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US Consumer Consumption Conflicts with Stock Market Highs

11 MINUTE READ | August 21, 2020

US Consumer Consumption Conflicts with Stock Market Highs

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Abby Long

Abby is PMG’s senior managing editor, where she leads the company’s editorial program and manages the PMG Blog and Insights Hub. As a writer, editor, and marketing communications strategist with nearly a decade of experience, Abby's work in showcasing PMG’s unique expertise through POVs, research reports, and thought leadership regularly informs business strategy and media investments for some of the most iconic brands in the world. Named among the AAF Dallas 32 Under 32, her expertise in advertising, media strategy, and consumer trends has been featured in Ad Age, Business Insider, and Digiday.

With a majority of corporate Q2 earnings now behind us, the last few weeks have given us an even more precise look at how society and the economy have evolved due to stay-at-home orders during the early days of the pandemic. Let’s take a closer look at some of those learnings and supplemental consumer insights to ascertain how commerce and work looks heading into the fall season. 

Perhaps the most prominent business outcome of the global pandemic has been just how broadly it’s impacted people’s lives, with significant changes spanning across shopping and consumption, learning and entertainment, health and community well-being, work, travel, mobility, and so much more. As underscored by McKinsey’s latest report, home became a multiverse, and there are no signs of that changing anytime soon. 

In recent earnings calls, the gap between retail’s winners and losers only grew wider as nationwide brands with robust ecommerce operations continue to thrive, and those that rely on foot traffic continue their struggle. 

Walmart reported its biggest earnings surprise in over 30 years as ecommerce sales for Q2 grew an astonishing 97 percent. Interestingly, the national retailer noted that customers shopped less frequently, but bought more when they did, reporting the average ticket increased by 27 percent during Q2 with transactions falling by 14 percent. On the earnings call, Walmart provided no update on Walmart+, its long-awaited answer to Amazon Prime.

Over on the warehouse side of the business, Sam’s Club memberships grew by more than 60 percent last quarter, the brand’s highest quarterly increase in over five years. Likewise, Sam’s Club ecommerce sales rose almost 40 percent with same-store sales increasing just over 13 percent. 

Across markets, the UK went from a 20 percent ecommerce penetration to over 30 percent in just 60 days, while the US went from 17 percent to 22 percent. As outlined by industry analyst Benedict Evans, we’re in a period of both “forced experiment and forced experimentation.” Digital, by-and-large, increased sales while most physical retail sales declined, with the exception of groceries.

The lockdown pulled forward a significant number of future ecommerce adopters, though it’s unknown how many of those first-time shoppers (and how much of their behavior) will stick around after curbside pickup or online shopping no longer feel as necessary as it does today. 

One thing’s for sure: ecommerce will play a huge role in holiday shopping with major retailers like Walmart already announcing plans to close stores on traditionally huge in-store shopping days.

Related: According to data from ShipMatrix, Amazon shipped over 415 million packages in July, topping its three-month average between April and June. The ecommerce juggernaut delivered 66 percent of its own packages last month, compared with 54 percent this time last year

Digital research firm eMarketer tallies US ecommerce sales grew by nearly a third in Q2, accounting for 16.1 percent of total retail sales, reaffirming ecommerce’s share of the pie will remain significant during the pandemic

McKinsey & Company has dubbed it ‘the quickening,’ with US ecommerce penetration in the last three months equating to the level of ecommerce growth projected to take ten years. As such, consumers are reconsidering brand loyalties as well as where and how they shop. According to McKinsey, 75 percent of Americans have tried different stores, websites, or brands during the COVID-19 crisis, with as many as 60 percent of those US consumers expecting to integrate those new brands into their post-COVID life. 

Target also benefited from the pandemic, flexing its ecommerce and curbside prowess when the capabilities were needed most. Target’s online sales nearly tripled from a year ago, with the brand reporting its strongest quarterly sales growth in the company’s history this past quarter. Target also plans to lengthen its traditional back to school season by making school supplies available throughout the fall. 

As we reviewed in previous briefings, due to uncertainty surrounding in-person back to school and hybrid learning models, most analysts believe around ⅔ of American students are starting the school year online with the potential for in-classroom lessons to resume potentially later in the year. This wait-and-see approach has retailers on edge over how one of the biggest shopping seasons shakes out, so they’re opting to prolong the availability of back to school merchandise, just in case there’s a sales uptick late in the season.

Related: According to Morning Consult, nearly half of youth sports parents say they plan to enroll their children in fall sports this year

Notre Dame became the latest to halt in-person classes due to on-campus coronavirus outbreaks, which were later linked to off-campus parties. According to a new College Reaction and Axios poll, one in five college students is not planning to enroll in classes this fall. Harvard, which is going fully remote, reported that roughly 20 percent of its incoming freshman class deferred due to the coronavirus pandemic. Those who do enroll in college courses return to a campus lifestyle and college experience unlike any other. 

Most universities have on-campus restrictions and have outright canceled college sports (so no tailgating), others have attempted to ban off-campus activities and parties, and some are allowing students to return to the dorms but offer a slew of different classroom learning styles; exclusively online, a hybrid model, or in-person classes. 

Related: Facebook launched a new Educator Hub ahead of students heading back to school.

Home Depot’s Q2 earnings this week provided further insight into how consumers have shifted focus to renovations and home projects in the last 90 days. The nation’s biggest home improvement retailer reported domestic same-store sales rose 25 percent in early August, which was approximately twice as much as Wall Street had expected. 

Ted Decker, Home Depot’s EVP of merchandise, told analysts on the call that sales to DIY consumers grew faster than those to professional contractors, though both categories increased significantly. Purchases such as patio furniture and riding lawn mowers were said to drive big-ticket transactions, which was only offset by the reduced sales of items that required intensive indoor installation work, such as kitchen countertops and new appliances. Total revenue ended at $38.1 billion for the quarter, and it was the company’s strongest quarterly sales growth in almost 20 years. 

Home Depot competitor Lowe’s said website sales soared over 135 percent last quarter as more consumers shopped online. As Lowe’s CEO Marvin Ellison brilliantly put it, Lowe’s benefited from “a wallet share shift away from vacations, away from dining out, [and] away from apparel purchases.” Total Q2 revenue rose 30 percent to $27.3 billion, passing Wall Street’s expectations of $24.27 billion while same-store sales growth came in at 35.5 percent. 

Related: Yelp tallies 15,770 as the total number of restaurants listed on the platform that have permanently closed since March 1st. See the data here.

In an interesting look behind the curtain, Lowe’s disclosed the brand had spent $460 million on increasing pay for workers, improving store safety and cleanliness, and supporting local communities. The home improvement company is also expected to pay $107 million in quarterly bonuses to employees across all locations in the weeks to come for surpassing its sales targets last quarter.

A variety of factors have fueled this home improvement boom: 

  • Corporate work from home directive extensions coupled with the desire for more space have prompted a — perhaps temporary — mass exodus from urban areas, such as New York City and San Francisco.

  • Record low mortgage rates and the end of COVID-19 lockdowns for home builders and construction crews spurred the housing and renovation market, driving contractors to spend more per visit and visit stores like Home Depot and Lowe’s more often.

  • Since consumers aren’t going on vacation (Morning Consult estimates 50 percent of vacation-goers canceled their plans this summer), people are investing more in their homes or putting their federal stimulus check to use supplementing home-related purchases. 

Walmart, Target, and Home Depot clearly benefited from their selection of essential items and household necessities. Each retailer made a point to document the stimulus check’s impact on the bottom line during their respective earnings calls. While US household retail spending increased for the third straight month, some analysts fear these gains could be short-lived. Many experts are anticipating retail spending to decline or level off after July, especially with the enhanced $600 weekly unemployment benefit no longer hitting bank accounts.

Overall, consumption is expected to continue its decline (12 percent drop over the next two years across the US) and is anticipated only to recover to pre-crisis levels by 2023-24. And what shoppers are buying has changed almost as much as how much they buy. Heftier investments into backyards and home improvement projects, fewer air miles and travel-related expenses. More raw ingredients and household goods, fewer cosmetics and professional apparel shopping sprees.

In earnings calls across the retail and commercial landscape, executives have withdrawn financial guidance for the year and said they are unable to forecast demand heading into the holiday shopping season. In a succinct synopsis, Target’s finance chief Michael Fiddelke noted, “there are many potential challenges on the horizon, including uncertainties surrounding COVID-19, economic headwinds from historically high unemployment, uncertainty surrounding government stimulus and a contentious November election. Predicting financial metrics is an exercise of imprecision at this point.” 

Despite this, Wall Street smashed records this week, with Apple hitting a $2 trillion valuation, the first company to ever do so, and the S&P 500 closing at a record high. Looking ahead, an IPO bonanza is expected for the back half of 2020. Airbnb has filed confidential IPO paperwork, and more startups are on the way

Despite these market moves, consumer sentiment in the US is relatively stagnant with mid-summer levels, though, in some polls, consumer confidence appears to be lifting, albeit slowly. Comfortability to return to normal activities, such as visiting an amusement park or going out to eat, and other activities outside the home, remain relatively the same as it did throughout the summer season, according to Ipsos and Morning Consult. These differences represent the growing chasm between US consumers and financial investors on what the future holds during and after the pandemic. 

As detailed by Morning Consult, “the relative stability of consumer confidence in the wake of President Donald Trump’s executive orders indicates that the economic impact of the funds will be proportionate to the total value of the government spending, without an additional boost from increased consumer confidence. The same was essentially true when the CARES Act was signed into law.” Meaning that consumer spending has not shifted since Congressional negotiations over coronavirus relief measures hit roadblocks, and President Trump signed executive orders detailing temporary relief measures

On the global stage, Ipsos catalogs consumer sentiment is rebounding slowly as former coronavirus hot spots now enjoy relatively normal activities, including outdoor concerts. In nearly half the countries surveyed, expectations about what the future holds are up.

Source: Ipsos 

As a result of these tumultuous times, many Americans face greater mental health consequences and report a prolonged heightened sense of anxiety as the fear of a second wave — primarily driven by back to school — remains top of mind. 

With the Democratic National Convention in full swing, and its counterpart, the Republican National Convention, just days away, the political sphere is heating up as political commentary and soundbites from influential party leaders consume the news. 

Related: Media giants across tech and news have launched various voting initiatives ahead of November.

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Already, the Pew Research Center reports 55 percent of social media users are “exhausted” by how much political content they see on the platforms. Through the noise, we’re eager to see how the upcoming election impacts the digital economy and how this contentious election cycle affects consumer sentiment and spending. As always, we’ll be here to help catalog noticeable shifts and guide you through it all in the weeks to come.

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