Retailers and restaurants: Embrace strategy amid rising tide of consumer spending

Increased pandemic-era spending for many consumer brands sparked rapid growth. Retail sales grew faster than overall gross domestic product from April 2020 to December 2021, rising the tide for all retail brands. Similarly, restaurants saw a spending boom with the lifting of COVID-19 restrictions, as pent-up demand spiked sales and growth.

In subsequent months, as inflation began to increase, the Federal Reserve stepped in to raise interest rates, which helped cool spending briefly; however, retail and restaurant sales have continued to exceed expectations, with retail spending increasing 3% year over year as of April 2024, according to the U.S. Census Bureau. This resilience is driven by the rare economic condition of full employment combined with high interest rates.

As retailers and restaurants look to the second half of 2024, they should expect consumer strength to persist, but should temper their expectations of a booming economy. Rather, companies should anticipate 2% to 3% sales growth in the retail and restaurant sectors, accompanied by similar inflation rates.

The U.S. consumer is not one-dimensional; rather, consumer cohorts vary based on income, age, geography and a host of other factors.

For instance, consumers in the upper quartile of income earners may have a more favorable outlook on the economy given their increased spending capacity and disposable income. However, lower-quartile earners may feel pinched on budgets, making them more selective about where to spend. With excess savings drained and current high interest rates on credit, lower-income consumers are experiencing reduced buying power. Restaurants serving lower-quartile income earners are reporting decreasing demand, likely due to tighter household budgets.

There are positive signs for lower-income earners, however, as real wages continue to increase, according to recent earnings reports, and the effects of the Fed policy on inflation could help increase disposable income for this cohort, potentially freeing up more household spend on consumer goods and services.

As a result of this complex consumer makeup, retailers and restaurants with high growth goals must rely on market share growth analysis, strategically expand target markets and offer new products accordingly. With high capital costs, however, strategies will require a measure twice, cut once level of accuracy.

Clearly, middle market companies cannot rely solely on a rising tide of spending to grow their business and must make strategic moves to achieve growth goals. Retailers and restaurants should consider the following to address the months ahead:

• An enhanced consumer experience and shopping convenience will be key to gaining market share. Companies will need strong technology solutions to achieve this goal. Unified checkout solutions, loyalty programs and personalized shopping recommendations are a few areas of focus. Leveraging technology tools, like artificial intelligence solutions, will be key to automation of the customer experience as expectations for offerings like personalized shopping with one-click checkout and lightning-fast delivery of product continue to expand.
• Balance sheet maintenance will remain critical to operating margins. Supply chain optimization to reduce costs, SKU rationalization and new product evaluation will be key to both improving operating margins and generating growth.
• AI and machine learning solutions will become increasingly important for balance sheet maintenance. Companies that focus on data strategy and use their data to gain an edge in the marketplace are going to succeed. Developing these strategies is not something to put on the road map as a future task. To meet business goals, businesses must make these solutions their highest priority now.
• Look for cash. Tax incentives can be hidden treasures used to decrease debt or make strategic investments.
• Cybercrime and retail crime are on the rise. Companies need to ensure they are well prepared to reduce costly exposure to risks.