Consumer spending is expected to rise this holiday season, but the benefits won’t be evenly spread. Mainstream retailers, under pressure from Amazon and off-price stores, are shifting risk to brands.

U.S. retailers are fast approaching the most important part of their year — starting with Black Friday and Cyber Monday and then rolling on to the rest of the holiday season. It’s always a critical period, but the stakes are arguably even higher this year after a disappointing performance in 2015. If projections pan out, this year could be a much better one.

Retailers are taking on less risk this year

Last year retailers underperformed because of the unseasonably warm weather in November and December — it was 72 degrees on Christmas Eve in New York City, a full 32 degrees higher than the historical average. The warm weather across much of the country led to underwhelming foot traffic at malls and particularly weak demand for cold weather clothing. This resulted in retailers being left with excess inventory — well into 2016 — that they were forced to discount in order to clear.

This year retailers have reacted by being far more conservative with their inventories — a key part of their efforts to shift more business risk onto brands. With lower inventories, retailers won’t be left as exposed if sales disappoint once again this holiday season. This strategy puts more pressure on brands to provide extra inventory if and when sales are strong — brands, in effect, are being forced to carry more of the risk (and cost) of matching consumer demand or are faced with leaving potential revenue on the table.

If forecasts are an indication, retailers should be in better shape

Despite the conservative approach, this year could turn out to be better for retailers. The National Retail Federation forecasts that consumer spending will rise by 3.6% this holiday season, well above the 10-year average of 2.5% and slightly ahead of the seven-year average of 3.4%, since the economic recovery began in 2009. Consumer confidence surveys are also heading in the right direction, with higher levels in 2015 and 2016 than in the previous four years.

cti_consumersentiment

The Index of Consumer Sentiment
Source: University of Michigan Consumer Sentiment Index as of October 2016

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