Demographic-Driven Promotional Strategies Are Crucial This Holiday Season

In 2023, a prevailing theme that has ensnared retailers is the phenomenon of consumer behavior. Both sentiment and spending have been unstable, leading business leaders through a whirlwind of changing strategies based on predictions that never quite came to fruition. Economists collectively anticipated that an impending economic downturn would dissuade consumers from depleting their savings. Contrarily, consumers pivoted instead towards credit-based spending.

On its own, this spending pattern is unsustainable. With student loan repayments resurfacing and the Federal Reserve's interest rate hikes creating more financial obligations, a substantial proportion of consumers, particularly millennials, will need to modify their current spending behaviors soon.

Amidst the backdrop of supply chain intricacies and the persistent emergence of COVID-19 variants, the holiday season has presented daunting challenges for retailers in recent years. By leveraging advanced external economic insights, retailers can diverge from this trajectory by attaining the insights needed to attract customers through the end of the year.

Holiday Shopping Scenarios

Economists have delineated two scenarios for the upcoming holiday season as it relates to consumer behavior. In an optimistic scenario, retailers are poised for a quarter-over-quarter sales performance that remains stable. While there exists the potential for few retailers to witness a marginal uptick, it's anticipated to be considerably modest in comparison to previous years. In the bleakest of scenarios, consumers may exercise restraint either in advance of or during the upcoming holiday season, resulting in retailers experiencing contracting sales. Regardless of the unfolding scenario, retailers need to brace themselves for inflation-adjusted growth rates that are projected to be the most subdued since the 2010-2011 holiday season.

To help improve sales amid changing consumer behavior, retailers should focus holiday planning and forecasts on four priority areas: brand awareness, promotional activity, online presence, and transitioning luxury items to more budget-friendly options.

• Brand awareness: Consumers are going to do more comparative shopping than in years past. Retailers that establish customer rapport will win at the cash register. Increasing sales requires more than reducing prices — discerning consumers prioritize the brand experience and are interested in knowing a brand's return policies ahead of a purchase.
• Promotional activity: Promotions will play a bigger role than in the past four years. However, it's more than just marking down prices. Retailers need to exercise promotions with precision to ensure the right customers see the right deal at the right time and place. This may mean starting even earlier than in years past.
• Online presence: Retailers should expect consumers to heavily utilize the internet to do a lot of their comparative research. Even if they ultimately end up purchasing in-store, they will utilize online channels to search for the best deal.
• Luxury to budget-friendly: Private label brands have performed extremely well this year, and retailers should expect that to continue throughout the holiday season. Plan for a shift from higher-priced luxury items to a more budget-friendly option.

Unveiling Your Target Demographics

In light of varying economic headwinds, retailers must identify their core demographic and tailor strategic business planning to accommodate shifting consumer behaviors effectively.

There are two demographic groups that will likely be affected by the upcoming holiday season:

1. Consumers aged 25-45 have the largest percentage of student loan debt and will be impacted by the revival of repayments. This demographic will take on an additional $200 to $400 payment starting in October and will be adjusting their spending accordingly.
2. Low-income consumers will feel the slowdown more than higher income consumers for two reasons. The first is that many depleted their savings during the COVID-19 pandemic and have likely already tightened their budgets. The second is that this demographic spends a higher percentage of their income on housing. As rent and cost-of-ownership continue to rise, this demographic will have a smaller percentage of income to spend on discretionary items.

These are widely cast statements, and economic shifts affect consumers differently depending on their location, occupation, housing, and more. For example, a brick-and-mortar fashion retailer in New York City will perform a lot differently than a brick-and-mortar fashion retailer located in New Orleans; their customers face vastly different economic barriers, disposable income, cost of living, and general population and demographic trends. The same can be said for retailers.

Predictive analytics is one of the best tools for retailers to understand not only who their demographic is, but how that demographic will be affected. Predictive analytics uses artificial intelligence data modeling that combines a company's internal historical data with external economic indicators to create custom "what-if" scenarios specific to every business. From there, business leaders and FP&A teams can use that data to plan and pivot strategically.

It's more important than ever for retailers to understand their customers' demographics and how the upcoming economic headwinds will affect each group. By understanding the varying scenarios, leaders can strategically and confidently plan their inventory levels, promotional materials, and workforce needs to increase revenue and have a successful holiday season.

Danielle Marceau is principal economist at Prevedere, a provider of intelligent forecasting solutions.