Amazon Prime Day May Be Consumers’ Last Hurrah Before The Recession Sets In

Amazon Prime Day 48-hour mega-sales event kicks off today with deeper discounts than in years before, Reuters reported.

Contents

Recession Watch At The Grassroots Languishing Retailer Results Consumers’ Perception Becomes Retailers’ Reality Sobering Forecast

Michael Ashley Schulman, chief investment officer at Running Point Capital Advisors, expects Prime Day sales growth to be slower than in previous years. Last year Prime Day sales were up 8.5% over previous year, bringing in nearly $12 billion.

This year Schulman expects Amazon Prime shoppers to lean into practical, everyday staples like pantry items, toiletries, and cleaning supplies, rather than more expensive discretionary indulgences.

Consumer excitement around Prime Day always runs high, but this year may be different, given people’s growing concern about their readiness to weather an economic storm.

A Nationwide Economic Impact survey completed in April among 2,000 consumers found nearly 70% of Americans expect a recession within the next six months. And nearly 80% of those who see recession close at hand expect it to be severe, with over 60% believing the next recession will be as bad or worse than the 2007-2009 Great Recession.

Already many retailers, even Amazon
AMZN
, are experiencing a consumer pullback. In a research note, Marshal Cohen, Circana’s chief retail advisor, calls it a consumer recession. “The broader U.S. economy may not be in a recession, but many consumers are experiencing their own economic downturns.”

Amazon and other retailers that ride its summer-sales event coattails, including Walmart
WMT
, Target and Best Buy
BBY
, hope they splurge this year. And they just might as a final swan song before the recession hits.

Recession Watch

At least in public, the experts are maintaining a positive outlook. Despite Treasury Secretary Janet Yellen’s warning on CBS News’ Face the Nation that a national recession is “not completely off the table,” she reassuringly stressed that job growth remains robust and inflation, while still “too high,” is coming down.

This comes on the heels of the Bureau of Economic Analysis’ upward revision of the first quarter GDP to 2%. It also reported through May that personal disposable income and personal outlays, including consumer spending, continued to inch up.

In June, Goldman Sachs reduced the likelihood of recession over the next 12 months to 25% from 35% in March, as it forecasts 1.8% annual average growth this year.

The National Retail Federation chief economist Jack Kleinhenz’s latest view is that the economy is headed for a “soft landing” and “does not appear in a recession.” However, he acknowledged conflicting messages from consumers.

In surveys, consumers signal a recessionary outlook, yet he observed that their spending remains strong going into the second quarter. He confidently stated, “What we’ve learned over the last several years is don’t count the American consumer out, at least not yet.”

Describing the economic outlook like “looking into a kaleidoscope” depending on which data set is in view, Kleinhenz and many other economists seem to be putting more weight on their traditional models. But then, the Wall Street Journal warns, “If the U.S. is in recession, it’s a very strange one.”

At The Grassroots

This time, the experts’ traditional economic measures are not in line with grassroots consumers’ feelings. American consumers don’t care about the macro jobs numbers; they care about their own jobs.

And yes, the Census’ retail trade data shows their spending continues to track positive, but it’s not adjusted for inflation, so it paints an incomplete picture of the brewing consumer recession.

For example, McKinsey found that consumers’ overall real year-over-year spending declined in March and April 2023 across all age and income demographics. Its analysis is based upon consumer credit card and some debit card data provided by Affinity Solutions and Stackline sourcing Amazon spend data.

On a side note, the Federal Reserve Bank of New York reported that credit card balances remained at an all-time high in the first quarter, at $986 billion, “bucking the typical trend of balance declines in first quarters.” And other non-housing loans used to fuel consumer purchases, such as auto, consumer loans and retail cards, increased during the period.

Even though McKinsey’s U.S. Consumer Pulse Survey among 4,000 consumers conducted in late April found that consumers’ optimism in the economy rose slightly from March’s 33% to April’s 36%, their “intent to splurge,” i.e. make discretionary purchases, hasn’t “translated into action.”

Languishing Retailer Results

The consumer spending pullback is reflected in recent reports from retailers that largely depend upon consumers’ discretionary spending:

Levi’s just reported second quarter net revenues dropped 9% compared with previous year, including a mammoth 22% decline in the Americas. Much of that decline is blamed on a 33% shortfall in wholesale revenues tied to its value brands. “Wholesale is very soft, with lower to moderate income consumers clearly being squeezed,” president and CEO Chip Bergh said in the earnings call.
Gap Inc. took a 6% hit in the first quarter, with its largest brand, value-leaning Old Navy down only 1% to $1.8 billion, while Gap
GPS
($692 million) dropped 13%, Banana Republic ($432 million) down 10% and Athleta ($321 million) off by 11%. It expects to close fiscal 2023 down mid-to-high-single digits.
Qurate, home of television shopping channels QVC
QVCA
and HSN that rely heavily on shoppers’ impulse buys, dropped 8% in the first quarter to $2.6 billion, owing to “fewer customers and weakened consumer sentiment.”
And Macy’s stores, Macy’s Inc.’s middle-income destination, were down 8.7% in the first quarter. “Starting in late March, demand trends weakened further in our discretionary categories,” reported Jeff Gennette, Macy’s chairman and CEO said in a statement.
Even Amazon is struggling. Its net product sales were down 1.2% in the fourth quarter 2022 from $71.4 billion in 2021 to $70.5 billion, ending the year up less than 1% at $242.9 billion compared to $241.8 billion in 2021. First quarter 2023 produced a 1% bump in product sales to $57 billion, benefiting from a strong January across retail.

Consumers’ Perception Becomes Retailers’ Reality

Long-time retail industry watcher Warren Shoulberg has identified a simplified formula to measure consumers’ relative strength or weakness that’s proved prescient over the past 20 years. He calls it the Wal/Get Guage.

“When Walmart is doing well, the economy is in trouble and things are not so great. When Target
TGT
is doing well, the economy is improving and things are looking pretty good,” he wrote in Gifts & Decorative Accessories magazine.

It all comes down to consumers’ perceptions. When Americans are worried about the economy and their finances, they turn to Walmart for the basics thanks to its carefully crafted “Save Money. Live Better.” promise.

Target, by contrast, has honed a more upscale cheap-chic image – “Tarjay” – and despite its prices being just as low as Walmart’s for many items, consumers perceive it as a place to satisfy their wants more than their needs, so when they are worried, they hold back.

The two companies latest first quarter results bear the Wal/Get Guage out. Walmart revenues were up 7.4% in the U.S., rising to $103.9 billion, with a 2.9% uptick in transactions. Its e-commerce sales advanced 27% as well, and its market share in grocery grew with more higher-income shoppers turning to the brand.

However, Walmart noted weakness in its discretionary general merchandise offerings, including home, electronics and apparel, down mid-single digits.

Target customers took a similar turn toward more needs versus want purchases, but its needs offerings didn’t pull as strongly as Walmart’s. Overall, Target first quarter revenues inched up 0.5% to $25 billion, but comparable sales were flat with e-commerce comps down 3.4% and stores up 0.7%.

Growth in its “frequency” categories, i.e. food, beverage, household essentials and beauty, offset declines in discretionary categories, including home, apparel and hardlines, which showed further softening during March and April.

“American consumers continue to face difficult trade-off decisions as they juggle the wants and needs of their families,” Target’s chief growth officer Christina Hennington said in the earning call. “The fear of a looming recession weighs heavily on many American families and though discretionary spending remains soft, our guests are still looking to sprinkle some affordable joy into their regular shopping at Target.”

No question that consumers will seek more joy when the economy takes the downward turn they expect, but they are more likely to find it by indulging in experiences rather than buying more stuff.

McKinsey found consumers’ real year-over-year spending on travel and out-of-home entertainment increased by 2% in April. And their intent to splurge on restaurant experiences was highest across the dozen categories included in its survey.

Sobering Forecast

The Conference Board remains 99% confident that the U.S. economy will fall into a recession, but in its most recent forecast, principal economist Erik Lundh pushed back the start date a quarter to the second half of 2023.

Now he expects the GDP to advance 0.6% in the second quarter, reversing the prediction it would decline by 0.6%. Going forward, Lundh projects a 1.2% decline in Q3 2023, -2.1 in Q4 2023, and -0.9 in Q1 2024.

As the inevitable unfolds, more shoppers will turn to Walmart, dollar stores, discounters and other destinations where they believe their money will go further for necessities and put discretionary purchases on hold.

Anticipating this, consumers might bolster Amazon’s Prime Day revenues and others that try to horn in on the summer-sales action, but after that, the other shoe will drop.

“The needs and expectations of budget-conscious consumers are evolving,” warns Circana’s Cohen. “The spending pie has gotten smaller, but the competition remains the same, which means smaller revenue slices — unless you take action to make your slice bigger.”

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