Retailers face a new threat this holiday season: wanderlust.
Americans are returning to the skies, filling hotels, teeming with theme parks — and showing a willingness to spend more on travel.
This leads to the fiercest Christmas battle for consumer wallets since the Covid pandemic as persistent inflation weighs on household budgets already during retailers’ crucial quarter. Retailers are juggling other challenges: sell off excess inventory, try to attract consumers who have already bought heavily during the pandemic, and woo shoppers who have become more price-conscious.
It was a year of recovery for the travel industry. Delta Air Lines, Mastercard and Airbnb are among the companies enjoying lucky breaks. Other companies have also signaled a shift toward experiences and services. living nation reported double-digit growth in attendance at theaters, arenas, stadiums and festivals. Starbucks said customers are looking for expensive drinks like Pumpkin Spice Lattes.
“The trend to spend on experiences continues,” Michael Miebach, CEO of Mastercard, said on a quarterly conference call late last month. “We saw notable strength in airline, accommodation and restaurant spending with a departure from categories such as home furnishings and appliances.”
The decline in spending on goods has already warned some retailers ahead of tougher times. Amazon shocked investors in late October with a weaker-than-expected year-end forecast as e-commerce growth slowed and the company announced a corporate hiring freeze. appliance giant jacuzzi lowered its estimates.
shipping giant FedEx missed expectations in its September report. CEO Raj Subramaniam said he expected a “worldwide recession.” US retail sales were flat in September, a sign that inflation is taking its toll on consumers as the numbers are not adjusted for inflation.
Walmart, target, home depot, Macy’s and others will provide their own updates to investors in mid-November. Walmart and Target disappointed investors over the summer when they detailed the financial drain of excess inventory.
Travel spending has skyrocketed, in part due to flexible office policies allowing Americans to travel more and book trips to Europe well into the traditional off-season.
According to Mastercard Spending Pulse, which measures retail and online sales, September flight ticket sales grew more than 56% year-on-year and 10.9% year-on-year in 2019. Accommodation sales were up year-on-year by more than 38% and by 42% compared to September 2019.
“In my opinion, taking annual leave is a right for people,” Hawaiian Airlines CEO Peter Ingram said in an interview last month. “After being denied that for a few years when movement was restricted, people are really embracing it and going out.”
United Airlines CEO Scott Kirby noted that more relaxed attendance policies are also leading to people traveling more.
“As a result, September, a normally low-traffic month, was the third busiest month in our history,” he said on the airline’s conference call.
Despite rising airfares fueled by pilot shortages and delays in aircraft deliveries, the desire to travel persists. Executives also said last month that many people are even willing to pay for roomier seats. Airfares rose 43% year over year, according to the latest US inflation.
“Travel remains extremely resilient,” said Anna Zhou, an economist at the Bank of America Institute. Even after Labor Day, when travel normally slows, “that’s just not the case this year, especially for international travel,” she said.
For now, airlines are brushing aside worries about a potential recession.
“While there have been rumors as to whether or not we’re headed for a recession, or whether we might even be in one now, we haven’t seen any noticeable impact on our booking and revenue trends,” Southwest CEO Bob Jordan said on one Result of October 27th call.
Airlines and hotels are not yet seeing a slowdown in travel. But if a recession hits, it could jeopardize all consumer spending — and cause even higher-income Americans to reconsider big trips.
“Where we’re going in a year is hard to predict,” said Ingram of Hawaiian Airlines.
Tim Quinlan, senior economist at Wells Fargo, expects the holiday season to be the “last hooray” for consumers. Adjusted for inflation, he expects holiday retail sales to grow 2% year-on-year in November and December. This compares to an estimated 8.1% last year and an annual gain of 10.4% in 2020.
The bank originally forecast a recession around Labor Day. Nonetheless, unemployment has remained historically low. The US added 261,000 jobs in October, ahead of estimates.
Americans have kept spending by lowering their savings rate, racking up credit card debt and withdrawing from savings accounts, Quinlan said. Soon, he said, they’ll have to start backing down and compromising.
“People spend more than they take in and that’s sort of the definition of unsustainable,” he said. “The consumer is on borrowed time.”
Quinlan now predicts a recession will hit in April, May or June.
U.S. credit card balances rose $46 billion in the second quarter, a 13% increase that was the highest in two decades, according to the St. Louis Fed. Both residential and non-residential debt have risen sharply since the pandemic began.
According to the St. Louis Fed, credit card delinquency rates hit 1.81% at the end of Q2, the highest since Q1 2021. But that’s well below historical averages, and consumers are still sitting on healthy savings, that they built during the pandemic.
The National Retail Federation, a major retail group, joined other industry watchers on Thursday in forecasting more modest holiday sales — and said some of that spending will be funded by credit card debt and savings accounts rather than income.
Jack Kleinhenz, the group’s chief economist, conceded on a call on Thursday that travel is a spending priority for more consumers too. However, he said he sees it as an addition rather than a compromise.
“You could say, ‘Well, my goodness, that should hurt retail sales because people are going to spend more on gas and on travel and plane tickets,’ but at the same time people are bringing food and gifts and we expect them to do that spend more on outfits.”
Travel may not be on the decline as people often plan and pay for trips months in advance, said Jorge Barraza, an assistant professor of consumer psychology at the University of Southern California.
“It’s maybe that people don’t realize how much prices have gone up and are willing to take it because there’s a pent-up demand for travel,” he said.
And he added that having friends or family members post about their trips on social media can motivate people to book vacations, even if it means diving into savings.
“When you’re having periods of stress and uncertainty, we’re more likely to see YOLO behavior occurring,” he said, referring to the phrase “You only live once.”