The US labor market cooled and consumers continued to trade down even as they continued to spend, more evidence that stores need online and vice versa, even as retailers continue to struggle with labor challenges. Data really is the new oil except for the growing realization that it also consumes a lot of energy generated by oil. And a note on when closing an innovation lab is less a sign of giving up on innovation and more a sign of not trying that hard in the first place. Let’s dive in!
Retail Economic Indicators
In the upside-down world that is the post-pandemic economy, unemployment rose in the US and the economy added almost half as many jobs as it did in March, and this was celebrated by the market. To keep it in perspective, analysts view this news as approaching a more “neutral” rate of unemployment, and even though 3.9% unemployment is an uptick, it’s still +1 to make 27 straight months of unemployment below 4%.
In similar “cooling” news, Adobe Analytics reported that while eCommerce spend grew 7% year over year during the first 4 months of 2024, they saw distinct signs of consumers trading down to cheaper goods. The most impacted categories were personal care, electronics, apparel, furniture, and groceries (so basically, most things). The use of buy now pay later (BNPL) also rose to new record level, and is projected to drive over $81 billion in online spend in 2024. And while 7% ecommerce growth is definitely above the rate of growth for stores, a lot of it was driven by growth in online grocery spend, which was up 15.7% YoY for the first four months of 2024. Adobe noted that categories of goods that showed the lowest inflation saw revenue grow by 13.4%, while goods with the highest inflation saw revenue drop by 15.6%.
To round things out, the National Association of Convenience Stores rounded up all kinds of signs of cooling, covering NRF’s Monthly Economic Review May issue that found economic growth has slowed in the first quarter of the year, that retailers like McDonalds are increasingly reporting a pullback in consumer spending, and additionally that lower-income borrowers are struggling more lately to keep up with debt payments.
Retail Tech & Research Data
This week’s research data was all over the place – I tried to find some way to hang them together, but they are completely different topics. Which I guess goes to show that part of the reason retail is hard is because it touches such a wide array of activities and stakeholders.
The Wall Street Journal rounded up a bunch of recent studies that show that online and stores are like chocolate and peanut butter: better together. GlobalData research finds that 42% of eCommerce orders last year involved stores in some way, vs. 17% in 2015. Coresight reports that retailers are opening more stores than they’re closing for the third year in a row. And retailers are leveraging stores for more and more activities, with Kohl’s fulfilling more than 1/3 of online orders from stores, Walmart more than half, and Target nearly all. The best quote from the article: “Many retailers have found that it’s too expensive and difficult to attract and retain customers without physical stores.”
However, if retailers can’t make stores a great experience, their benefits to the shopping experience will be lost, and retaining front line retail workers is still a big challenge, even if the labor market overall is starting to cool. A study by Quinyx found that 59% of retail workers have considered quitting their jobs in the last year, which is a 22% increase over 2023 survey results. Their concerns center on low compensation, scheduling and staffing challenges, poor leadership, and limited opportunities for growth. While these have always been concerns (I was pleasantly surprised that safety wasn’t on the list of top concerns), the pain of these concerns has sharpened over time. We’ll see if the cooling labor market makes “a job” more attractive even if it doesn’t deliver everything front line workers are seeking.
And finally, when consumers do come into stores, it is more and more likely that digital wallets will be their preferred way to pay. A WorldPay study predicts that digital wallets will reach half of POS transaction value share by 2027, starting from 30% of transaction value share in 2023. Over half of the US population will use a digital wallet in 2024. Apple Wallet is the most popular with nearly half of digital wallet users, followed by Google and then Samsung. A different study found that consumers who use digital wallets spend 31% more than non-users, but I’m not sure if that’s causation or correlation. Apple users tend to spend more than others, and if they have half the market share of digital wallets, that could translate into greater spend vs other forms of payment.
AI & Retail
In the last week, a significant milestone was reached with AI: it is officially THE most capital-intensive industry in the world, beating out oil. There have been lots of jokes about whether data is the new gold, or the new oil, and it is definitely the latter, apparently. Some choice quotes…
From JP Castlin: “Microsoft and Google both now match Saudi Aramco, the largest player by some distance, in spend. Meta’s lower capex budget will still roughly be that of Exxon Mobil and Chevron combined. But please, do tell me how your company, which has no previous experience of anything even remotely similar and is unable to attract and afford the kind of talent the big firms employ, will soon bring a ground-breaking AI feature to the table.”
From Scott Galloway, referring to data and oil more in the “data burns a lot of oil” sense: “One ChatGTP request requires 10 times the energy of a Google search. In five years, the incremental energy demand of AI will be equivalent to 40 million homes — more than California, Texas, Florida, and New York combined. Data centers make up 3% of total U.S. power demand, but that’s projected to triple by 2030. BTW, 2030 is the same distance into the future as the finale of Game of Thrones is in the past (2019).”
By all means, be excited about what AI can do and where it can potentially take us, but do it eyes wide open to the fact that we are very early days in understanding not just the upsides but also the potential downsides. GenAI is not a panacea. And people who are using it regularly are not actually paying the full cost of what it takes to provide it. This is a classic early-tech move – offer it for a low price, collect market share quickly, and then lower the costs and raise the prices while maintaining (or at least not losing) that market share. Is that a reasonable expectation for GenAI? When we’re not full accounting for the cost of things like energy and water? That remains to be seen.
Retail Winners and Losers
Two contrasting winner/loser stories this week. First, Kohl’s is going to leverage Instacart for same-day delivery. This is via the Instacart app, and adds nearly 1200 locations nationwide. It’s lauded as “one of the first” department stores on the platform. If you’re not Amazon or Walmart and you want to compete against their scale, you need an ecosystem. Target has Shipt, and now Kohl’s has Instacart. But the difference between the two groups is that Amazon and Walmart are using their scale to drive leverage, while Target and Kohl’s are partnering to leverage others’ scale.
Second, H&M is closing its Berlin innovation lab, called H&M Beyond. The lab was supposed to be a test center for new concepts, and did test out things like “hyperlocal” concepts and clothing personalization via embroidery. Innovation labs come and go – I don’t think I can keep track of all the times Walmart has opened or closed innovation labs. This is another example of whether your scale can be leveraged. Big companies have to make hard decisions about whether to externalize innovation – put it outside the reach and influence of the main organization, both to prevent the influence of “we already tried that” and to attract talent that might not otherwise be interested in working for a staid, stodgy retailer. But then you have to bring that innovation back in house – and what started outside is much harder to bring in than something that was actually “invented here”.
There are hints of that in the H&M announcement – the innovation lab is “ceasing to exist as a separate unit” – but also, this impacts a staff of four people, which ultimately makes one question the level of commitment that was in play to begin with.
The Bottom Line
What did I learn this week? It feels like the market is definitely slowing down and feeling the strain. I think some analysts have been saying that since September of last year, but lately it feels like there are more negative indicators than positive ones. Ironically, that’s good news if you’re looking for rate cuts, and more and more people are.
And I won’t say that there are more and more negative voices about GenAI – I play around with it, and I understand the attraction. Let’s just understand the costs, too. This isn’t some little startup throwing a bunch of scooters around a downtown area. These are big companies with big money, and not much insight yet into unintended consequences. It’s not a bad thing to be cautious.
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