Across the United States, consumers are continuing to spend, but they’re not opening their wallets too wide. Retailers that offer personalized promotions, same-day delivery, and “buy now, pay later” plans are more likely to capture cautious consumers’ holiday spending. Learn more about US consumers’ holiday shopping behaviors and expectations on this episode of the McKinsey on Consumer and Retail podcast, hosted by Monica Toriello. The following is an edited transcript of the conversation. Subscribe to the podcast.
Monica Toriello: It’s November. By now, about half of US consumers have already started their holiday shopping. That’s our topic for today: holiday shopping in 2023. Our two guests will talk about the findings from two ConsumerWise surveys they conducted recently—one in September and the other in October—that have yielded valuable information about how US consumers are feeling, how and when they plan to spend over the holidays, and what it all means for retailers. Let’s meet our guests.
Colleen Baum is a partner in McKinsey’s New York office. She advises retailers and apparel brands on a wide range of topics, including growth strategy, store footprint and format innovation, merchandise planning, inventory management, and omnichannel fulfillment. She also leads McKinsey’s retail real estate work in North America.
Tamara Charm is a partner in the Boston office. She helps companies drive growth and innovation by applying a deep understanding of consumer sentiment and behavior. She gets into the “why”—the motivations behind consumers’ actions—and advises companies on how they can meet consumers’ needs. Glad to have you both with us.
Last year, around this same time, the two of you coauthored an article about the 2022 US holiday shopping season. What’s different this year?
Tamara Charm: One difference is that consumers are very much in a trade-down mood. They were trading down last year, but this year they’re doing so even more. The average consumer is in pretty decent financial shape, but there’s more pessimism. Consumers are trading down, because they’re worried about what might come next.
A second difference is that consumers—rather than rushing to the shelves, to their phones, or to websites to buy something before everything runs out—are instead lengthening the holiday season. Their number-one concern is, “When can I get the items that I want at the best price possible?” Some consumers are saying, “I will shop earlier, because I think I’ll get things at better prices earlier,” while others are saying, “I will shop later, because I think that’s when the best deals will be.” That is a huge difference this year: the holiday shopping season started early and will end late. It’s going to be a longer season this year.
A third difference is that before the holidays, we had a huge shift of consumer spending to travel and experience and, in some ways, to self-care. What are experiences that I can have—such as travel—and what are goods I can buy—such as cosmetics—that might help me take better care of myself? So I think we’re coming into the holiday season with an elevated focus on self-care and self-treating, but at the same time, people want to trade down and are afraid to splurge.
Colleen Baum: Another difference between last year and this year is that 2023 has been a year of promotions. In a lot of ways, it has felt like a continuous run of promotions. So we’ll have to see retailers acting differently or putting more urgency on consumers in order to get them to transact and make that purchase. We do expect consumers to spend a significant amount of time waiting and monitoring to find the best price, while at the same time they’re having concerns about product availability and about getting it on time—and, ideally, for free. The one other big difference from last year is we’re starting to see younger consumers really lead on new shopping behaviors: specifically much heavier emphasis on same-day delivery and on “buy now, pay later” [BNPL], as well as some willingness to pay for those types of conveniences and fulfillment options.
Tamara Charm: What retailers have been able to offer—in terms of paying in installments and specifically BNPL—is really interesting, especially to the younger generation. Over 50 percent of Gen Zers say they think they will use BNPL in their holiday shopping. So for retailers, it will be really important this year to think about not only what you’re providing but also how to help consumers feel like they can afford it.
Colleen Baum: Finally, I’d say in-store shopping continues to be a priority: 85 percent of consumers will buy in-store, a lot of research is happening in-store, and about 12 percent of consumers expect to pick up their holiday goods in-store. This is consistent with a trend from last year, but it’s actually accelerated a bit on some of the omnichannel interactions. Not just stores, not just online, but a combination of the two will be critical this year.
Tamara Charm: We see a lot of enthusiasm to come into stores; we also see a lot of enthusiasm to look at apps and websites. Consumers are saying they plan to shop across all of those channels. And consumers are increasingly expecting that anything they want, wherever and whenever they want it, they can get. And they want retailers to understand who they are, when they’re shopping, and where they might want to get something, and coordinate it all. That is a challenge for retailers—one wherein consumers’ expectations are sky-high.
A longer holiday season
Monica Toriello: Let’s dig into some of the things you’ve brought up. First, this so-called Christmas creep: some retailers started their holiday sales and promotions in September, maybe even August or earlier. Clearly, there are advantages to both retailers and consumers: a longer shopping season spreads out the demand, and consumers can spread out their spending over a longer time period. But as you mentioned, Colleen, there are trade-offs for retailers. One is that they’re essentially training consumers to never pay full price, to always expect discounts and promotions. What are the best practices? How can retailers best take advantage of what’s become a four-month holiday shopping season?
Colleen Baum: For consumers, a longer holiday period with promotions starting in September—or even July—is quite good. The challenge is that retailers can’t consistently show 40 percent off and create any urgency.
So leading retailers are moving to far more personalized promotions: what am I trying to get you to purchase? What discount do I need to offer you in order to get you to transact? How am I going to message it? If I’m far more price sensitive than Tamara is, for example, I might get 40 percent off for toys but a much shallower discount on beauty products, for which I’m willing to pay full price. It might be different for Tamara. We see retailers doing more of these personalized promotions. Obviously, retailers that have collected customer data through loyalty and membership programs are really able to tailor the experience.
The one other note I’d have for retailers is to be thoughtful about the amount of inventory they’re holding and the cadence of the holiday season. The desire to clean out inventory toward the end of December means they could be quite precise on what products are eligible for the deepest discounts. They should target those goods with high or excess inventory.
Tamara Charm: Another thing that will be important for retailers this holiday season is to provide inspiration to consumers. While most consumers do want to trade down, around a third of them say that they want to splurge at the same time. This is especially true of younger and higher-income consumers.
So what can retailers do with this? They should think about how to inspire consumers. There might be a lot of consumers, for example, who want their houses to look fantastic for their in-person celebrations. They might not want to spend as much, but they love the idea of engaging their kids, putting crafts together, and making something really special for a holiday celebration. Putting out Instagram and YouTube videos—showing how to assemble things to make the best possible holiday season—can create a sense of urgency and give consumers a reason to spend.
These videos can be paired with personalized promotions, as Colleen said, to ask, “Hey, have you thought about what you could do with this product?” That will be extra helpful this year in helping consumers decide when they’re going to trade down and when they’re going to spend.
The power of personalized promotions
Monica Toriello: Indeed, the surveys show that 79 percent of consumers are trading down, whether that’s by seeking out lower-priced options, buying smaller pack sizes, or shifting to private labels. Consumers are looking for value, and as they become more careful and selective about what they buy, as you’ve said, personalization becomes more important. What are the best retailers doing on that front? What does it take to supercharge personalization? What’s working out there?
Colleen Baum: What’s working from a personalization perspective is starting from a strong data foundation. We’ve found that over the past 12 to 24 months, retailers have continued to invest in data. Some of that investment is going into the retail media networks that we’re seeing across the vast majority of the top 25 retailers, but they’re also using it to think about personalization across the end-to-end shopping journey: When do you log in? What type of assortment should I show you on the home page? How often am I talking to you and over what mediums—how many emails, how much Instagram and Facebook, how many pop-ups in your app? Retailers are thinking in an exhaustive way about how to influence your consumer journey.
They’re also engaging in thoughtful customer life cycle management, making sure that, for example, if Tamara is at risk for churning—she hasn’t come back to make a purchase yet this holiday season—the retailer is going to launch highly targeted efforts to reach her. Those might include a deeper promotion or a more tailored message specific to what Tamara has bought in the past. There needs to be real thoughtfulness around ensuring that the customers you have relied on continue to come back. That’s particularly important for this holiday season.
Just as consumers trade down, they’re more willing to switch retailers or consider new products. So if you’re the retailer who had those consumers’ spending previously, a high degree of personalization and tailoring will be important to retain the customers who continue to drive lifetime value.
Tamara Charm: Retailers who are doing personalization well have gathered a lot of data about their consumers: how many of them, and which ones, are opening which emails? Which emails are drawing people in and which are not? The best retailers are gathering that data, making a place for it, and then using AI and generative AI [gen AI] to figure out what is working and what is not—again, not for all consumers, but for each consumer individually, because all of our profiles are different.
Technology as a competitive advantage
Monica Toriello: You mentioned AI and gen AI. What role are new technologies playing in helping retailers serve consumers better during this busy season?
Tamara Charm: AI is key in personalized promotion. Retailers who have been using it for a while and are continuing to enhance their AI capabilities are able to do it at a different level than those that are not yet taking full advantage. Gen AI is still a wide-open field where a lot of retailers are experimenting with a lot of things.
Gen AI can be used in the front line: when a sales associate approaches someone looking for electronics, for example, gen AI can be used to understand what questions might elicit a good response and if a consumer asks a question, to understand what answers are going to be the most powerful and helpful for that consumer.
Gen AI is also being used to gather consumer comments as a whole and to analyze the themes and reactions that consumers have toward what’s on offer. Retailers are able to quickly gather and synthesize what consumers are saying, almost in real time, then adjust what they’re doing. It’s almost “test and learn” on steroids.
Colleen Baum: We’re also seeing quite a bit of that online, with meaningful improvements in the quality of chatbots on retailer websites. This is critically important, because more consumers are continuing to do research online as well as in-store; but when they’re online, they still want a guided shopping experience. These chatbots can recommend a product specifically to you, based on what you’re browsing. We’ll see some leading retailers with that capability this holiday season, and I expect even broader adoption next year.
Tamara Charm: Another use of technology this year will be for inventory management and getting supply to the right place. One of the implications of consumers trading down, switching retailers and brands, and shopping across channels is that if something’s not there or able to be delivered when they want it, there’s a high likelihood they will go somewhere else. They won’t wait for it. So retailers need to use technology to make sure that consumers have what they want when they want it—whether that’s managing through “dark stores” or looking at which products are selling quickly and making sure they’re replenished.
It’s also important to be transparent with consumers. When they click to buy something and it’s not available now, you need to tell them exactly when it will be available and when it can get to them. The more transparency you can offer consumers, the more likely it will be that you’ll retain the sale.
Colleen Baum: This is particularly important within the apparel space, where inventory is, in effect, perishable. I might be able to sell a jacket for $80 this week, but next week it will need to be marked down to $40. So having that view into where all of the inventory is, holding that inventory in locations that allow for most effective fulfillment, and then managing both out-of-stock risk and markdown risk are critically important. Inventory positioning is a tough, tough problem.
Another place where technology will continue to play a big role during the holidays is in the fundamentals of fulfillment. Given the combination of inventory positioning all across the retail supply chain, greater focus on fast fulfillment, and continued online shopping, retailers that haven’t yet invested in automation and robotics will feel far more pressure than those that have state-of-the-art online fulfillment locations with each-picking.
Faster fulfillment, please
Monica Toriello: What are consumers’ delivery expectations this year? We’re not dealing with the severe supply chain disruptions of years past, so are you anticipating that people will buy more online and trust that it’ll get shipped to their homes in time? Or will there be more curbside pickup or “buy online, pick up in-store”? And what’s the willingness to pay for same-day or next-day delivery?
Colleen Baum: People will continue to shop in stores and take purchases home with them. But for those shopping online, the big difference this year versus last year is the uptick in next-day and same-day delivery. About 32 percent of consumers expect to use some version of expedited fulfillment, which will be a challenge for retailers that do not have a national distribution network—unless they’re using their stores.
About 12 percent of consumers will continue to pick up in-store. That is a preference based on product category: high-value electronics, in particular, continue to be picked up in-store, both to prevent theft and because sometimes people want to look at and touch the product to make sure it is exactly what they had in mind. So that 12 percent is quite important.
Tamara Charm: When you look at Gen Zers and millennials, over 50 percent say that they’re willing to pay more for expedited delivery. And the trends we see during the rest of the year are likely to be true during the holidays as well: sometimes you’ll add something to the cart so you can get it faster. Or you might buy more just to make sure you’re not paying for shipping. More and more consumers are saying, “During the holiday season, I understand there might be times I don’t find what I want until right before I need it, and I’ll pay to get it in the time frame I need it.”
Colleen Baum: In-store fulfillment—having a customer come to your location—is by far the most effective means of online fulfillment. There’s also an added benefit: when you get someone physically into your store, there’s a good chance they’ll say, “Oh, I forgot X, Y, Z; let me add those to my purchase. And oh, I see something that would be really nice for so-and-so.”
One interesting finding that came out of the survey is that for consumers who decided to do curbside or in-store pickup, 44 percent of the time it was because they got a targeted promotion or the ability to earn extra points by coming into the store. That’s certainly something that retailers should consider: consumers are responding to offers that direct them to the store.
Monica Toriello: You’ve both alluded to differences between demographic groups. Gen Z, for example, expressed some preferences that are different from those of older consumers, right? Gen Zers ranked quality as a slightly more important consideration to them than price when doing their holiday shopping. Gen Z is also the cohort that saw the largest decline in intent to splurge. What’s going on there?
Tamara Charm: One of the things to always keep in mind when we see surveys is that what people say and what they do are not the same thing. But what we do see with Gen Z, and with millennials to a certain extent, is that there’s a lot of excitability and openness to change. Gen Zers and millennials say that they’re going to both trade down more and splurge more. They’re just more movable.
Another area where they’re different is in how they’re engaging in omnichannel shopping: the number of Gen Zers and millennials who say that they’re using social media as inspiration is a lot higher than in other cohorts. The number who say they’re going first to a brand website or to an app before going into a store is a lot higher. But as Colleen said, stores are still in their equation—so it’s a true omnichannel experience.
Colleen Baum: Among Gen Zers in particular, we see an amplification of the trend toward faster fulfillment. If you take the combination of same-day delivery and curbside pickup, over a third of Gen Z consumers expect to get the product on the same day in one way or another. Only about a quarter are willing to tolerate multiple-day delivery. So it’s some combination of, “I bought it, and I want to get it quickly in my hands,” and, “I want to know when the product ships and exactly when it’s coming.” It adds to that sense of immediacy.
‘I want to do something fun’
Monica Toriello: Something that struck me in the survey results was that one of the main reasons for people getting an earlier start on their holiday shopping was, “I want to do something fun right now.” What’s your favorite example of a fun holiday thing that a retailer is doing and is proving to be pretty effective?
Tamara Charm: Some retailers are really tapping into the trends around social media and the themes around inspiration. They’re finding ways to provide that inspiration through Pinterest boards, Instagram, YouTube videos, or microinfluencers talking about something they’re super passionate about. Friends and family have always been a huge source of inspiration in shopping, and I think “friends and family” right now has a very broad definition. You might have your favorite YouTuber, who is your inspiration for what you buy.
Colleen Baum: One thing I get excited about during the holidays is when groups of retailers and food-and-beverage companies get together to create unique experiences. Last year, there was a store that had little holiday crafts for my 18-month-old—who’s now two and a half. We’d do some crafts, then there was conveniently a place next door where we could get cocktails as we were unwinding. And there was a wide range of stores right around there.
So I’d really encourage retailers to think about their natural adjacencies from a physical perspective and how they can create a real destination and a reason for customers to come in—a combination of family activities and lots of complementary retail brands so that they can feed off each other’s traffic. In New York, there’s nothing more joyous than seeing the city decorated, seeing everybody out and about, and enjoying some holiday crafts—as well as some spiked hot chocolate, needless to say.