In December alone, spending was up 4.8% from the year before, according to the U.S. Census Bureau’s unadjusted Advanced Monthly Retail Trade Survey data released Wednesday. December sales grew .6% from the November, while spending from October through December 2023 was up 3.9% from the time period 2022. This holiday spending helped boost the year-end total to more than $8.3 trillion, a 3.2% increase from 2022. 

The growth in the holiday and year-end results show that the retail outlook isn’t as dour as it once was. Even as recently as August, some economists predicted a slower holiday season because of consumers tightened budgets and high credit debt.

“It’s a far cry from a few yeas ago when people were making comments about the apocalypse of retail,” the National Retail Federation’s chief economic Jack Kleinhenz said.

Looking ahead to 2024, Kleinhenz said he doesn’t anticipate major changes in consumer behavior, though there could be some softening. Less overall job growth could slow spending. And “deflation” — or a reduction in prices — may also dampen overall growth, a trend that Walmart CEO Doug McMillan forecast in the company’s third-quarter earnings.

“In the U.S., we may be managing through a period of deflation in the months to come. And while that would put more unit pressure on us, we welcome it, because it’s better for our customers,” he said in a November earnings call.

Moving forward, brands are likely to employ a mix of promotions, financial products and convenient shopping experiences to help keep sales churning. From a sector-based perspective, however, certain categories may fare better than others. While e-commerce spending continues to rise and consumer spending on health and wellness goods continues to swell, big-ticket home items aren’t as hot as they once were. And though apparel holds steady, brands are conintuing to push big promotions to help convert.

Using these numbers as a base, here’s a look at takeaways and what it means for brands moving forward.

Furniture & home furnishings 

Other than gasoline prices, the biggest drop in spending in 2023 was in the furniture and home furnishings category. Sales for 2023 came in at nearly $133.6 billion, a 5.4% drop from the year before. Kleinhenz said part of the decrease could be attributed to a slower real estate market, with home sales frozen amid high interest rates.

The year saw some legacy furniture stores — like Z Galleria and Mitchell Gold + Bob Williams — file for bankruptcy as the pull-forward demand seen in the early years of the pandemic began to slow.

Looking ahead, the sector may continue to stagnate as shoppers improve their homes in smaller ways. Erin Jaeger, head of North America for fintech company Klarna, said the activity in big-ticket home purchases has slowed in favor of smaller items like appliances and decor, which were big sellers for the Black Friday shopping weekend.

“Those are going to be a lot lower AOVs than a couch,” she said.

Clothing & accessories 

With a 1.6% year-over-year increase in sales to about $312.7 billion, spending on clothes and accessories didn’t see major gains in 2023. Yet, retailers were rolling out promotions and leaning heavily on value propositions.

The category proved yet again to be a strong holiday performer in the month of December, with about $40.3 billion in spending compared to $38.6 billion in 2022. Black Friday-style sales stretched from early November — even October — and some have continued in January.

Jaeger, who described apparel as the “bread and butter” of Klarna’s Buy Now, Pay Later products, said she anticipates discount and off-price retailers to continue to perform well in 2024. And the promotional environment for apparel is likely to continue as retailers attempt to drive sales.

“Everyone is still offering those same promos,” she said.

Health & personal care 

The “better for you” products mindset may be helping to turn health and personal care into one of the biggest growing categories of consumer spending. Sales in this category hit $433.1 billion, an 8.5% jump from 2022.

This points to more activity in the space in the year to come; Klarna’s Jaeger said it’s also one of the categories where the payments platform hopes to offer more payment plans. Developments on the product side may also drive sales, with companies that create over-the-counter medicines getting major boosts from VCs and larger retailers.

Under the federal government’s data definition, the category covers sales at pharmacies and drug stores. While the sector has some struggles — like Rite Aid’s recent bankruptcy — Kleinhenz said these outlets are seeing increasing traffic amid a season rife with illnesses, and are also seeing boosts as they offer more general merchandise and discretionary items.

“It’s got a variety, and it’s very convenient,” Kleinhenz said.

Online shopping

The “nonstore” category that represents online spending has seen major gains in recent years, hitting an 8% year-over-year growth in December with sales of $1.377 trillion. That compares to a 11.4% growth seen in 2022, and 13.6% growth in 2021, when the “nonstore” category first surpassed $1 trillion. 

NRF’s Kleinhenz said this wasn’t surprising, as it’s been a burgeoning trend over the past decade. Yet, he described this year’s gains as notable given the base of the spending and how competitive pricing is online.

“People can get online and shop to their content, and find opportunities for price comparisons,” he said.

The sustained growth also bodes well for fintech companies like Klarna that offer some in-store financial products but ultimately have grown due to growth in online shopping. Jaeger said while there may not be a “massive pivot” in 2024 for online shopping or BNPL usage, she anticipates continued growth. The holidays alone saw e-commerce sales catching up to stores.

“We’re seeing a shift there,” she said.