Market Talk: 'A large contingent of Americans aren't feeling wealthy' | REUTERS

Key Concepts:

• Black Friday: A major shopping event, particularly in the US, marking the start of the Christmas shopping season, characterized by significant discounts.
• Muted Christmas Shopping Season: A forecast indicating lower-than-expected consumer spending during the holiday period.
• K-shaped Consumer: A concept describing a divergence in economic recovery or spending patterns, where wealthier consumers thrive while lower-income consumers struggle.
• Food Inflation: A sustained increase in the general price level of food and food products.
• SNAP Payments: Supplemental Nutrition Assistance Program payments, a federal program providing food assistance to low-income individuals and families.
• Household Essentials: Basic necessities for daily living, such as food, personal care items, and cleaning supplies.
• Retailer Sentiment: The general mood or outlook of retailers regarding current and future business conditions.
• Golden Quarter: The fourth quarter of the year (October, November, December), which is critically important for retailers as it typically accounts for a significant portion of their annual sales and profits due to holiday shopping.
• Savings Rates: The proportion of disposable income that is saved rather than spent.

Global Black Friday Outlook and Consumer Readiness

Black Friday is projected to drive $78 billion in global online sales this year. However, the overall Christmas shopping season is widely predicted to be "muted," with consumers actively searching for discounts. In the US, Salesforce forecasts a 2.1% growth in spending, a notable decrease from 4% last year, primarily due to higher prices deterring consumers. The UK market, meanwhile, is still digesting the implications of the recent budget.

The K-shaped Consumer in the US

Anna McDonald, an Investment Manager at Aubry Capital Management, highlights a "K-shaped consumer" trend, indicating a divergence in spending patterns:

• Wealthier Consumers: These individuals, particularly in the US, are "willing to spend." They have benefited from "pretty substantial stock market gains." Unilever, for instance, observed that customers with significant stock and share holdings were spending on their products. If the stock market continues to perform well, luxury goods are expected to maintain strong sales.
• Less Wealthy Consumers: A large segment of the population is "not feeling wealthy" and continues to experience the effects of "food inflation." These consumers may also have been impacted by the government shutdown, which caused disruptions to SNAP payments, further limiting their purchasing power. Their purchases are largely restricted to "essentials" or "cheaper discretionary items." This K-shaped dynamic suggests a potentially "good holiday season for higher-end retailers" but a "more difficult" one for discounters.

US Retailer Performance and Social Factors

• Walmart's Resilience: Walmart is "quite well protected" as nearly two-thirds of its offering consists of "household essentials" like food and personal care items, which consumers consistently need.
• Target's Strategy: Target is adapting by producing "not too expensive" items, such as "cheaper Christmas ornaments," for the holiday season.
• Restaurant Sector Challenges: Commentary from restaurant groups, including Chipotle, indicates that "younger shoppers aren't feeling very buoyant."
• Impact of ICE Agents: An interesting social factor mentioned is that the presence of ICE agents on the streets has made the Latino population "much more reticent about going out," thereby changing their socializing and spending habits.

The British Shopper: A Challenging "Golden Quarter"

The British shopper's outlook for the Christmas season is described as "not great."

• Negative Retailer Sentiment: The latest CBI survey, conducted earlier this week, reported that retailer sentiment had fallen at the "fastest rate for 17 years," a significant decline even when considering the impact of the COVID-19 pandemic.
• Weak Retail Sales: October saw "really quite weak" retail sales, down 1.1%, which was considered "a bit of a shock." The sector has also experienced "profit warnings."
• Consumer Caution: Consumers have been "worried about the upcoming budget," which was delayed ("such a long trail budget"). This uncertainty led to a significant increase in "savings rates to over 10%," reflecting a cautious approach.
• Black Friday Hope: There is a slight hope that increased certainty following the budget might "unlock a bit" of spending for Black Friday discounts.
• "Golden Quarter" Importance: The current quarter is critically important for retailers, known as the "golden quarter," as it's when they typically make their profits. This makes the current environment "tough for them." The industry awaits trading updates early in the new year from major retailers like Next, Marks & Spencer, and supermarkets.

Synthesis and Conclusion

The 2023 Black Friday and holiday shopping season is marked by a stark divergence in consumer behavior, primarily driven by the "K-shaped consumer" trend. While wealthier consumers, buoyed by stock market gains, are willing to spend, a significant portion of the population, particularly in the US and UK, remains cautious due to persistent inflation, economic uncertainty, and specific social factors. Retailers face a challenging "golden quarter," with those offering essentials or catering to higher-end markets potentially faring better than discounters. The UK market, in particular, shows signs of deep caution and weak sentiment, making the outcome of this crucial shopping period highly uncertain.