Online retailers again will have a tough go of it this season, trying to convince shoppers who are contending with inflation and recession fears not to skimp on their gift lists. In 2022, U.S. consumers’ digital spending in November-December will grow a modest 6.1% year over year, Digital Commerce 360 projects.
Digital Commerce 360 projects ecommerce revenue will reach $224.31 billion during the holidays this year, up from $211.41 billion for the same two months in 2021. That means online sales growth would be in the single-digit range for the first time dating back to pre-2015, the first year for which revised Digital Commerce 360 seasonal data is available. That’s a drop-off from 2021’s 10% online sales increase the muted 10.0%, which already was less than a quarter of the 40.8% surge in online seasonal sales during a COVID-19-fueled 2020.
Consumers to scale back on in-store shopping
Retail sales through all channels — including physical stores — are likely to rise 4.0% for the season, Digital Commerce 360 estimates. Shoppers will spend $916.42 billion overall with online and offline combined, up from $881.17 billion last year. That growth would also be a significant slowdown from 2021, when total retail grew 13.4% over the holiday period but is still higher than the median 3.2% in the five years before the pandemic.
In 2021, physical store sales drove overall retail growth during the holidays as vaccinated shoppers flocked back to stores, eager to resume shopping traditions. Store sales soared by 14.5% year over year, outpacing 10.0% online growth, Digital Commerce 360 estimates. But that will subside in the 2022 season, giving way to the importance of comparison shopping and the ease of doing so online. In-store spending will considerably decelerate to 3.3% — which still is more than double the five-year median before the pandemic.
And the digital share of total retail sales will hit 24.5%, meaning nearly $1 in every $4 spent on retail purchases during the 2022 holiday season will come from online orders. That’s still less than the peak of 24.7% penetration in 2020 but does mark an increase over 24.0% last year.
A summary of previous holiday seasons
The last couple of holiday periods threw big challenges at merchants. In the first year of the pandemic — a pre-vaccine 2020 — retailers were grappling with store closures and enforcing social distancing during a season known for its crowded aisles and long lines. The sudden shift in consumers’ reliance on ecommerce led to what the industry called “Shipageddon.” Overburdened carriers couldn’t keep up with unprecedented demand from online shoppers, resulting in a massive number of delayed packages at arguably the worst time of year.
By 2021, retailers instead were navigating massive supply chain issues. Many merchants struggled to get enough merchandise into their warehouses before the high-volume season. A raw material shortage made it tricky to manufacture goods, shipping containers were scarce, and massive bottlenecks at ports meant holiday shipments were idle. That all worked to stunt ecommerce growth last year.
Now, it’s inflation and surplus inventory that are troubling retail executives and causing consumers to expect deep discounting.
How Digital Commerce 360 derives holiday projections
The Digital Commerce 360 research team studies various factors when considering how the ecommerce market might perform in the future. We analyze historical online and in-store spending behavior and follow how digital’s share of total retail has trended. We examine the year-to-date performance of the overall market, using retail data from the U.S. Department of Commerce and individual publicly traded online retailers.
Additionally, we use the following insights to inform our numbers: traffic patterns to ecommerce sites, shipment volume, discounting levels, recent shifts in pricing and average order value, retailer and consumer surveys, consumer confidence indices, editorial interviews, holiday marketing that we track and more.
Here are five insights that contributed to Digital Commerce 360’s holiday projections:
1.) Year-to-date online sales growth has been weak
There’s not a lot of spending momentum heading into the season.
Through the first half of 2022, ecommerce grew a moderate 7.0%, according to retail data released by the U.S. Department of Commerce. Q2 marked the fourth straight quarter of single-digit growth in online sales as the market has continued to normalize after giant spikes in ecommerce spending earlier during the pandemic.
Starting in Q2 2020, COVID-19 drove four straight quarters of 40%-plus year-over-year increases in digital revenue. Online consumers maintained their prior spending levels as the market lapped the first pandemic year, but growth tapered off. According to Commerce Department data, shoppers spent 6.7% more on the web in Q1 2022 vs. the same quarter the prior year. And in Q2 2022, growth reached 7.3%.
The Commerce Department won’t publish ecommerce figures for the third quarter until mid-November. But there likely will be a higher bump than Q1 or Q2 as Amazon.com Inc.’s popular Prime Day sales event was moved later to Q3 this year, and the increase in online traffic typically translates into a bigger sales day for many retailers.
Other firms with ecommerce spending data available for a bigger chunk of the year also show single-digit growth so far in 2022. Adobe Analytics registered an 8.9% year-over-year increase in digital revenue for January through August. Data from technology vendor Salesforce Inc. showed more sluggish growth for the same eight months of 2022 — just 3.0% in the U.S.
2.) Inflation woes likely to make shoppers scale back on holiday purchases
Up until mid-summer, prices for goods on ecommerce sites had been rising year over year for more than two years straight — 25 consecutive months — according to the Adobe Digital Price Index. In July, online shoppers finally got a small reprieve, with a 1% drop in the cost of items vs. the same month in 2021. Although prices on the web rose again year over year in August, they dipped by 0.2% in September. But through the first nine months of 2022, the median inflation rate was 2.0%, according to Adobe data.
Average selling prices will increase monthly between 8% and 12% for the remainder of 2022, according to Salesforce predictions. And surveys suggest the economic landscape is impacting consumers’ willingness to spend heading into the holidays — especially as the higher cost for necessities like groceries and gas has left shoppers with less money for discretionary items.
Nearly two-thirds — 63% — of online retailers anticipate high inflation will cause consumers to purchase fewer gifts overall this season. That’s according to a Digital Commerce 360 survey of 70 merchants conducted from July through September. More than half — 56% — of respondents cited rising inflation as a major obstacle for their businesses heading into the holidays.
Merchants seemingly have accurately gauged consumer sentiment, according to a Digital Commerce 360 and Bizrate Insights survey of 1,088 online shoppers in September. More than half — 52% — of consumers named competitive pricing as one of the most important factors in choosing an online retailer this season. Four in 10 respondents reported they would comparison shop more because they expect prices to be high, and 35% said those high prices would lead them to buy less for the holidays.
With shoppers’ magnified price consciousness, retailers’ customer service policies like price matching and price adjusting will take on added importance this year. 16% of online shoppers said they would seek out retailers that offer price matching more than in the prior year.
3.) A more promotional holiday season
The 2021 holiday season was a far less promotional one than usual. Product scarcity coupled with soaring costs for retailers — on everything from materials and labor to freight and last-mile shipping — meant consumers didn’t get the same holiday deals last year and paid more for gifts.
Online retailers offered weaker year-over-year discounts in five out of eight tracked merchandise categories, according to Adobe data. That was largely due to increased competition among consumers for limited quantities, which meant merchants didn’t need to offer heavy promotions to sell off products, and items were left at full price for longer or not marked down as much.
But there will be a big swing in discounting levels this year as merchants face the opposite inventory problem.
Big retailers, including Walmart Inc. (No. 2 in the Digital Commerce 360 Top 1000), Target Corp. (No. 5), Macy’s Inc. (No. 16), Nordstrom Inc. (No. 20) and Kohl’s Corp. (No. 21) acknowledged an inventory glut when reporting their Q2 earnings. And nearly one in five — 19% — of respondents in Digital Commerce 360’s retailer survey conducted in Q3 also reported they have too many products sitting ahead of the holidays. 27% of merchants surveyed said they have enough inventory but not in the right categories for gifting and gathering season. That means they’re likely to mark down less in-demand items.
The well-documented surpluses have dominated headlines, and shoppers know how much extra retailers have left in stock. That means consumers wield a lot of power leading into a big shopping period by passing on lackluster sales and waiting for retailers to slash prices further. A third — 33% — of merchants surveyed said consumers will expect more promotions now that they’ve seen the news. And a quarter — 25% — of online shoppers said they are anticipating better deals this year than in past holiday seasons, according to the Digital Commerce 360 and Bizrate Insights survey from September.
Adobe is predicting “massive” discounts that will “hit record highs (upward of 32%) this holiday season.” While the firm expects the period between Thanksgiving and Cyber Monday to offer the best deals, bargains as high as 15% were likely to kick off in the second week of October. Discounts will probably stretch until the end of the year, with promotional rates as high as 20% in the weeks after Cyber Monday, Adobe says.
Because consumers are generally worried about their finances, they’ll hunt for and be tempted by good deals on gifts for others and stock up on cheaper items for personal use. So this year’s deeper discounting is likely to at least partially offset inflation, and online sales growth will be temperate.
4.) Holiday shopping season kicks off even earlier
Retailers are perpetually making a case for early holiday buying so they can distribute revenue more evenly throughout the year and to ease the burden of fulfilling high order volumes during peak season. But more sales in October may mean fewer online orders in November and December, which would translate into a smaller year-over-year increase in ecommerce.
Early purchasing picked up steam in 2021, and merchants’ nudging will be effective this year, too.
Many shoppers will likely snap up deeply discounted items online to avoid increased prices later. 41% of online retailers in the Digital Commerce 360 survey reporting they’ve extended return windows for the season, there’s one less reason for shoppers to hesitate to get a gift before the official holiday kickoff.
Additionally, retailers’ holiday marketing has started earlier and earlier for years now. This year, nearly two-thirds — 64% — of online merchants began their seasonal campaigns in October or earlier, according to the Digital Commerce 360 retailer survey. That’s up from 59% in 2021. What’s more, a quarter — 25% — of respondents kicked off holiday messaging during the summer, up from 16% the prior year.
And consumers have responded. More than four in 10 — 44% of — online shoppers said they would begin checking off gift lists in October or earlier, according to the Digital Commerce 360 and Bizrate Insights survey. That’s up from 40% in 2021. And more than a quarter — 26% — of consumers reported that they had already started their holiday buying in August or earlier. In 2021, that share was just 16%.
Amazon’s July Prime Day sale also influenced in early-season spending. 17% of online shoppers who placed an order during the two-day summer sale said at least a quarter of their purchases were gifts for the upcoming holidays, according to a Digital Commerce 260 survey of 875 online shoppers in July. And while that’s not a huge share, it will have an impact on the winter holidays. Especially since Amazon ran a second big early access sale for Prime members in October, when consumers were even more mentally prepared to holiday shop.
These changing dynamics mean consumers now spend some dollars they have historically reserved for the November-December season earlier in Q4. In some cases, that spending is even being pulled into Q3. And that erodes growth figures for online sales during the traditionally defined holiday period.
5.) Consumer confidence fluctuates in 2022 but on the rise heading into the holidays
Consumers have faced a lot of economic uncertainty recently. Aside from inflation, shoppers are weathering steep declines in the stock market, rising interest rates that are making borrowing more expensive and geopolitical upheaval with Russia’s war in Ukraine that’s causing spikes in energy costs. And the stimulus payments that helped line consumers’ wallets and encourage spending in previous years have stopped rolling in.
And that rollercoaster is reflected in some economic indicators. The Conference Board’s Consumer Confidence Index is based on a survey that measures consumer sentiment on current economic conditions and prospects for the next six months. The numbers reflect the general public’s degree of optimism on the state of the U.S. economy. In 2022, confidence has generally scored low vs. prior years outside of 2020. In the five years leading up to the pandemic, the median monthly index was 120.2. The monthly median for 2022 through September was 14.5 points lower at 105.7.
After registering three consecutive month-to-month decreases, the index dropped to its lowest point of the year in July at 95.3, down 13.3 points from 108.6 in April. But since mid-summer, it has been on the rise. September’s confidence reading hit 108.0, nearly recovering to hover near mid-spring’s high.
While this index isn’t always a predictor of online spending growth — like when 2020’s lower figures translated into the largest seasonal ecommerce bump tracked by Digital Commerce 360 — last month’s reading is good news for retailers hoping for consumers primed to spend.
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