With container ships clogging up ports worldwide, people are eager to snag toys, electronics, and other gifts off the shelves—real or virtual—as soon as they see them this holiday season. With many shoppers intending to buy early and not wait for out-of-stock items to be replenished, retailers must compete harder for consumer loyalty, in addition to managing the supply-chain and labor challenges spurred by the pandemic.
To help retailers understand this year’s holiday-shopping landscape, we surveyed 2,095 shoppers in the United States, asking about their spending intentions. We combined the resulting consumer insights with third-party reports on actual consumer spending over the course of the COVID-19 pandemic to establish expectations for holiday spending in 2021. While the consumer survey helps to understand what consumers say they will do, third-party data provides a window into actual spending behavior. The combination enables a more complete picture of how consumers’ attitudes and behavior will continue to evolve. Besides laying out these expectations, we offer recommendations on how retailers can successfully navigate what may be a record spending season by acting early to retain consumer loyalty.
The 2021 holiday shopper
Given current spending trends and consumers’ buoyant outlook, we forecast strong demand over the 2021 holidays. Shoppers are already embracing the omnichannel experience, and since they’re worried about stock running out, they are seizing opportunities to buy sooner rather than later. They’re also more willing than ever to switch brands or retailers, especially when items are unavailable (Exhibit 1). Retailers that want to take full advantage of the opportunities provided by the decline in brand and retailer loyalty will need to meet consumers’ demands despite their supply and labor challenges.
The responses to our survey, combined with a look at third-party data on consumers’ credit- and debit-card spending, suggest a robust holiday season. Our analysis indicates that fourth-quarter consumer spending in 2021 is likely to rise 7 percent over 2020 and 9 percent compared with 2019, driven by consumers across the income and age spectrum. Consumers are also increasingly bouncing between apps, websites, and in-person shopping for inspiration, ordering, and fulfillment.
In addition, shoppers are anxious about empty shelves, given they have been finding so many products out-of-stock. Approximately 40 percent of respondents to our survey (and 50 percent of both high-income and younger consumers) say they expect to shop and spend earlier than they did in 2020 because they anticipate shortages, longer shipping times, and unexpected supply-chain challenges related to COVID-19.1
Finally, retailers will need to work harder to gain and retain loyalty. Among the 60 percent of consumers who have faced out-of-stock products in the last three months, only 13 percent say they waited for an item to come back in stock. About 70 percent switched retailers or brands instead.
Thus, while the holidays will be bountiful for retailers, the season will also be challenging. Stretched supply chains, inventory shortages, and labor disruptions will likely make it difficult for retailers to meet demand and maintain profitability. Meanwhile, consumers’ omnichannel preferences will increase demand for flexible and fast fulfillment at a time when such service is harder to provide.
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Shoppers are feeling spendy and social
Consumers, in general, report feeling highly optimistic about their spending in the coming holiday season. The typical big spenders in the fourth quarter—high-income earners and millennials—are ready to open their pocketbooks. In response to our survey, half of those who earn at least $100,000 per year and 47 percent of millennials say they are excited or eager about the holidays.
Using McKinsey Global Institute’s scenarios for COVID-19’s potential impact on GDP, we modeled how we would expect holiday related categories to continue to evolve. Our model suggests that consumer spending, discretionary spending, and e-commerce spending could rise 7 percent, 11 percent, and 8 percent year over year, respectively (Exhibit 2).2 Spending in the fourth quarter will likely reach double-digit growth in many discretionary categories, including sporting apparel, cosmetics, software and electronics, and retail apparel.
Since the pandemic began, consumers have significantly increased their omnichannel behavior, and we expect this to extend into the holiday season. For most holiday-related categories, 60 to 70 percent of consumers say they are shopping in an omnichannel way. To place their orders, almost half of consumers expect to increase their online spending compared to last year. Online purchasing remains elevated above pre-pandemic (2019) levels, and we expect that the 30 percent increase in online penetration we have seen since the second quarter of 2021 will remain consistent through the holiday season.
Many consumers are now looking to social media for holiday inspiration. Fifty-eight percent of consumers say social media will influence their holiday buying decisions, and of those consumers, the platforms that are influencing behavior the most are Facebook (67 percent), YouTube (57 percent), and Instagram (52 percent) (Exhibit 3). Not surprisingly, platform preferences differed significantly by age. Eighty-seven percent of Gen Z say they expect to be inspired by social media, with YouTube, Instagram, and TikTok being their most likely sources of inspiration.
The early bird catches the worm
US consumers can be known to wait until the last minute to buy gifts, but this year, many are shopping earlier. Forty-five percent of our respondents report that they already started holiday shopping in early October.3 Of those early shoppers, 31 percent say they already completed more than three-fourths of their expected purchases. Only 11 percent of respondents say they will wait until December to start shopping versus years previous to COVID-19 when over 25 percent of consumers said they shopped in the couple of weeks before Christmas.
Consumers tell us they are shopping earlier than usual because of uncertainty and, for some, as an escape from COVID living. Those who expect to shop earlier say they are concerned about availability (51 percent), long lead times in shipping (45 percent), and unexpected challenges due to COVID-19 (44 percent) (Exhibit 4). In addition, 29 percent of consumers say they have been shopping early because they want to do “something fun right now.”
These concerns around availability and lead times are well founded, as supply-chain challenges will likely persist throughout the holiday shopping season. Retailers currently face higher freight costs because of port and inbound delays, while falling vacancies have led to increased warehousing costs. The cost challenge is compounded by surging demand in e-commerce, which has snarled large integrators’ last mile networks, and worker shortages, with a 1.7 percentage point decline in labor force participation versus pre-COVID-19.4
Shoppers are willing to switch
When deciding where to shop, consumers tell us they prioritize value (cited by 40 percent), convenience (34 percent), and product availability (31 percent). Nonetheless, given the economic upheaval in 2020 and expected uncertainty this holiday season, we expect that consumers won’t hesitate to shop elsewhere if their favorite retailers don’t have what they want. In particular, we expect few to wait for replenishment of out-of-stock items. Sixty-two percent of survey respondents report having been unable to buy at least one item due to availability over the past three months. Of those who could not buy what they wanted, 39 percent say they switched brands, while 32 percent went to another retailer. Only 13 percent say they waited for the item to be back in stock (Exhibit 5).
How retailers can maintain consumer loyalty
Retailers will undoubtedly face challenges this holiday season. However, the strong demand will present significant opportunities for companies that can identify the proper marketing channels, optimize inventory, and meet consumers’ needs. The key will be maintaining—and even increasing—consumer loyalty. We suggest that retailers consider six ways to win back consumer loyalty and ensure that they meet demand while earning a profit:
- Communicate early and often. Since consumers won’t hesitate to shop elsewhere if they can’t find the products they seek, fulfillment will be critical. Retailers should therefore encourage consumers to order early. For example, on October 6, 2021, the CEO of children’s apparel maker Hanna Andersson emailed customers, alerting them of potential inventory challenges and suggesting they place orders very early. Retailers can also enable customers to check whether items are in stock, and when unexpected supply-chain issues pop up, they can communicate alternative options as well as dates when items will come back in stock.
- Move up the promotion schedule. Since consumers are already shopping for the holidays, it’s critical to make sure promotions happen early. Walmart, for example, announced in mid-October that it would offer savings events throughout November and allow paying Walmart+ members the opportunity to shop those same deals four hours earlier than everyone else.5 Amazon started even earlier, offering limited-time discounts throughout October and November.6
- Make it a social holiday. To capitalize on this year’s population of younger consumers eager to shop and spend, retailers can turn to social media early and influence their consideration and purchase. Old Navy and other clothing retailers are creating TikTok videos and hoping they’ll go viral to drive sales among younger consumers. Beyond that, given how omnichannel consumers shop, retailers should also invest more in social and digital channels.
- Get creative to drive meaningful experience. Retailers should consider prioritizing a positive and meaningful customer experience to strengthen their brand and reputation as they anticipate challenges ahead of the season. For example, children’s apparel retailer Carter’s worked to address customer disappointment about shipping delays by offering an extra discount on future purchases. This not only salvages customer satisfaction but creates future sales opportunities.
- ’Tis the season to take care of your workforce. With employee retention at risk and retail having famously high turnover rates even during non-pandemic times, employers need to hold onto the staff they have. Top retailers are finding creative ways to reward their workforce. For example, in the past, Walmart has provided employees who worked on Thanksgiving a free meal and offered them 15 percent off a variety of products in addition to their usual 10 percent employee discount.
- Face supply-chain pain with short-term fixes and long-term planning. For short-term inventory surprises, retailers should prioritize procuring the most essential items for this holiday season. In addition, supply-chain challenges are expected to persist into 2022, so retailers should invest now in a resilience mindset and prepare for new cost realities. This may include diversifying and building redundancy into suppliers and transport, planning for more localized fulfillment, and building greater real-time visibility into inventory positions across the supply chain. Take Costco, which recently chartered three of its own ships to move goods between Asia and North America next year.
Although this holiday season will pose many supply-chain issues and labor challenges for retailers striving to hold onto their customers, companies will also face unique opportunities related to strong holiday demand and omnichannel shopping preferences. In thinking about inflationary pressures, retailers will also have to consider whether they can absorb the increased costs or whether they’ll partly pass them on to customers. Companies that can stay agile, anticipate early, and pivot to face consumer demand will receive their own holiday “gifts.”