Holiday Retail Sales Expected to Increase This Year

Holiday retail sales are expected to increase this year, despite the challenges of a tight labor market, lingering supply chain issues, stubborn inflation and soft consumer sentiment.

As was the case last year, the holiday season is starting earlier than usual, with higher retail center foot traffic expected in October. CBRE projects a 6.9% increase in Q4 retail sales year-over-year to $1.48 trillion, despite inflation straining consumer budgets.

Figure 1: Q4 Retail Sales by Year

Source: University of Michigan, U.S. Census Bureau, CBRE Research, Q3 2022.

Tight Labor Market Poses Challenge

Retailers are finding it difficult to hire enough staff for the holiday season. In a recent Deloitte survey of retail executives, 68% cite a shortage of employees as one of their biggest challenges. Job openings and resignations remain above long-term averages. Less availability of temporary workers may force some retailers to reduce store hours this holiday season, a circumstance that is already evident in the restaurant industry.

E-commerce companies have been more successful in attracting and keeping workers. Non-store retail employment (traditionally e-commerce) has grown by 12.4% over the past three years, compared with just 1.7% for total retail trade employment, according to the St. Louis Federal Reserve Bank.

Figure 2: U.S. Retail Job Quits, Openings & Wage Growth

Source: St. Louis Federal Reserve Bank, July 2022.

Total Retail vs. E-Commerce Employment

Inflation: the Uninvited Dinner Guest

Consumers can expect greater costs this holiday season, evidenced by an 8.2% annual increase in the Consumer Price Index (CPI) in September. The cost of a homemade holiday dinner may be the most noticeable expense, averaging $103 this year compared with $84 in 2020, according to data from the American Farm Bureau Federation and the St. Louis Fed.

Consumers who dine out for the holidays can expect even higher costs. The CPI for food outside the home is about 40% higher than the cost of food at home.

Figure 3: Average Cost of Homemade Holiday Dinner in $

Source: American Farm Bureau Federation, CBRE Research, Q3 2022.

Highest Inflation Among Holiday Dinner Components Forecast, 2020 - 2022

Inventory Control

An ill-timed slowdown in July retail sales has left some retailers with excess inventory that may prompt discount offers to consumers. Nordstrom, for example, estimates $200 million worth of markdowns over the second half of 2022. However, retailers could benefit from excess inventory due to an extended holiday shopping season. Data analytics firm Placer.ai expects a repeat of last year’s early holiday shopping season start when weekly sales in October grew by 3.2% compared with 2.5% growth in November.

Figure 4: 2021 Weekly Retail Foot Traffic Growth Over 2019

Source: Placer.ai.

Santa Claus to the Rescue?

With indoor-mall foot traffic down by 6.1% year-over-year in the first half of 2022, according to Placer.ai, many centers are banking on Santa Claus to lure more customers. Bookings for the Santa-for-hire business were up 121% from 2019 to 2021 and growth is reportedly up further in advance of the 2022 holiday season, according to Mitch Allen, owner of Hire Santa. Even standalone big-box occupiers, such as Cabela’s Bass Pro Shops, are hiring their own Santas.

The Santa industry continues to evolve as retailers use mobile apps to help consumers avoid long wait lines by making a reservation. Retailers benefit by freeing more time for consumers to browse and hopefully spend in stores.

More people are also seeking Santa visits and photos with their pets. The U.S. Census Bureau reports that miscellaneous retail sales, including pet supplies, is up 20% over 2021 and market research firm Forrester predicts online pet supply sales will grow 11.2% annually for the next five years.

Figure 5: Annual Expenditures on Pets, U.S.

Source: American Pet Products Association's National Pet Owners Surveys.

M-Commerce is King

Mobile commerce is expected to become the dominant driver of online sales by 2027, particularly during the holiday season. Forrester estimates that 76% of U.S. online consumers used a mobile phone to shop online during the 2021 Thanksgiving weekend—an increase of 22 percentage points from 2016. Similarly, 70% used a mobile device to shop during Cyber Week, which includes Black Friday, Small Business Saturday, Super Sunday and Cyber Monday.

Figure 6: E-Commerce Retail Sales by Type & Click-and-Collect Share

Source: Forrester, CBRE Research, Q2 2022.

What about returns?

Although most goods will eventually make it to stores, a sizeable portion will be fulfilled directly from warehouses via the online sales channel. The challenge with online fulfillment, however, is that e-commerce sales have a 15%-to-30% higher product return rate than those of brick-and-mortar stores. Reverse logistics company Optoro estimates that two out of three consumers return at least one gift during the holiday season.

With an e-commerce penetration rate of 19%, there could be up to $85 billion worth of goods returned during or immediately after the 2022 holiday season. As a result, retailers and logistics operators must decide what to do with returns of apparel, toys, electronics and many other items to recapture product value and minimize waste. Physical returns allow the store to assess whether the item is in good enough condition to put back on the shelf at a full or marked-down price.

Although many customers expect free returns, this is costly for retailers. Optoro estimates that, on average, it costs $33 (or 66% of the price of a $50 item) to process a return. That cost likely will be higher this year given increased transportation and labor costs. In some cases, it might make sense for the retailer to allow the customer to keep the item since the processing cost exceeds the product value. In addition to transportation and labor costs, other factors contributing to the high cost of returns include processing, discounting and liquidation losses. A customer-centric return policy is a competitive differentiator and has become increasingly important to attract and retain customers.

Many retailers—especially those with a thin supply-chain network—use third-party logistics providers (3PLs) for return management. This has contributed to 3PLs accounting for 36% of large industrial leases (100,000 sq. ft. and above) in 2022 year-to-date, up from 30% last year. 3PL activity will continue to grow as retailers outsource reverse logistics to reduce costs and avoid the challenge of finding warehouse space in record-tight markets with limited labor.

Figure 7: 3PLs Capture Larger Share of Industrial Leasing Market

Source: CBRE Research, August 2022.

Although faced with many obstacles, the retail industry has been remarkably resilient and should fare well during the 2022 holiday season. Holiday shoppers should be out in force at prime retail centers, utilizing mobile technology for on-the-move product research and to make purchases at the time of their choosing.