2022 Halfway Point Lessons
We dove into retail, dining, and fitness foot traffic data to find the biggest trends of 2022 so far and understand what the second half of the year may have in store.
By:
Ethan Chernofsky & RJ Hottovy
on
July 14, 2022
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The first half of 2022 took brick-and-mortar businesses – and the economy as a whole – on a wild ride. The challenges started in January with the spread of Omicron, and although foot traffic briefly bounced back when the COVID surge eased, inflation and high gas prices quickly brought visits down again in several key categories. At the same time, supply chain issues and rising costs ate into major retailers' bottom lines, which led many to speculate on the health of the economy in general and consumer sentiment in particular.
While some categories will bear more of the brunt of the current economic downturn than others, the situation is also creating opportunities for brands who can cater to customers’ current value orientation.
Looking back on foot traffic trends over the past six months indicates that many of these factors have indeed had a real impact on retail performance – but the extent of the challenges may be overblown. And while some categories will bear more of the brunt of the current economic downturn than others, the situation is also creating opportunities for brands who can cater to customers’ current value orientation.
But the first half of the year also drove critical indications on many other issues, including some key trends to watch and signs of what could be coming in the back half of 2022.
It is increasingly clear that the rise of both inflation and gas prices are having a marked effect on retail. And although these two trends are usually mentioned together, inflation and high gas prices are impacting the retail space in different ways.
Inflation is likely to have a greater impact on spending patterns and may be driving trading down behavior. This could give a short-term boost to value oriented retailers such as dollar stores, value grocers like Lidl and Aldi, and even off-price apparel. The rise in prices leading to tighter budgets may also impact discretionary spending – something we’re already seeing with restaurants.
Unlike inflation, rising gas prices fundamentally impact the visit itself – how far consumers are willing to drive, how often they shop, and how many stops they will make in a given shopping trip. The increase in gas prices can push more mission-driven shopping which privileges superstores, wholesale clubs, and other retailers that enable consumers to stock up and consolidate shopping trips. Another effect of the high cost at the pump could be a greater orientation to the local option – and the expanding visit gaps in outlet malls could be an indicator of this trend.
As of now, inflation is likely to remain elevated going into the second half of 2022. Learning to grapple with these issues and finding ways to attract consumers despite the challenges will be critical to success in H2.
The current economic climate is also creating opportunities, and some categories can capitalize on this moment.
While inflation and high gas prices are undoubtedly adding a speed bump to the recovery journey of many brick-and-mortar retailers, the current economic climate is also creating opportunities, and some categories can capitalize on this moment.
The ongoing strength of grocery and QSR categories can be attributed in part to customers’ need to be more cost-conscious. Movie theaters can position themselves as recession-friendly entertainment options. BevAlc retailers can help consumers make their favorite fancy cocktails at home.
And, as mentioned above, superstores and big-box retailers that “offer it all” like Target and Walmart could also be major beneficiaries of the latest market trends. As opposed to pessimistic predictions that are centered heavily around the stock market and companies that are being negatively affected – there are clearly retailers that will benefit in both the long and short term from current trends.
Many of the QSR and coffee-oriented chains are still seeing significant success, with recent foot traffic numbers close to 2019 levels – but full-service restaurants and the wider dining segment are facing major challenges.
After nearing pre-pandemic visit levels towards the end of 2021, foot traffic to the category took a plunge in early 2022 as the Omicron wave spread. And while the category bounced back somewhat mid-February, year-over-three-year (Yo3Y) visits fell again in March 2022 as the economic uncertainty became more pronounced.
In April 2022, the visit gap narrowed again, and consumers appeared to be making peace with the current situation. But over the past two months, as gas prices and inflation continued to rise, Yo3Y dining visits have been trending downward. Now, the declines in discretionary spending could have an extended effect on the category – and the drop in demand could be exacerbated by declines in domestic tourism driven by fuel prices.
It's important to note that all the dining segments analyzed – including full-service and fast-casual restaurants – are performing significantly better than they were this time last year.
Still, it’s important to note that all the dining segments analyzed – including full-service and fast-casual restaurants – are performing significantly better than they were this time last year, or even this time six months ago at the height of the Omicron wave.
Dining concepts that are still operational have succeeded in overcoming some of the biggest hardships faced by restaurants in recent history, so the current inflation may be just a bump in the road towards a full visit recovery. And some of the ways many dining chains dealt with the challenges of COVID – whether by enhancing their drive-thru and curbside pick-up options, or by strategically rightsizing – will serve them well to overcome the economic challenges of 2022.
The real meaning of the concept should be building the ideal retail footprint that will deliver the maximum impact for a given audience or area.
Rightsizing should be the buzzword for the brick-and-mortar retail ecosystem in the coming months and years. While some think of rightsizing as synonymous with forced store closures, the real meaning of the concept should be building the ideal retail footprint that will deliver the maximum impact for a given audience or area. Strategic rightsizing will look different for different brands depending on each brand’s current store fleet composition and wider business goals.
Brands that are overextended - whether because of a shift in focus like pharmacies or because they have underperforming locations - will look to optimize their retail footprint to maximize efficiency and reduce cannibalization, which can lead to a far more efficient reach and enable these brands to drive greater and more sustainable success.
Multi-format locations are going to become more popular as retailers look for ways to grow in a cost-efficient way that maximizes reach and minimizes cannibalization. This concept is of particular interest because it enables brands to drive heightened flexibility by leveraging different locations for specific purposes that serve the greater network of stores. For example, if a smaller format store lacks the ability to contain inventory, other nearby locations can be used for distribution after a visitor has identified the ideal item. This utilization of fleets as part of a more comprehensive channel for reaching customers has major implications for how retail could evolve in the coming years.
Already, some brands that have strategically rightsized such as Rite Aid and JCPenney, are seeing an increase in visits per store – which means that closing venues has enabled the brand to reach more customers with each location. The push for greater optimization of retail footprints is critical as it should allow retailers to drive maximum value with each location, drive greater flexibility and sustain success far more effectively.
Some retailers that are now riding a uniquely powerful wave can optimize their physical footprint by expanding and opening new locations.
Rightsizing and store fleet optimization don’t have to mean reducing store count or store size. Some retailers that are now riding a uniquely powerful wave can optimize their physical footprint by expanding and opening new locations.
The key is to ask why and where these brands are expanding. Expanding into new markets holds a tremendous upside, but also raises questions about the retailer’s ability to thrive outside its regional comfort zone. Expansions within existing markets offer a more likely impact, but can create other risks like cannibalization. Brands also need to ask themselves what they are looking to accomplish through their brick-and-mortar locations to ensure that the expansion makes sense in the context of the brand’s long-term strategy.
To properly appreciate the driving force behind current brick-and-mortar expansions, we need to consider the full array of business goals that can be advanced through a large-scale and strategic physical presence.
As more retailers come to terms with the value that a location brings beyond the in-store sale numbers – benefits such as brand-building, advertising, distribution, cost of returns – the more value these retailers will be able to extract out of each venue. To properly appreciate the driving force behind current brick-and-mortar expansions, we need to consider the full array of business goals that can be advanced through a large-scale and strategic physical presence.
With all signs indicating that inflation could last at least into 2023, trading down behavior will likely be a key trend in the coming months.
Consumers are now looking to stretch their dollar as far as possible, so value-priced retailers that enable consumers to get the most bang for the buck are likely to benefit. In New York, for example, Macy’s stores with Backstage (off price) shop-in-shops are outperforming Macy’s stores without. The question is how wide-ranging and long-lasting the impact will be.
As consumers become more price-sensitive and increasingly prioritize value, we might be seeing a very different holiday shopping season in 2022.
Last year’s holiday season was defined by the success many retailers had selling full-priced despite the price bumps, with categories such as apparel ending 2021 on a high note. Now, as consumers become more price-sensitive and increasingly prioritize value, we might be seeing a very different holiday shopping season in 2022.
The roaring return of brick-and-mortar fitness channels might be the biggest story of H1. The segment got hammered by Omicron in January – a huge setback considering how significant Q1 visits are to fitness chains overall. But once the Omicron wave receded, gyms recovered with incredible speed and have exceeded pre-pandemic monthly visits for the past five months.
The fitness sector’s successful comeback offers some useful lessons for brick-and-mortar brands looking to succeed despite the wider challenges.
The fitness sector’s successful comeback offers some useful lessons for brick-and-mortar brands looking to succeed despite the wider challenges. First, companies should not overreact to short term challenges from digital competitors – while digital elements are incredibly important, brick and mortar has a draw that cannot be underestimated. Second, customers want options – so digital and brick-and-mortar channels can and should work together to give customers the experience they are seeking. And, last but not least, value is carrying the day – many of the most successful fitness brands currently are those with value-priced membership options.
Luxury was one of the strongest performing segments during the peak of the pandemic. With fewer options to spend on entertainment, dining out, or travel along with the added government stimulus, key high-earning audiences saw a significant increase in disposable income, which drove visits to leading luxury retailers.
The demand for luxury apparel and accessories is not a short term phenomenon.
Now, although luxury foot traffic has slowed down, Yo3Y luxury spending is still high, which indicates that the current visit gaps reflect a temporary pullback due to the stock market correction rather than a real drop in demand. And as luxury brands expand their digital channels, the category’s long-term potential remains significant. It appears, then, that the interest in luxury apparel and accessories is not a short term phenomenon. The growth of luxury retailers is likely to be helped by the changes in the resale market that fundamentally changes the consumer cost of these goods by letting buyers resell their luxury goods and recoup at least a portion of the initial investment.
Cities took a short term hit over COVID, although many urban centers are still well-positioned for long-term success.
Many metropolitan areas, including New York City, have already rebounded, while other cities actually saw their population increase.
Of course, some cities that lost population over COVID will not regain all their pre-pandemic residents. But many metropolitan areas, including New York City – which saw its population decline between 2020 and 2021 – have already rebounded, while other cities actually saw their population increase. In other areas, the urban population did drop, but people remained close by and only moved one degree of separation away (e.g. leaving the downtown for the periphery), meaning the city remained the center of orbit. This could actually increase the attractiveness and retail draw of some urban areas – especially those who have seen a sustained positive migration trend.
And, critically, offices are recovering, so the predictions regarding the long-term impact of a widespread transition to fully remote work are unlikely to materialize. Instead, it seems that many companies are settling on a hybrid model, which means that many people will be coming to the office – and to downtown urban centers – at least a couple of days a week. And as the economic situation changes to privilege employers, the work-office balance might shift even further.
The types of populations who have chosen to stay or move into cities over the past two years may boost local consumerism. Already, certain urban areas are seeing a retail resurgence. Given the consistent growth of rising urban stars such as Tampa, Phoenix, and Denver, cities should definitely not be written off just yet.
The situation is also creating its own set of opportunities, from the offline fitness sector’s comeback to urban retail’s rebound.
From the Omicron wave to inflation to the significant fuel hikes, brick-and-mortar brands faced wide ranging challenges in H1 2022. But the situation is also creating its own set of opportunities, from the offline fitness sector’s comeback to urban retail’s rebound. Companies that cater to value-seeking consumers are also positioned to do well as people trade down from their usual mainstays and seek out lower-priced alternatives.
It is also important to note that the current challenges are coming after a two-year period of sustained offline innovation. The pandemic forced many new and legacy brands to rethink their strategies, incorporate digital channels, and find creative ways to attract customers back to stores – and many of these companies have emerged from COVID stronger than they were in 2019. If the past is any indication, brick-and-mortar leaders will also rise to the present occasion, finding opportunities for growth amidst the current challenges.
