Q1 2023 retailer and consumer trends

• Target is locating a significant number of their small-format stores near college campuses to cater specifically to students. Using these stores as an opportunity for a digital-first strategy, this retailer has these locations serve as e-commerce pickup points for students. Reports show that these small-format college campus stores are outperforming the company’s already impressive nationwide average sales.
• GreenWise by Publix is using its small-format stores to carry a highly curated product selection while offering a premium shopping experience with details such as shopping carts equipped with cup holders and a floor plan dividing merchandise into “experience zones.” This elevated brand concept approach led to the stores having significantly higher dwell times compared to neighboring traditional format locations.
• Market by Macy’s is using its small-format store to offer a curated array of merchandise that gives customers the advantages of department-store shopping in an easier-to-navigate setup. The small-format stores report shorter dwell times compared to neighboring larger-format stores, meeting the brand’s goal to appeal to their subgroup of customers who want to complete shopping trips quickly and efficiently.
• Bloomies by Bloomingdale’s is also experimenting with small format. In a concept store, they are carrying traditional luxury brands as well as emerging labels, infusing the traditional shopping experience with interactive activities, such as shop ’n’ sips, styling sessions, and community events. This store was launched with an effort to woo customers back to luxury department store shopping in a playful, innovative way after a decline in sales during the pandemic.

Retailers can use small-format stores to meet business objectives aligned with improving customer experience and experimenting with new brand concepts, on-site inventory, efficient cost structures, or reaching previously untapped markets.

1. Experiment with new brand concepts: Small-format stores support brand discovery and allow retailers to experiment with new brand concepts. This “rightsizing” allows stores to deliver unique shopping experiences, such as dedicated spaces for contactless shopping experiences and online purchase pick-ups or offering a curated selection of merchandise unique to the local area or small-format brand.
2. Encourage impulse purchases: With consumers returning to stores, small-format stores can focus on convenience—increasing visitor traffic while mitigating inefficient and unwanted congestion. This encourages consumers to visit stores to pick up online orders or to make a return, which drives foot traffic and increases the likelihood of consumer impulse purchases and brand discovery.
3. Increase cost efficiencies: Storefronts with smaller footprints tackle cost inefficiencies by saving on gross lease costs, streamlining merchandising strategies, and realizing improved fulfillment. With real estate prices continuing to climb, retailers can take a more conservative approach by opting for smaller square footage in spaces where prime real estate is scarce and highly valued.
4. Reach new markets: These less cost-prohibitive store formats allow retailers to open in secondary and tertiary markets to extend their reach, leasing smaller vacant storefronts to serve a more urban area. Retailers are aiming to meet their customers where they are, in the right moment, such as IKEA adopting a new targeting strategy to be within 30 minutes of its customers to remain a conveniently accessible choice.

The move to the small-store format is expected to continue surging as one of the trends in 2023 and beyond to reach consumers. While there are many potential benefits to experimenting with a store resizing effort, retailers must be careful of protecting brand integrity, preventing store cannibalization, and prioritizing the in-store and online customer shopping experience. Whether resizing is the right fit for a brand or not, all retailers need to consider innovative ways to reach their consumers in a cost-effective, consumer-focused manner.

Buy now, pay later rose to prominence over the past decade as an alternative form of credit primarily for online retail purchases. Initially, buy now, pay later usage was most heavily concentrated in apparel and beauty; now, buy now, pay later solutions are popular in other industries such as travel, pet care, and groceries. Apparel and beauty merchants, who (combined) accounted for 80% of originations in 2019, accounted for only 58% of originations in 2021. Over the past two years especially, buy now, pay later is increasingly utilized for everyday purchases, such as groceries, bills, and gasoline. With this increase in usage, coupled with economic instability in the United States, buy now, pay later is now becoming an affordability tool intended to help people manage their purchases and payments.

Buy now, pay later users tend to be younger, with research showing that younger generations are more flexible and willing to adopt alternative payment methods. In 2021, 75% of buy now, pay later users in the United States were Generation Z or millennials, and more than 45 million Americans ages 14 and older said that they would use buy now, pay later services during 2021, up 81.2% over 2020. As Gen Zs age and continue to shop, they’ll continue to flock to these alternative payment services in larger numbers than their millennial counterparts have. By the end of 2022, 44% of Gen Z digital buyers ages 14 and older will have used buy now, pay later services at least once that year, compared with only 37% of millennial buyers. According to eMarketer projections, buy now, pay later adoption rates among Gen Zs are expected to increase from 37% in 2021 to 47% in 2025.

On a socioeconomic breakdown, according to research from Morning Consult, Americans who used buy now, pay later solutions are more likely to fall into a lower income bracket and report income volatility compared to those who solely use credit cards. In June 2021, 64% of adults who used a buy now, pay later service reported an annual income of less than $50K. Furthermore, buy now, pay later users are more likely (than credit card households) to report that they feel “behind” on their finances and that they feel “controlled” by finances.

Financial services leaders should be sensitive and demonstrate responsibility toward buy now, pay later users, as these users tend to be more financially vulnerable. With the rapid adoption of any new solution, the potential unknown harms to consumers necessitate regulation and protection by the government. The US Consumer Financial Protection Bureau (CFPB) recently published a report that finds that the industry grew rapidly during the pandemic, but borrowers may receive uneven disclosures and protections. The CFPB has stated that they will “identify potential interpretive guidance or rules to issue with the goal of ensuring that buy now, pay later lenders adhere to many of the baseline protections that Congress has already established for credit cards” to address the discrete consumer harms. According to a study, nearly 40% of US consumers who used buy now, pay later have missed more than one payment, and 72% of those saw their credit scores decline.

For the 2022 holiday season, 20% of US respondents said that they planned to use buy now, pay later services, according to a survey from Electronic Transactions Association (ETA), as 72% of respondents said they were concerned with the affordability of gifts last year, compared to 61% the previous year. According to the Deloitte Black Friday–Cyber Monday (BFCM) Survey, BFCM shoppers increasingly relied on credit as inflation waned on and budgets were stretched; in 2022, 33% of BFCM shoppers were concerned about making payments, up from 26% in 2021. According to data from PYMTS, for 2022 Black Friday shopping, online buy now, pay later use reached an all-time high of 10%, and in-store buy now, pay later use increased 41% year over year.

Other big companies are getting in on the growth in buy now, pay later trends, too. In December 2022, Walmart announced they will offer buy now, pay later through their FinTech venture ONE, which may be launched in 2023. In June 2022, Apple Inc. announced that they’ll be entering the space with Apple Pay Later to be integrated into iOS 16, highlighting their belief in and enthusiasm for the space. In July 2020, Google Pay partnered with a buy now, pay later provider to allow for expansion of buy now, pay later services into Google Pay services.

To achieve competitive advantage or parity as well as appeal to a wider consumer base that is expected to use buy now, pay later pervasively, retailers should consider partnering with buy now, pay later service providers or even develop and launch their own buy now, pay later service.

Essentially, social commerce involves brands leveraging social media apps to both market and sell their products directly to consumers without requiring users to leave the social media app upon transacting. Traditional e-commerce takes place on a brand’s own website or platform and depends on broader, more generalized messaging to drive and complete sales. Uniquely, social commerce leverages user-specific content to directly engage consumers via their personal social media feeds; purchases can then be completed through either the social media platform itself or through an integration to the brand’s platform.

1. Get in early: Social commerce is still a growing avenue, with sales expected to increase from $45 billion in 2022 to nearly $80 billion by 2025. Establishing themselves in the market early will allow retailers to gain competitive advantage and maximize their growth in the area.
2. Know your audience: As of 2021, Facebook, Instagram, and TikTok are the three most commonly used social commerce platforms. Facebook has a designated shopping tab, Instagram allows brands to set up shops in the app, and TikTok houses shopping tabs on the users’ profiles. Retailers should familiarize themselves with the demographics and content style for each platform and focus social commerce efforts accordingly.
3. Create a seamless shopping experience: Social commerce provides a more frictionless experience for shoppers. Brands can interact with consumers directly on the platforms they frequent. User-generated content along with the engagement on the post act as social proof, building trust with the consumer. Social commerce can shorten the steps between product discovery and checkout, creating new and engaging brand interactions that could increase the speed and frequency of conversions.
4. Livestream shopping: Livestream shopping is a new retail avenue that is collecting a lot of buzz in overseas markets, where the TV “shop from home” model is being adapted to incorporate today’s technology. An influencer or celebrity will model/promote a product on a livestreaming platform, and consumers can tune in live to ask questions or comment. Revenue from livestream shopping is expected to increase from $6 billion in 2020 to $57 billion in 2025. During the livestreams, promotions and giveaways are common—however, only within the active “live” streaming period, effectively creating a sense of urgency among the consumers.