Future retail trends Q4 2022

TREND 1: Inventory trends: shortages become surpluses

After months of COVID supply chain shocks and headlines about empty shelves, many retailers are facing the opposite problem: having too many products on hand. This situation has been driven by shifting consumer preferences post-COVID and supply chain overreactions.

This over-supply is creating two options for retailers:

Option 1: Sell surplus goods at a discount and incur a loss now to make space for new merchandise.
Option 2: Hold excess inventory to maintain current quarter performance, but risk warehouse constraints and limited budgets during the holiday season.

This inventory choice extends beyond stores and into warehouses. Several major retailers in home supplies, technology, and general merchandising have inventory piling up at seaports and clogging both warehouses and distribution networks.¹ In some markets, warehouses are even operating at less than 1% capacity.² However, inflation might be the key to saving these retailers’ bottom lines. Year-over-year inflation remains at 8.5%,³ and strategists don’t expect prices to fall soon, meaning that discounts in areas where retailers want to offload inventory will be matched with price increases on a broader scale.

Many retailers were not able to predict the shift in customer behavior. As consumers emerge from the pandemic, they are shopping less for pandemic categories⁴ such as TVs, fitness supplies, and outdoor furniture. Retailers also may have been spooked by pandemic shortages and over-ordered. This retailer, as well as several others,⁵ has opted to mark down unwanted supply to make room for other merchandise. As a result, operating margins declined in⁶ Q2 2022 for the retailer. Some analysts believe that it may have a long-term effect for retailers that don’t take the right measures to win big during the holidays.

TREND 2: Shifts in the labor market

Retailers are being disproportionally impacted by the labor deficit since the COVID-19 pandemic. In July 2022, the US Bureau of Labor reported that in the retail sector there was a wide discrepancy in retail labor with 1.09 million job openings⁷ and 744,000 unemployed⁸—a labor deficit of more than 46%.

Over the past two-and-a-half years, retailers have been challenged with higher labor attrition, largely due to the in-person nature of the work. With 85% of retail transactions completed in-store,⁹ retailers cannot offer remote options.

In addition, a shift in workers’ attitudes emerged during the pandemic. Successful retailers need employees that are engaged and deliver a robust service culture that drives consumer loyalty, but these employees may be difficult to find and retain in this unprecedented tight labor market. This holiday season, retailers will make hiring a robust workforce a top priority to meet the forecasted surge in holiday sales. According to Deloitte’s annual holiday retail forecast,¹⁰ holiday retail sales are expected to increase 4% to 6 %. Experts also predict the 2022 holiday shopping season will start earlier than it did in 2021.¹¹

A risk for major retailers is running into the same pitfalls big tech and digital-first retailers experienced this summer. With this most recent wave of alarming hiring freezes and mass layoffs, big tech companies and digitally native vertical brands cited one of the largest reasons in the headcount reduction was that they over-hired.¹² Attempting to meet the surge in online shopping these past two years, many companies were overly optimistic about their growth and now they need to walk back on hiring decisions. However, for most retailers, difficulty staffing, heighted turnover rates, and a noticeable loss in employee loyalty, are unmistakably the largest challenges, especially during the holiday season.

To mitigate short-term labor challenges, retailers can focus on competitive pay and enhanced company culture. In the long term, retailers must invest in technology and automation innovation.

TREND 3: The rise of retail media networks

The onset of the pandemic resulted in a boom in online shopping¹³ which led companies to rely heavily on third-party consumer cookies to track consumer data across the internet to better tailor ads. However, due to rising data privacy concerns,¹⁴ many consumers have objected to their data being used this way. For retailers exploring new ways to bolster the online consumer experience, retail media networks have emerged as one of the most effective strategies.

A retail media network is an advertising hub set up by online retailers that allows third-party sellers to access customer data across their websites and to buy advertising space on their platform. For example, when consumers are searching for something on a website, a retail company could pay for their product to be the first result on the page or have their products advertised to consumers searching for similar products. This approach is similar to supermarket endcaps, where stores sell premium store space to brands to showcase products and highlight promotions.

Many companies are already using retail media networks, with 74% of brands already reserving budgets.¹⁵ With even more companies planning to make the switch soon, below are a few advantages that retail media networks offer over third-party data.

First, since sales are made on a hub platform, retail media networks can provide brands with first-party customer data and insights. This can unlock the ability to further customize messaging ads to optimize engagement. Some retail media networks even allow brands to proactively send consumers offers, helping to attract new shoppers.

Second, retail media networks can deliver ads faster. When a suitable ad target is identified, brands using third-party cookies have no control over where or when the ad is shown. With retail media networks, consumers are already on the website looking to buy—seeing an ad for what they are already searching for can impact conversion rate.

Retailers with a sufficiently large footprint can leverage retail media networks to open a new source of revenue. For example, a large online and brick-and-mortar retailer reported that its ad business helped to increase revenue by 240% in Q3 2021.¹⁶ The market is not yet saturated and has space for new entrants. Setting up a retail media network is a simple way for a retailer to raise revenue while building relationships with brands. Leveraging brand partnerships is a prime way for retailers to position themselves competitively and carve out a profitable niche.

Endnotes

¹ Liz Young, “Surging retail inventories are swamping U.S. warehouses,” Wall Street Journal, August 2, 2022.
² Lori Ann LaRocco, “America’s warehouses are still filling up on inventory of goods,” CNBC, updated July 27, 2022.
³ Eric Wallerstein, “Don’t count on significant goods disinflation, Goldman Sachs says,” Wall Street Journal, August 10, 2022.
⁴ Alina Selyukh, “What happens when people want all the air fryers and then, suddenly, they don’t,” NPR, July 25, 2022.
⁵ Melissa Repko, “Target expects squeezed profits from aggressive plan to get rid of unwanted inventory,” CNBC, June 7, 2022.
⁶ Sarah Nassauer, “Targets profit sinks as retailer unloads unwanted inventory,” Wall Street Journal, August 17, 2022.
⁷ US Bureau of Labor Statistics (BLS), “Job openings levels and rates by industry and region, not seasonally adjusted,” last modified October 4, 2022.
⁸ BLS, “Household data, not seasonally adjusted: Unemployed persons by industry, class of worker, and sex,” last modified October 7, 2022.
⁹ Shelley E. Kohan, “Remote work, quiet quitting may make holiday hiring difficult for retailers,” Forbes, August 29, 2022.
¹⁰ Deloitte, “Holiday retail sales expected to increase 4% to 6%,” press release, September 13, 2022.
¹¹ Zak Stambor, “The holiday shopping season is starting earlier than ever,” Insider Intelligence, September 12, 2022.
¹² Juliana Kaplan and Áine Cain, “The ‘Great Regret’ isn’t just for job switchers. Some of the smartest companies in the world realized they hired too many people.” Business Insider, July 21, 2022.
¹³ April Berthene, “Coronavirus pandemic adds $219 billion to US ecommerce sales in 2020-2021,” Digital Commerce 360, March 15, 2022.
¹⁴ Internet Society, “The trust opportunity: Exploring consumer attitudes to the Internet of Things,” May 1, 2019.
¹⁵ ChannelSight, “Why retail media networks are essential for brands in 2022,” accessed October 31, 2022.
¹⁶ Rachel Wolff, “Retail media networks hit their stride in 2021,” Insider Intelligence, January 3, 2022.

Special thanks to Carol Cui, Madelyn Harvey, Katie Morgan, Anirudh Panuganty, Sylvie Wallin, and Natalie Weinberg for their authorship, support, and research throughout the development of this article.