Consumers Weather Inflation Headwinds with Flying Colors

Consumer spending analysts have been raising significant questions about the impact of inflation on consumer spending.  Many forecasts projected consumer spending to wane with rising gas, food and raw materials prices, however, March/April retail sales results present a strong argument otherwise.

Overall retail sales increase over 5% on a weighted average basis.  Given the Easter calendar shift, March and April 2011 same store results have to be combined to show a clear picture.  As is always the case there were winners and losers, but the overall sales results were strong.  The 5.2% increase was similar to January and February strong sales results, despite much heavier inflationary pressures.

Price increases accelerate in March and April. According to NationalGasAverage.com, gasoline prices increased from $3.40/gallon to $3.85/gallon in March/April — a huge 13% increase.  Food prices have also increased roughly 3% thus far in 2011, and if you’ve been apparel shopping recently, you’ll notice retailers are now passing along the increases in cotton prices and blends to consumers.   How did consumers react?  See below.

Consumers accept price increases for branded goods. Even with the inflationary headwinds, consumers demonstrated their optimism this Spring.  The strongest retailers and categories were in branded apparel and accessories, with particularly strong results from luxury retailers such as Neiman Marcus and Saks (with expected continued strength in Tiffany’s, Coach and others) and department stores such as Nordstrom and Macy’s.  Discounters were not as strong, with the notable exception of Costco who also focuses on branded goods.  Given that these branded goods generally have a higher content of inflationary raw materials (cotton, for instance), retailers were passing along price increases in March and April.  Spring 2011 has been a good testing ground to see whether consumers would wilt in the face of price increases.  The jury is in, and it’s good news for full price retailers.

Some trends to watch for:
  • Discount consumers appear more resistant to price increases. By definition that should be no surprise, but this gives additional headwinds to Wal-Mart’s new merchandising plan.
  • Tug o’ War between retailers, consumer products companies and manufacturers. With price increases, retailers are pushing suppliers for more visibility further back in the supply chain.  However, the success of these efforts often depends on who has the most leverage in the relationship.  Large retailers continue to use their volume as leverage, however “must-have” consumer brands have strong leverage toward the retailers as well.  Finally, with Chinese manufacturers experiencing undisputed cost increases and capacity issues, retailers and consumer products companies realize that they can only realistically push so hard without risking quality.
  • Home and consumer electronics more of a question. These retailers generally don’t report monthly sales, so in early May we have less of a read on whether higher gas and food prices will take a bite out of home and consumer electronics spending.  I believe that the market share shift in consumer electronics will continue toward online shopping, price comparisons and hot mobile devices (Apple, Android, etc.).  Retailers who are not strong in those categories will be challenged.  Home will benefit from the gradual economic recovery, but will likely continue to be a lagging category, due to the persistent problems in real estate.


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