This holiday shopping season, consumers face continued inflation, dizzying technological advances, and an uncertain economy—making it more important than ever for merchants to understand their customer base.
One thing is clear: A wide swath of Americans are too nervous—or unable—to spend at the pace of the past two years, despite traditional economic indicators pointing to a robust US economy. The National Retail Federation has forecast holiday sales to grow between 2.5 percent and 3.5 percent this year, slowing from 3.9 percent in 2023.
How are merchants to stay nimble? We asked Harvard Business School faculty members to share observations of consumer behavior and the economy, and offer ways for retailers to adapt.
Alberto Cavallo: Understand Cheapflation’s impact
As we head into the 2024 holiday season, the recent inflation experience continues to challenge both retailers and consumers, particularly in the realm of cheaper brands.
During the inflation surge of 2021-2023, the prices of low-cost goods increased at a disproportionately faster rate—about 1.3 times higher—than those of premium products. This phenomenon, which I termed "cheapflation" in a recent paper, seems to be driven by changes in shopping habits during an inflation surge, as many consumer switched from expensive varieties into cheaper alternatives to lower their total grocery bills.
Cheapflation is not apparent in aggregate inflation statistics, but on a cumulative basis, the more expensive food brands experienced about 22 percent inflation from early 2020 to mid-2024, while the cheaper varieties (of the same type of goods) experienced more than 30 percent inflation in the same period.
This pattern leaves low-income consumers facing relative high prices on items that were once dependable budget options. For those that normally buy the cheapest varieties in each category, the impact of inflation has been particularly difficult to endure.
This conclusion may seem to contradict analyses by many economists who argued that the purchasing power of all US consumers rose in recent years. Indeed, as measured by earnings adjusted for aggregate inflation numbers, the purchasing power of consumers along the income distribution appears to have climbed, and the increase is highest for low-income households, as seen in the dark bars in the Figure below.
Understanding the drop in purchasing power is crucial
However, while these traditional measures can account for differences in nominal earnings, they typically rely on the same price index to account for inflation in all income groups.
If, alternatively, we consider the existence of “cheapflation” and assume that lower-income households tend to buy the cheapest varieties of different goods, the results change dramatically. Instead of an increase of more than 3 percent in real terms, low-income households may have experienced a decline in purchasing power since 2019.
For online managers and retailers, understanding this phenomenon is crucial.
While high-income consumers may show more resilience — benefiting from a purchasing power that often remains stronger than aggregate statistics might suggest — lower-income shoppers are still experiencing increased financial pressure and responding with greater selectivity in their purchasing decisions. What can retailers do to help alleviate the financial strain faced by lower-income consumers?
Discounts and transparency
During the holiday season, introducing discounts on cheaper brands could cater to these cost-conscious shoppers, particularly those in the lower income brackets who are more sensitive to these prices. This approach can help retain loyalty in a customer base that could otherwise feel priced out of options, ensuring that retailers maintain engagement across income levels.
Another consideration for larger retailers is transparency. With more consumers aware of rising prices in budget goods, clear messaging on price increases and the reasons behind them can foster trust, particularly during the heightened spending season. For smaller businesses, the focus might be on showcasing quality in affordable items to maintain competitiveness and attract those seeking both value and reliability.
By strategically acknowledging “cheapflation,” businesses can more effectively navigate the holiday season’s challenges and create customer-centric solutions that help sustain engagement even in a tight economic landscape.
Alberto Cavallo is the Thomas S. Murphy Professor of Business Administration at HBS.
Karen Mills: Embrace digital transformation
Small businesses are pivotal to economic growth and local job creation. And they are key to the fabric of our communities. Small Business Saturday (November 30, 2024) is an important upcoming moment where small businesses can take advantage of local support.
Initiated by American Express in 2010 and co-sponsored by the US Small Business Administration since 2011, this day encourages consumers to take a moment from Black Friday deals to “shop local” during the holidays.
Reported spending topped $17 billion during Small Business Saturday in 2023 and has surpassed $200 billion since its creation, according to the SBA. That makes this a critical moment to capture.
Here are three tips for small businesses to embrace digital transformation and take advantage of the holiday spending:
Optimize your e-commerce site. Enhancing your online presence is crucial. Updating e-commerce storefronts for optimal mobile compatibility and integrating platforms like Shopify can provide a more engaging shopping experience for your customers.
Know your cash flow. Managing cashflows efficiently is critical for small businesses. On average, a US small business has a 27-day cash buffer, according to the JPMorgan Chase Institute. Use cash flow tools available from your bank or Quickbooks to be sure you have enough cash to build inventory and prepare for the holiday sales.
Engage with social media. A successful holiday marketing campaign will use social media trends, on top of personalized emails and advertisements. Look out for trendy songs and videos, and be creative to showcase your products.
Karen G. Mills is a senior fellow at HBS and former administrator of the US Small Business Administration.
John Deighton: Follow consumers to digital markets
Digital disruption has knocked the props from under the festive season. For traditionalists, this is desecration. Brands built the season. In the 1920s Coca-Cola transformed Santa into today’s jolly character. Macy’s Thanksgiving Day Parade from 1924 was the shopping season’s kick-off event. Montgomery Ward wrote the story of Rudolph in 1939, and GE created a Claymation starring a lightbulb as Rudolph’s red nose.
But disruption is the enemy of tradition. A 2023 study found that of the season’s traditions, 21 of 22 were declining in popularity. The only one that was holding up was the ritual of watching a Christmas movie. No surprise. Digital media disruption in the form of streaming services and video creators have splintered audiences once held together by TV Christmas specials.
Digital encroachment means that people don’t go to malls in the numbers they once did, to soak themselves in the season’s iconography: they go to sterile transaction engines like Amazon and Walmart. Digital e-cards hold our attention for just a moment, where holiday cards once decorated homes for the duration of the season.
In sum, the festive season, which was always the year’s premier marketing play, has lost traction where it matters most—in shopping and messaging.
What’s a merchant or a brand to do?
It seems that just updating the old playbook won’t work. Coca-Cola tried to refresh tradition with a dose of AI in 2024 by revising its 1995 “Holidays Are Coming” advertisement without human input: critics from the traditionalist right to the digital left delighted in taking umbrage.
Among the latter, a Search Engine Journal reporter called the AI ads “a creepy, dystopian nightmare.” Digital disruption, as always, is better met by thinking from scratch, not just a fix.
Target social media influencers
It might be worth giving the problem to marketing’s new creative class: social media’s influencers. The big ones have reach—Charli D’Amelio has 155 million followers—and the smaller influencers have a shot at digital reach by going viral. More importantly, influencers are natural disrupters or they go out of business.
Another thought—follow shoppers out of musty malls with seedy Santas into digital media that link messaging to transactions. YouTube Store and TikTok Shop are where new festive traditions are most likely to be born.
Bottom line—this is the year to give your brand a chance to play its part in a new digital festive season for the 2020s, the way Coke and Macy’s did for the 1920s.
John Deighton is the Harold M. Brierley Professor of Business Administration, Emeritus.
