- Holiday sales are forecast to grow from last year, though the increase will likely be driven by inflation.
- Consumers are expected to be more budget conscious as inflation pushes up prices for groceries and other necessities.
- Discounting is expected to continue at least through the holidays.
Retailers are scrambling to prepare for the fast-approaching holiday shopping season, but sales growth is expected to be muted this year as consumers cope with tightening budgets.
A spate of reports say shoppers are likely feeling thrifty as they face higher prices for groceries and other necessities. The consumer price index has climbed 8.3% over the past year, according to Tuesday's Bureau of Labor Statistics report. As a result, holiday sales growth is expected to be driven largely by inflation.
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Already, retailers have relied heavily on discounts to move excess inventory and clear shelves in time for the holiday shopping season, which typically kicks off with Black Friday after Thanksgiving. It's a critical time for retailers and can account for upwards of 40% of a company's annual sales.
Here's what forecasts say shoppers and retailers can expect.
On paper, this holiday season's sales may appear healthy, with Bain & Co. forecasting growth of as much as 7.5% from last year. But when adjusted for inflation, it expects growth of just 1% to 3%, which is below its 10-year average.
The modest forecast follows the 14.1% jump for last year's holiday season, according to the National Retail Federation. That increase was chalked up to shoppers being eager to spend their savings as pandemic restrictions eased, even as supply chain bottlenecks slowed deliveries.
Now, consumers and retailers alike are facing a bleaker reality. A poll commissioned for CNBC by Morning Consult showed more than half of consumers are either somewhat or very concerned about staying within their holiday-spending budgets, and 80% expect to be affected by inflation.
The poll also found 52% of respondents said it will be harder to afford their holiday expenses this year than in 2021.
"It's for sure a year in transition," said Matt Kramer, KPMG's national sector leader for consumer and retail.
With consumers being cautious about spending this year, he said retailers will need to push discounts.
Retailers are expected to continue leaning on promotions, a lever they've grown familiar with while struggling to adjust to changing shopping habits in recent months.
As pandemic restrictions eased and people started going out more, many companies found they had stocked up too much on items people didn't want anymore. That forced them to heavily discount products to clear shelves and make room for the holidays.
In August, Target reported a steep drop in earnings and slashed financial outlooks following steep markdowns. Walmart in July opted out of competing with Prime Day after it was forced to significantly slash prices to move its own inventory.
The discounting is expected to continue into the holiday season, with 73% of retail executives telling KPMG their stores will be more promotional, and 21% saying they plan to be "much more" promotional.
Though down slightly from last year, the vast majority of retailers also still expect to participate in the Black Friday and Cyber Monday sales.
Holiday shopping could start as early as October as shoppers start hunting for deals early, according to Mastercard SpendingPulse.
That report also predicts that clothing will have the strongest growth as people returning to offices opt for nicer outfits. Executives from Nordstrom and Macy's noted the growing demand for such clothing at the Goldman Sachs Annual Global Retailing Conference last week.
Sales of luxury goods are also expected to be relatively strong, according to Mastercard SpendingPulse, echoing the summer's reports of continued strength in spending among higher-income consumers.
In-store sales are forecast to grow 7.9% as retailers lean into doorbusters and capitalize on people going out to shop again this year, according to Mastercard SpendingPulse. Online sales are expected to grow 4.2%.
A report by Deloitte, however, estimates stronger e-commerce growth of between 12.8% and 14.3%, which it attributed to budget-focused consumers going online to find deals and compare prices.
Even if retailers see stronger sales this holiday season, 92% of executives surveyed by KPMG said they expect a recession in the near future. Eighty-one percent said they believe a recession would last a year or less.
To prepare, 52% of retailers said they would seek to cut indirect expenses, while 42% said they would invest in customer loyalty, reduce direct expenses and reduce inventory.
The summer's inventory gluts could also come back to haunt retailers, with 56% percent of executives expecting to be stuck with excess merchandise after the holidays. That could lead to even more discounting.
The worries are a stark contrast to the 2021 holiday season, which was marred by shortages and supply chain bottlenecks.
"Retailers who were able to clear past merchandise and accurately forecast inventory needs will be the best positioned for growth," said Steve Sadove, senior advisor for Mastercard and former CEO and chairman of Saks Inc.