Making big bets on consumer resilience in the retail and restaurant sectors

Dec 05, 2023

Key takeaways

The resilience demonstrated by consumers, bolstered by a robust labor market, is a trend likely to endure.

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Companies should remain vigilant about market risks that could influence consumer confidence and spending capacity.

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Strategic planning that considers macroeconomic factors will be instrumental in delivering growth to the bottom line.

Economics Retail Restaurant

Companies are placing significant bets on the enduring resilience of consumers as we approach the close of 2023. Amazon's plan to hire 250,000 workers to bolster its holiday sales is a prime example of the widespread optimism regarding consumer strength.

The third quarter RSM US Middle Market Business Index, our gauge of economic sentiment for midsize companies, recently revealed that 60% of respondents are bullish about the next six months. This optimism largely hinges on American consumers who have steadfastly maintained their spending habits despite considerable strain on household budgets in the face of inflation. The unwavering labor market has played a pivotal role in shoring up consumer confidence, ensuring that cash continues to flow into the pockets of the American populace. Recent increases in real wages are supporting households' ability to continue spending. Companies are banking on this as well as positive signs of inflation. All of this fortifies a resilient consumer.

However, it is imperative for companies to exercise caution and closely monitor the state of consumers' budgets. While discretionary personal income may show signs of tightening, consumers still choose to spend while reducing their savings. In August, savings rates declined over two consecutive periods to 3.5% from 7.5% in December 2021. The consumer has made concessions to maintain spending habits at the expense of lowering savings. 

Although consumer credit rates are on the rise, they remain within historical ranges on a headline basis. Nevertheless, certain income groups undeniably feel the pinch, making it essential for middle market companies to understand these dynamics and tailor their consumer marketing strategies based on historical profiles.

As we move forward, several significant events loom on the horizon that could potentially dampen spending and overall economic growth in the year’s final months. These include the labor strikes like the United Auto Workers (UAW) strike that began in September 2023, the resumption of student loan payments, elevated energy prices, geopolitical events and persistently high interest rates. While companies may be optimistic about consumers' willingness to continue spending, they must closely monitor trends to adjust their strategies in line with evolving consumer preferences.

Consumers seek value

Middle market retailers must concentrate on delivering value to their customers as shoppers grapple with difficult decisions about making their dollars stretch further. Discount strategies remain paramount in both in-store and online sales, and loyalty points and rewards programs are proving to be effective tools for attracting and retaining customers. According to the third quarter MMBI, excess inventory seems to be gradually subsiding, with 39% of respondents indicating that they had adjusted their reserves, down from 47% in the second quarter. Nonetheless, inventories remain high, compelling companies to continue using discount strategies to clear their stockpiles. Savvy consumers are expected to hunt for deals and avoid paying full price for products.

Companies should focus on maintaining profitability while carefully pricing products to match the changing consumer landscape. As inflation stabilizes and consumers begin to shop value, companies will need to evaluate costing strategies to balance sales prices that will capture optimal demand but maintain margins. 

Consumers are trading down on dining options

As of August 2023, the U.S. Bureau of Labor Statistics reported the fifth consecutive month of restaurant industry price increases (6.5% annualized for the month), exceeding a 3% gain in the retail food sector. This ongoing trend may prompt consumers to consider dining at home more frequently. With waning demand and consumers stretching their dollars, fast food and fast casual restaurants will be best positioned to capitalize on demand from diners trading down from pricier establishments.

Restaurants must prioritize the customer experience and maximize the value of their spending to remain competitive as demand weakens. Automation will be integral for fast-casual and dine-in restaurants as operators strive to maintain quality service with fewer available workers. 

TAX TREND: New technologies

For retailers and restaurants adopting new technologies to meet consumer expectations, integrating new systems with modern tax applications can help effectively manage complex tax and financial data. For example, retailers that automate sales and use tax processes can improve accuracy of collections and remittance, free up personnel and resources, and protect margins. Involve the tax function at the outset of any project to promote an effective integration.

Learn more about RSM’s tax technology consulting services.

E-commerce regains momentum

Bloomberg predicts that e-commerce sales will account for 33% of retail sales by 2026, up from 25% in 2022. Artificial intelligence and machine learning are poised to improve conversion rates significantly for online shoppers to drive growth. Examples of this include personalized shopping recommendations using digital twins to show clothing items on a model that matches a consumer’s sizing or allowing home improvement shoppers to see a new furniture item in their home with intelligent rendering technology. AI-powered algorithms will deliver increasingly customized product messaging to consumers and valuable insights to companies on their buying preferences. 

CONSULTING INSIGHT: AI and machine learning

Artificial intelligence and machine learning are not new concepts, but they may have previously felt out of reach for many middle market companies. However, solutions are evolving rapidly and becoming more accessible, enabling more organizations to take advantage of more efficiency and insight through automation. Learn why taking advantage of AI and ML technology may not be as difficult as you think.

Major players like the retail giant Amazon will continue to expand market share as they invest in technology. Middle market companies must explore ways to capture consumer preferences and embrace new technologies to meet customer expectations. Brick-and-mortar retailers will need to offer a cohesive brand experience to leverage these technological advancements and meet the growing consumer expectations regarding technology.

The takeaway

The resilience demonstrated by consumers, bolstered by a robust labor market, is a trend likely to endure. However, companies should remain vigilant about market risks that could influence consumer confidence and spending capacity. Strategic planning that considers macroeconomic factors will be instrumental in delivering growth to the bottom line.

Originally published by RSM US. 

RSM contributors

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