The new year began with good news for retailers. Journalists Gregory Meyer and Stephen Gandel report, “US consumers continued to open their wallets at the start of 2025 after a $1tn spending spree during the holiday season, overcoming pressures from higher borrowing costs and years of elevated inflation. Retailers rang up $994bn during the 2024 holiday season, with sales rising 4 per cent year on year, the National Retail Federation said. The rate of increase surpassed the trade group’s forecast and accelerated from 2023.”[1] Mark Zandi, chief economist at Moody’s Analytics, told Meyer and Gandel, “Consumers are doing their thing, driving the economic train. There is no real signs that the growth of spending is slowing.” The big question remains: Will the good times continue?
2025 Consumer Outlook
Economic journalist Megan Leonhardt writes, “The U.S. consumer is still holding up nicely, even after years of robust spending that has helped propel economic growth far beyond expectations. And while the extraordinary run may not be over, there is a significant caveat.”[2] That caveat involves a lot of uncertainty about the future. Leonhardt explains, “What happens next will depend, more than usual, on Americans’ ability to stay employed and wage growth remaining relatively healthy. While wage gains and cooling inflation helped bolster Americans’ real spending power over the past year, other factors that have boosted consumption are now less likely to provide a lift. Consumers’ savings have diminished, it is still difficult to borrow, and wealth effects — the benefits of the past two years’ stock market gains — are fading.”
Perhaps the biggest uncertainty is what effect Trump administration tariffs will have on inflation. Some economists believe the recent spending splurge by consumers was prompted by fears that prices would surge once tariffs were put in place. Reuters reports, “U.S. consumers expect inflation to increase over the next 12 months and beyond, likely reflecting concerns that broad tariffs on imports pledged by President Donald Trump’s administration could raise prices for households. … In addition to imposing or massively raising tariffs on imports, Trump has also promised to deport millions of undocumented immigrants, policies that economists have warned would stoke inflation.”[3] Consumers have good reasons to be concerned. A survey conducted by Endeavor Business Intelligence (EBI) found, “71% [of business executives] said their most likely reaction to higher prices from tariffs will be to pass along increases to customers.”[4]
The long-term outlook concerning consumer spending is mixed. Meyer and Gandel report, “Some households showed signs of strain as they spend long after the disappearance of savings built up during the pandemic. In the first nine months of this year, banks charged off $46bn in credit card debt that was deemed unrecoverable. But while delinquency rates rose slightly at a number of the big US banks, they remain historically low for credit cards.” Leonhardt adds, “Much of the robust consumer spending over the past year has been driven by healthy wage growth. While pay growth for higher-income workers had failed to keep pace with the increases for lower-income people for several years, gains for the wealthier cohort caught up within the past year. That helped to lift spending growth among better-paid people as well last year.” David Tinsley, senior economist at the Bank of America Institute, told Leonhardt, “The situation is solid at the start of this year. There are people who are squeezed, but, by and large, the aggregate picture is reasonably benign.”
What Retailers Should Expect
Despite the positive short-term consumer-spending outlook, consumer behavior is changing. McKinsey & Company analysts explain, “The share of consumers trading down — opting for lower-priced goods, delaying purchases, or taking another action to save money or get more value from a purchase — remains persistently high. Consumers reported feeling more optimistic in the fourth quarter [of 2024], but 74 percent said they continued to trade down, suggesting that this behavior is stickier than experts expected.”[5] Of course, consumer behavior differs among various groups depending on numerous factors like age, gender, wealth, location, and the economic sector involved.
Take, for example, the grocery sector. Food journalist Cathy Siegner reports, “The different ways people across generations shop for food will dictate changes in how brands maintain relevance and drive growth. That was the conclusion of recent research from 84.51º, a subsidiary of The Kroger Co. … The research shows the shopper of tomorrow will be older, more likely to live in a one-person or multi-generational household, more diverse, and potentially facing economic challenges.”[6] At the same time, other research concludes that younger consumers are foodies. Journalist Madeline Fitzgerald reports, “A McKinsey & Company survey revealed that groceries were the top category that Gen Z-ers and Millennials planned to splurge on — surpassing clothing, going out, and traveling.”[7]
Keeping up with current trends and strategizing future actions are critical activities for all kinds of retailers. Artificial intelligence (AI) systems can help brands and retailers stay abreast of the ever-changing consumer landscape. For example, the Enterra Consumer Insights Intelligence System™ allows companies to quantitatively uncover and logically understand the inter-relationships that lead to heightened consumer understanding, hyper-personalized product recommendations, and new product innovation. And the Enterra Global Insights and Decision Superiority System™ (EGIDS™) — powered by the Enterra Autonomous Decision Science™ platform — can help business leaders rapidly explore a multitude of options and scenarios.
Concluding Thoughts
Deloitte executives Anthony Waelter and Stephen Rogers observe, “Spending intentions for housing remain elevated but have started to plateau. Meanwhile, spending intentions for a mix of other major purchase categories continue to increase, including leisure travel, clothing, and groceries.”[8] Depending on how events unfold, this picture could change quickly — especially if a global trade war breaks out. But, as Meyer and Gandel note, “For now … consumers have shown little sign of pulling back.” I agree with McKinsey analysts who observe, “Amid massive shifts in the consumer landscape, companies can’t afford to rely on yesterday’s consumer insights.”[9] They insist the changing business landscape has created four imperatives to win the consumer of the future. They are: 1) Building microtargeting capabilities; 2) Investing in wellness; 3) Propelling the social–digital experience; and 4) Offering premium products where they matter. They conclude, “In this consumer landscape — one in which standards, complexity, and stakes are all higher — leaders should understand the new nuances that define who the ‘next’ shoppers are, what they care about, and how they shop. These insights, which should then inform strategic category and channel investments, can lead to long-term, profitable growth and sustained competitive advantage.”
Footnotes
[1] Gregory Meyer and Stephen Gandel, “‘US consumers ‘resilient and strong’ in face of high prices and interest rates,” Financial Times, 18 January 2025.
[2] Megan Leonhardt, “U.S. Consumers Kick Off 2025 on Solid Footing. What to Watch Now.” Barron’s, 19 January 2025.
[3] Staff, “US consumer inflation expectations soar in January on tariff fears.” Reuters, 10 January 2025.
[4] Geert De Lombaerde, “Survey: More Than Two-Thirds of Leaders Aim to Pass On Tariff Impacts,” IndustryWeek, 8 January 2025.
[5] Becca Coggins, Christina Adams, and Kari Alldredge, “An update on US consumer sentiment: A boost in optimism amid the holiday spending season,” McKinsey & Company, 11 December 2024.
[6] Cathy Siegner, “New shopping trends signal changes coming for retail, CPG,” Food Business News, 11 June 2024.
[7] Madeline Fitzgerald, “Gen Z splurges more on groceries than on travel, clothing, and nights out,” Quartz, 31 October 2024.
[8] Anthony Waelter and Stephen Rogers, “State of the US consumer: January 2025,” Deloitte, 17 January 2025.
[9] Christina Adams, Kari Alldredge, and Sajal Kohli, “State of the Consumer 2024: What’s now and what’s next,” McKinsey & Company, 10 June 2024.
