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Highlights from the NRF’s State of Retail Forecast

The National Retail Federation (NRF) issued its annual forecast during the third State of Retail & the Consumer virtual presentation last week. 

The organization anticipates retail sales growth between 4 and 6 percent, to between $5.13 trillion and $5.23 trillion in 2023, excluding gasoline, motor vehicle, and restaurant sales. This is above the pre-pandemic average annual retail sales growth rate of 3.6 percent.

Economic Factors At Play

This year, more expensive credit, higher interest rates, inflation, and slower job growth will likely decrease consumer spending. For this reason, the NRF expects full-year GDP growth to either stay flat or rise to around 1 percent—half the rate recorded in 2022. Household finances remain healthy, but we’re seeing a rise in delinquencies, debt-servicing ratios, and credit used to offset inflation, said Gregory Daco, chief economist, EY-Parthenon at Ernst & Young LLP. Higher income earners will spend with more discretion and lower income earners with more caution. The credit crunch from banking stress will further weigh on consumer and business activity.

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He said the labor market is also cooling, indicating that a recession is more likely. But it is unlikely to match the severity of prior downturns. While we might see income growth and consumer spending stall or drop, a massive pullback in consumer spending in the next few months probably won’t materialize, Daco said. 

At the end of the day, the key will be the labor market, said Kathy Bostjancic, senior vice president and chief economist at Nationwide Mutual. 

“If labor gains start to moderate and in the second half of the year decline, that paints a very different picture,” she said. “It’s still really income that dictates consumer spending at the end of the day.”

Despite the pandemic, supply chain woes, and inflation, retail is proving itself a resilient industry.

Matthew Shay
Matthew Shay

“Through all those challenges, retailers have done what they do best: adapt and change to meet the evolving needs of consumers,” said Matthew Shay, president and CEO of NRF.

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Let’s Get Phygital

Jonathan Silver, CEO and founder of Affinity Solutions, said two things made consumer behavior different during the pandemic. First, behaviors, such as online shopping, were forced on us because we had to stay home. Second, stimulus checks issued in 2020 made people shop more. 

The outcome of this is that consumers reverted to some pre-pandemic behaviors. This is evidenced by the fact that pre-pandemic, 25 percent of total shopping spend occurred online. By the end of 2020, it was at 29 percent. Right now, it’s at 30 percent.

The NRF forecasts non-store and online sales growth between 10 and 12 percent year-over-year, from $1.41 trillion to $1.43 trillion. Brick-and-mortar stores still account for 70 percent of total retail sales. This year’s consumer will increasingly toggle between online and in-store shopping thanks to “omni” technology or, in buzzword-speak, “phygital” capabilities. 

Whatever you call it, connecting brick-and-mortar store operations to online capabilities increasingly offers a fully immersive, channel-less consumer experience, said Pashmeena Hilal, research manager and thought leadership lead for the retail sector at Google. For example, consumers use a retail brand’s app while shopping in-store or buying online and picking up in-store (BIPOS). 

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“If you think about the sheer amount of real estate as well as employees and just overall how much these retailers are placing in that experience, it’s true to say then that this omnichannel digital store is very much a concept that will continue to stay,” she said.

What this means going forward, Silver said, is that it will become challenging even to make a distinction between online and in-store. 

“You’re going to walk into a store, and the store may take on an entirely different experience for one person versus another,” he said. “That’s our prediction over the next year, year-and-a-half, two years.”

With consumers no longer loyal to specific channels, we’ll see more non-linear retail shopping experiences turn the traditional sales funnel on its head. 

“It’s not that one experience is better than another,” Hilal said. “It’s just we’re able to put together all of these experiences to ultimately buy what it is we’re looking to buy, whether that’s furniture or a red t-shirt.”

It’s something on the mind of Haio Barbeito, president and CEO of Old Navy. 

“We see customers going to both channels now in a more balanced way,” he said. “That is why we are focusing on making sure that we ignite that experience in the stores.”

Anushka Salinas, president and COO of Rent the Runway, said the company made a concerted effort to add automation to its operations during the pandemic to prioritize the customer experience. 

“During COVID, we also took the moment of not having a lot of volumes in our warehouses to install a lot of automation, things like RFID, to drive a ton of efficiency in the warehouse so we’d be ready to scale,” she said.

Value Is the New Loyalty

Not only are consumers no longer bound to specific shopping channels—they’re also finicky when it comes to brands in general. 

Given the current economic climate, consumers are looking for the best deal and are willing to buy from other brands with comparable products.

“We’re seeing people that are looking for deals more often than they’re not; they’re going from higher-priced versions of the same product to off-brand or generic products,” Silverman said.

Salinas said this is happening even among Rent the Runway’s higher end shoppers. While her customers have been less impacted by macroeconomic events, she said they’re still more cost-conscious than ever.

“That is leading (the customer) to be very, very selective about where and how she is spending her money,” she said. “She has very high expectations.”

She said that Rent the Runway did see an impact on their customers after a price increase last April, which highlights the need to deliver more value for every dollar a customer spends. The company is now retooling its subscription service to offer 25 percent more value for the price point. It’s the beginning of a series of changes the company plans to make to strengthen customer experience this year. 

Today’s consumers are also more focused on buying what they need rather than what they want right now, Barbeito said. 

“The pressure of inflation on gas, on groceries, and really on interest rates is really putting that pressure on the consumer,” he said. “That’s why we see that they’re more price-sensitive.”

The Work Ahead

Hiring and retaining talent took a lot of work for retail and other industries during the pandemic. But Salinas said the mood amongst employees at Rent the Runway is now one of enthusiasm, even amidst ongoing economic uncertainty. 

“It’s really amazing to see how excited employees are about the work we have ahead of us now that we’ve gotten past a lot of the cost management side, restructuring the financials and the foundation of the business, and now squarely thinking about investing in the customer experience,” she said.

Even though Old Navy experienced quite a bit of turnover in recent years, Barbeito said he’s encouraged by recent improvements, especially in the turnover rate among employees there fewer than 90 days.

“We just need to make sure we get better and better as employers,” he said. “They will stay if we provide the right opportunities.”

You can watch the full recording of the State of Retail & the Consumer presentation here

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