Testing the crystal ball in the age of COVID... here are 5 predictions for retail in 2022

It was the best of times, it was the worst of times.??It was the age of rampant customer demand.??It was age of constrained supply.??It was the epoch of bigger paychecks and savings account balances.??It was the epoch of the worst inflation in 30 years.??It was the season of vaccines and effective treatments against COVID-19.??It was the season of Omicron, shuttered restaurants and cancelled flights.??It was the spring of hope.??It was a winter remarkably similar to the year before.??We were all trying to hire staff, and we were all coming up empty.??

It was the year of Our Lord two thousand and twenty-one, and even Dickens couldn’t have come up with more paradoxes than we experienced.??Fortunately, it’s over.??Wait… didn’t we say the same thing last year?????

The time we live in has been one of the most tumultuous and unpredictable in recent history.??Trying to predict what will happen next week is challenging - let alone what will happen in 3-5 years - which makes planning and decision-making in retail that much harder.??But as we turn the calendar once again, it’s time to dust off the crystal ball and look at what changes to expect in retail in 2022.??Here are my top five predictions that will re-make retail in the new year:

1.??????Expect a slow-down in consumer spending?

Consumers are fickle beings and notoriously hard to predict.??We’re in the middle of one of the biggest consumer spending booms in history.??Total retail sales through November were up over 18% year-over-year, with sales at general merchandise stores up almost 12%.??Bank accounts are flush.??Average wages are up 5% just in the last 12 months, with a recent survey indicating they will go up another 4% in 2022.??But prices are also up and outpacing wage gains.??When you account for the fact that prices for all of the goods and services we consume rose by 6.8% from a year ago, it means the average worker can actually afford less now than before, despite earning a higher nominal wage.??Putting gas in our cars and heating our homes is now 33% more expensive than it was in 2021.??The same bag of groceries costs 6% more this than last year.??Rents are up over 11% for the year.

The Fed is now shifting gears from saving us from the next Great Recession to staving off worsening inflation, and has announced its intention to speed up the end of bond-buying that flooded the economy with money and raise interest rates three times in 2022.??Consumer confidence has been on a roller coaster ride, falling off a cliff in 2020, then rebounding in early 2021, only to dip again late in the year.??Consumers are realizing that their paycheck doesn’t go as far as it used to and their fixed costs have increased significantly. Retailers should expect a pull-back in spending on discretionary items.?

2.?????Travel and restaurant spending will rebound to “normal” levels

Spending on leisure travel cratered in 2020, dropping by -32% with travelers spending nearly $300 billion less than the year before.???Similarly, spending at restaurants fell -24% year-over-year or a drop of a little more than $200 billion.??The aggregate impact of lockdowns and changes in consumer behaviors mean that there was $500 billion in spending diverted to other things.??

Both industries turned the corner in 2021, picking up steam as the year went along.??Restaurant spending is projected to hit $600 billion this year, up 20% from last year and down only 8% from 2019.??Leisure travel is poised to end the year +25% vs. 2020 and only -14% off of pre-pandemic levels.??In fact, spending on domestic leisure travel has largely returned to 2019 levels already with a strong holiday travel season.??Industry groups for both sectors are predicting more gains in 2022, with leisure travel returning to historical highs and spending at restaurants picking up another $70 million or +10% over this year.

Obviously, this recovery is closely tied to what lies ahead in our battle against COVID-19, but retailers should expect that much of the “donated” spending on goods will return to these service sectors again in 2022 with a lot of consumers eager to fill up their Instagram accounts again.??

3.?????Self-service will be more important than ever for in-store experiences

As I mentioned in an earlier article, there just aren’t enough people to fill all of the open jobs in retail right now.??The labor force participation rate fell to nearly 50-year lows during the pandemic, and while recovering a bit in 2021, remains at levels not seen since the late 1970s.??Academics can debate the reasons for this, but consumers feel it almost every time they set foot inside of a store.??On a recent visit to a furniture retailer who shall remain anonymous, I spent 40 minutes waiting to return an unwanted shelf and then spent another hour waiting to pay for a new purchases.??Two hours at the store – 85% of that time spent waiting in line.??The reason???Over half of the registers were left unmanned and there was no self-service option – remarkable because the rest of the shopping experience at this retailer is largely self-service.

While many retailers have charged ahead in areas like self-checkout and easier returns, many are still lagging behind.??Most customers are used to doing more themselves in stores these days, with 75% of customers in a recent survey saying they used self-checkout all or some of the time.??Amazon has set the standard for in-store returns, allowing customers to complete most of the process on their phone or laptop in advance with only a simple scan of the barcode required in the store.???Improving the store experience means more loyal customers and increased spending, and reducing pain points is a great place for many retailers to start in 2022.??Expect more retailers to invest in making their service more self-led in 2022.??

4.??????New store concepts will continue to proliferate

In 2020, more than 11,000 US retail stores closed, with less than 3,400 opening, a net loss of more than 7,600 storefronts.??2021 saw marked improvement in this area, with as many stores opening as closing in the US, roughly 5,100 in each category.??While it looks like we’ve reached equilibrium this year in terms of number of stores, don’t expect the stores themselves to remain the same.??

Retailers started testing more new concepts in 2021 than any time in recent memory.??Target and Kohl’s plowed ahead with new beauty partnerships that threaten to take more share away from department stores.??Macy’s launched 5 new small format stores in Dallas and Atlanta, bringing must haves and store pick up and returns closer to their customers.??Toys R Us is back with a 20,000 square foot flagship and a new partnership with Macy’s.??Wayfair, the largest online home furnishings store, announced it’s going omnichannel in 2022.??And in a little over a month, Amazon has introduced “Just Walk Out” technology in their 6th?large format Amazon Fresh grocery store in California.

Whether it’s to get closer to customers, becoming more convenient, capturing more share of wallet with existing customers or brand-building, expect a proliferation of new store concepts in 2022.

5.??????Bricks and clicks remain joined together

In early March 2021, Saks announced that it was splitting up its physical and e-commerce retail into two separate companies, valuing the new online company at $2 billion.??In recent months, both Macy’s and Kohl’s have announced they are exploring similar splits based on increasing pressure from activist investors.??Jana Partners claimed in an October investor presentation that Macys.com was worth $14 billion, twice as much as the combined enterprise at the time.??Similarly, Engine Capital said that Kohls.com is worth $12 billion, again nearly twice as much as Kohl’s market cap at the time.

While it might work for Saks, with its brand punching well above the 40 physical stores it operates, splitting up e-commerce from physical retail for retailers with national footprints of hundreds of stores seems unlikely at best.??The biggest competitive advantage that retailers like Macy’s and Kohl’s have is their integrated retail portfolio, which allows customers to seamlessly browse, purchase, and return merchandise in whatever channel suits them best.??It also allows these retailers to take a holistic view of their inventory and ship out online orders from the least productive locations first, thus avoiding major gluts in any one location and getting goods to consumers faster without major investments in new distribution facilities.??Finally, it eliminates pricing friction that existed in a pre-omnichannel world, where customers expected to pay the price they saw online and then were either pleasantly surprised or angry that the store charged a different price.??Given that omnichannel customers are generally the most loyal and generous with their share of wallet with retailers, there’s a lot of revenue and goodwill risk involved in splitting operations, not to mention the costs of building out two separate teams to run these operations.

Expect the noise to fade in 2022 as the facts come out from the retailer studies, and omnichannel retail to remain firmly in place under one umbrella.