Why retail remains stronger than headlines suggest

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[00:00:46] Bill: Welcome to Retail Gets Real where we hear from retail's most fascinating leaders about the industry that impacts everyone everywhere, every day. I'm Bill Thorne from the National Retail Federation, and on today's episode we're talking to NRF's Chief Economist and Executive Director of Research, Mark Mathews. We're going to talk to Mark about consumer spending and sentiment heading into the summer and beyond. Mark, welcome once again to Retail Gets Real.

[00:01:14] Mark: Thank you for having me, Bill.

[00:01:15] Bill: Now, I've said often and I think it's become a mantra that nobody is closer to consumers than retailers and nobody's closer to retailers than the National Retail Federation. So I always feel like that gives us the opportunity as well as the credibility to talk about the consumer. So what do you consider to be the current health of the consumer?

[00:01:41] Mark: Yeah, and I think you're absolutely right. I spent a lot of time watching the consumer and listening to them and then seeing what they do. I think the health of the consumer right now is good. We continue to see strong spending. If we look at the retail monitor data, retail monitor is our own monthly release of retail sales, seven months in a row of positive numbers. And this is despite all the stuff that's going on.

[00:02:04] So I think things are good right now. I worry a little bit when we look into the future because the points right now are good, but if we think about the trend, in some cases the trend doesn't look so good. So if we look at unemployment, if we look at credit card delinquencies, a lot of these are trending in the wrong direction. So at this point in time, it looks okay, but if the trend continues, the trend is not our friend.

[00:02:31] Bill: Right. I did see the other day that consumer sentiment has reached an all time low, a record low. So how is this playing out? If consumer sentiment's so low and yet sales remain consistent and high, how do you explain that?

[00:02:49] Mark: It's a paradox, isn't it?

[00:02:50] Bill: It really is.

[00:02:51] Mark: But what we've seen since the pandemic is a complete dislocation between sentiment and spend. I've seen people refer to it as griping and swiping, and that's what the consumer is doing right now. There are a lot of studies that show that consumers react very, very strongly to certain things like gas prices, for example. It damages sentiment.

[00:03:12] And honestly, if you look back over the history of the last few years-- I've been around for a while-- I don't think I've seen a five- or six-year period where there has been this much thrown at people. Think about the pandemic, you think about the high inflation after the pandemic, the current conflict in the Middle East. It's just one thing after another.

[00:03:32] And when we look at economic news, there's a study that was done recently that shows that economic news sentiment is five times more negative than it has been in the past. So consumers have a lot coming at them, but the reality of the matter is that fundamentally, financially, they're not in bad shape. So we have to separate this psyche from the ability to spend, and consumers have had the ability to spend and they've been spending.

[00:04:00] Bill: Yeah. You had indicated today, earlier when we were talking that there is this concern now, however, that with inflation reaching its level and wages not necessarily keeping up, that that may be a precursor to some more difficult times.

[00:04:18] Mark: Yeah. I think one of the pillars of financial strength, one of the things that allowed consumers to continue to spend despite their low sentiment has been the fact that we've had wage growth that is higher than inflation, and that is starting to dissipate.

[00:04:34] And I mentioned the pandemic. I mentioned five or six years ago, all these challenges that people have had, we've had something along the way that has allowed consumers to spend all of that while.

[00:04:44] So if we go back to the post pandemic government stimulus, consumers had excess savings. And while inflation was really, really high, those excess savings allowed the consumer to continue to spend. Once they spent through those excess savings, inflation had dropped and wages had risen. So they had that buffer of real wages to continue to spend.

[00:05:04] So if we think about now, excess savings are out the window. If inflation continues to be higher than wages and we have negative real wage growth, then I think that becomes a little bit problematic.

[00:05:18] Bill: Well, I think also, as you look at the gas prices, and we've seen them rising and rising and rising, and we've been hearing about it, you can't turn on the TV or listen to the radio without somebody commenting about it. How do you expect that to impact consumer spending?

[00:05:36] Mark: So the saving grace for the last few months, when I talk about retail sales being really strong is that the Working Families Tax Cut Act meant that we had much higher tax refunds this year than last year, an extra $50 billion thrown at the consumer for the last few months. And that has been, again, another spending stimulus.

[00:05:58] Now, if we look into the summer, things are definitely a little bit more challenge. I mentioned to you that if inflation continues to be high and wage growth continues to be low it's a problem. I worry a little bit less about retail than I do about other industries because what we've seen over time is that retailers-- consumers, sorry, have protected spending, when it comes to retail, especially when it comes to spending on their loved ones.

[00:06:25] If we go back over the last couple of years and we look at these spending events like Mother's Day, Father's Day, valentine's Day, every single time we have seen almost record spend, if not record spends.

[00:06:37] Bill: It's Amazing. Yeah.

[00:06:37] Mark: So as we head into the summer season, back to school spending is one of the biggest events for retailers in the year. I really believe that consumers are probably going to cut back in other areas. They might travel less. They might drive less. They might spend a little less on eating out.

[00:06:54] What I do believe is that they're going to protect that spending on family. When it comes to spending on your kids and buying them the things that they need for school, that is an area of spending that has a moat around it.

[00:07:06] Bill: Yeah. So we often hear about, and I'm not like you, financial guy, so when people talk about the K shape economy, what does that mean?

[00:07:19] Mark: The thing is that economists keep on coming up with different shapes, right? I saw people talking about the C shape and the E shape. So you're not alone in being a little bit confused by what that means, but what it really means is that the higher-end consumer is performing a lot better than the lower-end consumer.

[00:07:40] And we see that when we look at the data across almost all retail sectors. We see higher spending growth amongst higher incomes than we do amongst lower incomes. There's a piece of research that was done last year, and this is done by Moody's showed that the top 10% of earners used to account for 37% of total spend back in 1990. They now account for 50% of total spend.

[00:08:07] Bill: Wow.

[00:08:07] Mark: So we're living in an economy where higher income households are driving spending more and more, and in some cases you can see weakness in the lower income households. And that's completely obfuscated by the fact that higher income households are actually doing quite well based on financial markets, based on higher wage growth.

[00:08:26] So the K shape is really about those households in a way, hiding what's happening amongst lower income households. So when we look at the economy more broadly, we see all these strong numbers, but we have to recognize that underneath the hood, there's different things that are happening to different segments of the consumer.

[00:08:47] Bill: And does that contribute-- I guess a lot of times, what people try to put together is that these type of economic programs, or not economic programs, but that this type of scenario contributes to the overall feeling like the economy's not doing well, people aren't doing well. The future looks more bleak than maybe it is, but the retail industry is pretty resilient. The consumer is pretty resilient. So if people were to focus on how the retail sector is doing, what they're doing and maybe what they need to do, what would that be?

[00:09:27] Mark: I think if we look at the retail industry over time, there's nobody better at sussing out what's going on with the consumer. I really do think that if we look at the consumer now-- there's this old saying, consumer is king, right?

[00:09:41] Bill: Sure.

[00:09:42] Mark: If anything that is more true now than it ever has been. It used to be that as a retailer, the customer came to you. You had to do things right, but the customer came to you. We live in a world now where the retailer has to go to the customer.

[00:10:00] When we look at Gen Z, Gen Alpha, they behave in a completely different way than you or I did when we were younger. And they live on social media platforms and they want to transact wherever they are.

[00:10:14] And retailers have to be able to go out and find these people where they are and create a seamless experience, not just interest them in the product at the right price, but allow them to buy that product where they are.

[00:10:27] Bill: Right. I assume AI is going to have a role in that.

[00:10:30] Mark: Yeah, absolutely. And I think that's something that-- and not just retail, but all industries are having to grasp how that's going to impact. But I think definitely, we all see it. When you Google something, five years ago was a very different experience than it is right now.

[00:10:47] When I Google something, I have so much stuff flying at me. Is it AI? And how do we measure that? And how do retailers make sure that they're showing up in this new form of search result.

[00:10:59] Bill: Yeah. So you've been around the National Retail Federation for a while. As a matter of fact, I think we just celebrated your 10th anniversary at NRF. And you were on Retail Gets Real very early on in your career here. So you've seen some changes. What surprised you?

[00:11:17] Mark: I think that retail is one of the most misunderstood industries out there, and I've worked in a few industries, so I have something to compare. But when you think about retail workers-- and I think it goes back to the fact that we interact with retail on a daily basis. So we all think we're experts when it comes to retail. We all think we understand the industry, but we're just seeing one facet of it. We're seeing people in stores. So everyone thinks that all retail workers are frontline in store workers.

[00:11:50] Bill: Folding sweaters at the gap in the mall.

[00:11:53] Mark: Exactly. That's only about 45% of the workers in our industry. Last year we hired more PhDs than a lot of other industries. There are so many different roles out there, but it's not just the employment. It's things like retail Armageddon that just seems to keep on coming back over and over again.

[00:12:13] We now have more stores than we have ever had in the retail industry, and yet people still talk about the death of the store and how e-commerce is killing the store. And the reality of the matter is, frankly it's all part of a coherent ecosystem. Stores matter. Young kids still like to shop in stores.

[00:12:34] So I think there are just so many misperception and misconceptions about what's going on in our industry. I also think that retail is so much more dynamic than I ever thought it was, the amount of change in this industry, the speed of change in the industry.

[00:12:53] Think back to the pandemic. You saw what happened during the pandemic. We had to completely change our buying behavior in no time flat, and retailers were able to adapt and cater to consumers in a way that befitted the situation. So that dynamism, that blows my mind how quickly the same industry shifts.

[00:13:17] How you can go from a zero revenue business to a billion dollar revenue business in what used to take 30 or 40 years, you do in a year now. So it's just this constant evolution and change. It's fascinating.

[00:13:30] Bill: Well, I've always said, I mean, at the end of the day that is the commonality. It runs through the bloodstream of retail. And that is change. You can't avoid it. You can try to resist it, but if you do, you'll fail. You have to embrace it and invest others in it, and you can succeed.

[00:13:49] Mark: And I think, going back to this notion of bankruptcies, and everyone being a retail expert, when a retail company goes bankrupt, it makes the news. You can lose several billion-dollar energy companies in Texas and it doesn't make a blip, but when these retail businesses go bankrupt, it's headline news.

[00:14:11] And if you have a few in a row, people start to feel like, oh my goodness, there's Armageddon happening. What they're not noticing is that those companies are going out of business because they haven't been able to keep up with the times. They have not been able to keep up with the consumer and the change.

[00:14:26] And you're constantly seeing this evolution from the bottom. These companies that are changing the way that we buy, the way that we think about buying, and they are taking market share from people who aren't able to move quickly enough.

[00:14:40] Last week I saw another one, 40,000 stores going to close. You know what? Doesn't matter how many stores are closing when retail sales are growing. That's the metric we should be looking at. Stores are closing. I don't know any retail CEO that wouldn't trade revenue growth for store numbers.

[00:14:58] So we're looking at the wrong metric. We're measuring things in the wrong way. And this comes back to this notion that it's a misunderstood sector. It's misunderstood by a lot of people who should be paying better attention. A lot of people sitting on Wall Street who should be measuring this industry better because it's no longer about same store stills. That that doesn't matter. It's really about the customer and catering to that customer.

[00:15:22] Bill: Yeah. Those are your finance bros, I guess, right?

[00:15:25] Mark: That's correct.

[00:15:26] Bill: For those just starting careers, what makes a good economist?

[00:15:31] Mark: You have to have that inquisitive mind and understand or want to understand how things are put together, how things work. So when you think about people who want to understand how things work, like a mechanic taking part in an engine, or a scientist understanding how a disease or a pandemic happens, it's the same thing with economics.

[00:15:55] If you want to understand what makes this financial world go round, economics is the answer to that. It's like all these data points. We hear about them, CPI, unemployment, all these different things are like puzzle pieces.

[00:16:11] And to understand where things are going, you need to take those individual pieces of the puzzle and put it together. And I think that's what it takes to be a good economist. You need to have an interest in understanding how things work and putting together that puzzle and figuring out where things are going.

[00:16:29] Bill: It's not easy.

[00:16:30] Mark: It's not easy. It takes a lot of work, but despite what a lot of people think about economists, it can be fascinating. It can also be dry. Don't get me wrong, but I think people think about economists and the world of financial services, which is a lot sexier as two different things.

[00:16:54] I come from the world of financial services, and I'm also an economist, and I think those things were our hand in glove. And I think it can be exciting.

[00:17:05] Bill: So is it e-conomy or economy?

[00:17:07] Mark: I say economy. I say economy, but I pronounce a lot of things weird. Yeah. I lived in England for 17 years. I grew up most of my life in other countries. So yeah, I do have some pronunciation idiosyncrasies to say the least.

[00:17:23] Bill: I appreciate your self-awareness.

[00:17:26] Mark: Thank you.

[00:17:27] Bill: Mark Matthews, it is always a pleasure talking with you, and it's an honor to be working with you. Thank you for joining us today.

[00:17:35] Mark: My pleasure. Thank you.

[00:17:37] Bill: And thank you all for listening to another episode of Retail Gets Real. You can find more information about this episode at retailgetsreal.com. I'm Bill Thorne. This is Retail Gets Real. Thanks for listening. Until next time.