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December 15, 2021
2021 has been a challenging year for the retail industry. Contending with a global pandemic, supply challenges and store closures has changed the face of shopping for many, but is the “new normal” going to last? Do further changes lie ahead and how will the retail sector adapt?
In this industry outlook, J.P. Morgan Research explores consumer spending habits and upcoming trends through three key lenses: Holiday shopping, the rise of e-commerce and key trends that will shape the future of retail in 2022 and beyond.
How Much Are Holiday Shoppers Spending This Year?
Record sales growth is expected this holiday season, with the J.P. Morgan annual holiday forecast predicting growth of +13% year-over-year (yoy), up from 2020 growth at 7.6% and 2019 growth at 4.3%, meaning 2021 looks set to be a much stronger year for holiday retail. Consumer spending in November, per proprietary Chase credit card data, accelerated around 220 basis points (bps) compared to October (relative to 2019). Key drivers include strong consumer confidence, increased disposable income, resurgence of brick and mortar retail following pandemic constraints and an additional shopping day between Thanksgiving and Christmas (30 days vs. 29 days last year).
“Bigger retailers will reap the benefits more than smaller ones given their ability to mitigate supply chain challenges, with healthy inventory levels across large retail players such as Walmart, Target and Costco,” said Christopher Horvers, Broadlines and Hardlines Retail Analyst.
Record holiday season: 13% core retail sales growth expected November-December
Core retail sales growth during the holiday season has been largely positive since 2000, with the exception of 2008, when it was -7.1%. Growth is expected to reach 13% year-over-year in 2021, up from 7.6% in 2020 and 4.3% in 2019.
Holiday shopping was underway early this year and retail sales accelerated in October, driven by fears over product availability come December. For retailers, demand is high, so limited holiday season promotional risk should more than offset challenges posed by transportation issues and supply tightness, even though freight pressures are likely to accelerate in the fourth quarter (Q4) of 2021.
“Demand is exceeding supply. That said, there’s ample inventory on hand to see retailers through to the best holiday season on record. We’ll see themes from previous years continuing and as a whole, we’re likely to see very strong numbers coming out of this holiday,” said Matthew Boss, Head of Department Stores and Speciality Softlines at J.P. Morgan.
“With all eyes on December, Weather Trends International is forecasting continued dryness which is a key traffic driver. Christmas week itself is setting up to be the coldest in 11 years in both the U.S. and Europe. A cold snap into Christmas supports our view that there is the potential for a ‘double-dip holiday’” Boss added.
The sectors least affected by holiday shopping include home improvements and autoparts. Christmas matters most in the discretionary category and Q4 has the largest impact for speciality retailers such as Best Buy, Bed Bath & Beyond, Dick’s Sporting Goods, Ulta Beauty and Williams-Sonoma, as well as apparel retailers.
Matthew Boss, Head of Department Stores and Speciality Softlines
Looking Beyond Black Friday
Consumer discretionary spending on Black Friday increased by 17% vs. 2019, despite brick and mortar channel constraints on peak holiday volume days relative to 2019. Looking broadly across retail, Amazon, Boot Barn, Allbirds, Five Below and PVH have all cited strong Black Friday sales and good holiday momentum.
The early start to the season will likely lead to a softer ending, with January even leaner given the lapping of stimulus last year.
Christopher Horvers, Broadlines and Hardlines Retail Analyst
Regional Retail Spotlight: Singles Day Spending in China
This year’s Double 11 or “Singles Day” shopping holiday saw China’s e-commerce leaders Alibaba and JD achieving record sales. However, e-commerce growth was lackluster compared with previous years which was not unexpected against a backdrop of greater regulation in the e-commerce space and weakening sentiment amongst China’s consumers.
Singles Day 2021 in numbers:
- Gross merchandise volume (GMV) between November 1 and November 11: 540 billion Chinese yuan or $85B, up 8% yoy but lower than the 26% growth seen in 2020
- 290,000 new brands took part
- GMV (from 8pm on October 31 to November 11, four hours ahead of last year): 349 billion Chinese yuan or $55B, up 29% yoy and much closer to last year’s growth of 33%
- 31 brands surpassed GMV of 1 billion Chinese yuan, including Apple at over 10 billion Chinese yuan
Andre Chang, China E-Commerce Analyst
The Future of E-Commerce
A strong online holiday season is expected despite physical retail making a comeback. U.S. online holiday sales are expected to grow 14.5% yoy, even after the outsized +32% yoy pandemic-driven growth seen in 2020. Chase credit card data indicates U.S. discretionary card-not-present spend has grown +23% so far this quarter compared to the same timeframe last year. E-commerce penetration of adjusted holiday retail sales is estimated to be 21.2%, relatively in line with the 20.9% seen in 2020.
Chase credit card data, e-commerce discretionary card-not-present spending growth
According to Chase card data, U.S. discretionary card-not-present spending has grown in 2021, peaking in March 2021 before tapering through August 2021.
COVID-19 changed spending habits and the pandemic pulled e-commerce forward by around three years in 2020, driving +32% yoy growth. Likewise, U.S. e-commerce growth has continued to outpace average adjusted retail spend, growing at a +17% compound annual growth rate (CAGR) vs. 4%. In the U.K., total online penetration across all non-food categories was 42%, 10 percentage points higher than two years ago. Footfall for the month was also down 14%.
Looking ahead, e-commerce is expected to continue to gain share, with 30%+ e-commerce penetration predicted by 2026. Amazon and other retailers can further unlock underpenetrated product verticals such as grocery, apparel/accessories and furniture/appliances/equipment, creating the potential for 40-50% penetration long term.
Around 30% U.S. e-commerce penetration is predicted by 2026
E-commerce penetration is the U.S. is growing steadily, from 7.9% in 2012 to a predicted 31.2% in 2026. Penetration increased 400bps between 2016 and 2019.
E-commerce vs. Retail
Advocates for brick and mortar retail believe that while e-commerce has taken three steps forward, it is likely to take one step back. E-commerce mix could decline in 2021 for three key reasons:
- The gap between core retail sales growth and e-commerce-only growth has steadily receded since last May and took a step function down in March toward more normal levels as vaccination rates rose.
- Online penetration generally receded yoy in Q1 2021 for retailers within J.P. Morgan’s coverage. There was particular enthusiasm from Target and Walmart on the return to stores.
- Companies like Best Buy and Ulta Beauty are explicitly guiding for penetration declines yoy.
While long-term digital penetration is likely to be above 30%, 50% seems high given this consumer climate.
“This is especially the case due to inflation. We would see it benefitting dollar stores such as Dollar General, as well as off-price retailers,” Boss added. “Looking ahead to 2022, it’s all about value and convenience in brick and mortar retail,” said Boss.
Telling the Story of E-Commerce Through Amazon Statistics
What does the world of e-commerce look like from the point of view of the biggest U.S. online retailer?
- Amazon’s share of U.S. e-commerce rose to 39% and sales accounted for almost 8% of total adjusted retail sales. It is believed that Amazon will surpass Walmart as the largest U.S. retailer in 2022. “This is the battle of the “everything” stores” said Doug Anmuth, Head of U.S. Internet Research (Large Cap/Mid and Small Cap). “Walmart is the original everything store and is now leveraging its specific asset base and dominance in grocery while taking numerous pages from Amazon to drive alternative profit pools. However, Amazon is still expected to become the largest U.S. retailer in 2022 with strong top-line growth at scale, the Prime flywheel and strong 3P seller growth.”
- J.P. Morgan Research estimates the Prime subscription is worth around $1,000/year and expects the pandemic may have delayed a Prime price increase in 2020, which could potentially come during 2022.
- J.P. Morgan Research estimates Amazon is most underpenetrated in jewelry and watches and flowers/greetings, both with around 25% share. It indexes highest in books and magazines with 80% share and consumer electronics at 50% share.
The Future of Retail: Industry Outlook for 2022 and Beyond
2022 promises to be an important year for retail. It will likely be a defining one for e-commerce, in particular for Amazon and the split between online shopping and brick and mortar retail will come into focus with greater freedom from the retail constraints posed by COVID-19. Here are some of the key retail industry trends and themes to watch in 2022.
Three Retail Trends to Watch in 2022
The worst may already be behind us and multiple macro indicators are pointing to a thaw in supply chains, with U.S. and Asia backlogs reversing in recent weeks. One view is that supply and labor shortages will be temporary, reversing with a decline in COVID-19. However, it may take some time for improvements to be felt everywhere.
“Supply chains are gaining some fluidity but there’s no silver bullet. There have been several carrots to move freight faster, such as rebates and more hours, but it looks like the sticks – congestion fees – have had the biggest impact so far. The queuing system changed mid-November so the total number of ships coming into ports is actually up, nearing an all-time high. The ships are just queuing up further offshore now,” said Brian Ossenbeck, Airfreight and Surface Transportation Analyst at J.P. Morgan.
J.P. Morgan Research also expects retail inventories will take six months minimum to build back to a normal level.
“What needs to happen is for port congestion to ease, particularly on the Transpacific lane. Over time this will likely be caused by consumption patterns normalizing and a return of U.S. trucking capacity, helping retail inventories climb from their current record low level vs. sales. Limited container shipping capacity is expected in 2022 given the two to three year lead time on new ship building. Longer term, as the congestion eases, there is a lot of capacity coming in 2023 and 2024 as shipping lines have been ordering more ships. This will tend to put downwards pressure on freight rates in the mid-term,” said Samuel Bland, European Transport Analyst.
In Q1 2022, J.P. Morgan forecasts a drop of around -6% yoy in disposable personal income as COVID-19 stimulus winds down, with growth following this. For total consumption, an 8% increase is forecast in the first half of 2022. By Q4 2022, consumption is expected to largely match income growth at 4% which is indicative of normalized savings levels.
Sporting goods share is 30%+ above pre-COVID levels, while home furnishings and consumer electronics (PCs, tablets and TVs) are up 20%. With mounting transportation costs applying increasing pressure, there is more risk of gross margin disappointments in Q4 2021 and Q1 2022. While heavy import categories such as sports, furnishings and electronics appear to be ahead of the costs, there is still the risk of a flattening earning revision curve.
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