Retail Pulse Report: Demand Destruction and Supply Distortions
Whatever tariff impact is coming, it’s already on the boat and at sea (or rather, it’s not and that’s the problem).
Source: Adobe Stock’s take on “demand destruction” (one of the least apocalyptic ones!)
This week I read some bulletins from UBS that framed the period we’re in as “demand destruction.” Powerful term, and true on many levels. We are in the midst of watching consumers ask themselves if they should buy things (TL;DR – they still are, but not quite as enthusiastically as they were before). But more important, we’re watching retail demand from Chinese manufacturers grind to a halt.
The opportunity to suspend tariffs before they impact the economy has passed. Even if some kind of “beautiful deal” materializes quickly, we’re looking at two months of lost capacity, both in terms of manufacturing and shipping, that will not easily be made up. The distortions are built into the system now, they just haven’t made it to the shelf yet. And if consumer confidence is any measure, they know that as well as any supply chain analyst.
Let’s dive in.
Retail Economic Indicators
The US economy shrank 0.3% in the first quarter. You might have seen two different reactions to that: panic, that Trump’s tariff policies are already wrecking the economy, or a big shrug. Really, it’s both. The GDP calculation treats imports as a negative and imports spiked so therefore the calculation turned out negative. The positives side of the equation was actually OK, but only OK – consumer spending grew, but at a much slower pace than in 2024, and inflation was up 3.6% in the quarter, much higher than the 2.4% increase in Q4 2024.
But on the flip side, even before the first dollar in tariff fees is collected, tariffs have distorted the economy: retailers accelerated shipments to bring them in before tariffs might hit. So now they are sitting on inventory they hope they can sell with pre-tariff costs attached, to a consumer base that is reconsidering their future spend in light of fear of rising prices. And in the meantime, a rising chorus of port-watchers are warning that with expected 145% tariffs on goods from China, the flow has effectively stopped – to even greater degrees than during the pandemic.
As far as consumers themselves, confidence is low no matter how you measure it. Last week it was the University of Michigan’s consumer sentiment survey that fell off a cliff, and this week it is The Conference Board’s consumer confidence index, which fell 7.9 points to 86 in April. This is the lowest reading since May 2020. Nearly one-third of consumers expect hiring to slow in coming months, which nearly matches the level reached in April 2009, the depths of the Great Recession. About half of consumers are worried about a recession and “most” expect prices to rise because of tariffs.
However, Mother’s Day spending is expected to rise over last year, to $34.1 billion versus $33.5 billion in 2024, according to the NBC / Prosper Insights and Research survey. About the same amount of consumers are expected to participate – 84% - as last year, so the increase is coming from increased spending per person, about $5 on average, and a 2% increase year over year (which would not beat average inflation).
NRF doesn’t publish these statistics in their forecast, but it would be very interesting to know if that $5 per person average increase in Mother’s Day spend is driven mostly by higher-income shoppers spending more vs. lower-income shoppers spending less. CNBC analyzed the most recent quarterly results among credit card companies and found that they are seeing a distinct split in spending habits – spending is falling among credit card providers that serve lower income shoppers (think companies like Synchrony that power store credit cards), while spending is increasing at credit card companies that serve higher income shoppers (think AMEX). The share of credit card users making only minimum payments rose to 11.1%, the highest level in 12 years according to the Federal Reserve Bank of Philadelphia.
Lest you think only the US (or the US and China) are struggling, the British Retail Consortium reported a mix bag of inflation results in the UK, with non-food inflation falling 1.4% year over year in April – falling, but at a slower rate of fall than in March (when it fell 1.9% year over year). But food prices increased 2.6% year over year in April, versus 2.4% year over year in March.
The BRC points to increased business costs as labor wages rose and business costs that are mandated by the government also rose. During the pandemic, different countries tried different policies, or had built-in factors (like mortgage reset rates) that meant cost of living all hit differently. Now we’re seeing that coming out of it is surfacing differently as well. The US was ahead in its soft landing, but the UK’s continued inflation challenges show that it wasn’t at all guaranteed to begin with.
Retail Tech & Research Data
I debated about where to stick this story, but at the end of the day it’s a survey and it comes from a vendor with a solution to sell, so even though you could say it’s an economic indicator, it really does belong here in data. Lending Tree surveyed Buy Now Pay Later (BNPL) users in the US and found that 41% report being late on a BNPL payment in the last year, an increase from 34% in 2024. However, they note that they were mostly (76%) missing by a week or less.
Where things get worrying is that 25% say they are using BNPL for groceries and takeout versus just luxury items – an increase over the 14% who said so in 2024. It could be that consumers are just getting used to using BNPL for everything, but it still indicates a shift in behavior that runs counter to the advertised benefits of using these short term payment options. It compounds when you hear that 62% of BNPL users believe using it will improve their credit score. It does not.
Hey, remember before tariffs when we cared about base motivations of consumers? You know, long running trends that shape consumers’ expectation for what they seek from retailers or what motivated them to buy? I had kind of forgotten about those too – in fact, I put a lot of effort into a trends report for 2025 that still has not seen the light of day, mostly because too much has happened since the end of last year when I put it together.
One long-running trend has been sustainability. And as we see budget cuts that threaten the little bit the government was doing to fight climate change in the US, it will be inevitable that some consumers will feel ever more obligated to demand ecological accountability from businesses instead.
To that end, YouGov published a report breaking down a segmentation that retailers can use to better understand sustainability motivations among US consumers. While the conventional wisdom is that consumers are unwilling to pay more for sustainable products, the truth is a little more nuanced. 28% are “planet protectors” who will pay more for sustainability and use it as part of their decision-making in selecting products and/or retailers. 20% are “price point green” where they do prioritize the environment but are price sensitive. 14% are “green but keen” – they care about the environment, they just haven’t figured out how to integrate that into their daily lives (and will likely be price sensitive about it). 17% are “on the fence” and don’t know if they do or should care about sustainability issues, and only 21% are actual “green rejectors” who see the topic as only political and don’t want to consider it as part of their retail decision-making.
There were other survey results in there, probably the best one is that 58% believe the government is responsible for contributing to sustainability and 76% believe the government is doing a bad job, and only 10% of US consumers believe their habits or actions negatively impact the environment for future generations.
That’s one trend. Here’s another, and this is the heaviest part of this week’s newsletter. One other big trend among consumers for 2025 is the loneliness epidemic and its flirtation with toxic wellness. Zoe Scaman published another blockbuster this week on this topic. It’s just the slideshow of a presentation she is giving right now, but you don’t need the talk track (but have the sound on anyway, there are parts where you’ll want that). Be prepared for the gut punch towards the end.
Zoe is the same person who wrote about the topic I picked up a couple of weeks ago, on the intersection of social responsibility and stockholder returns. This week, my caution to you is, while consumers absolutely want retailers and brands to play a role in building connections and community places that help address loneliness, this is one that I caution you to tread carefully. If you do it wrong and/or superficially, your customers’ lives may literally be at stake.
AI & Retail
This week, two stories intersected in interesting ways. The first one is one that I was ignoring for a while now, which is the launch of World. This is Sam Altman’s side hustle, which intends to scan people’s eyes in order to create a biometric digital ID that can be used to verify identity. The process of establishing your digital ID with World has been described as “cumbersome”, but the company has now announced some new partnerships. The biggest one is a team-up with Visa to launch The World Card, a card that lets users spend “digital assets” (aka crypto) anywhere that Visa is accepted. World also announced a partnership with Stripe to pay with World on Stripe-enabled websites and apps.
The second story is also a Visa one: the company announced they are opening their payment network to “developers and engineers who are building agentic AI shopping experiences that find and buy products for users.” (MasterCard has also announced its own “Agent Pay”). The idea is to make it easy for agentic AI to buy on your behalf securely and safely and theoretically with your controls and permissions. We saw plenty of hilarity around kids spending thousands on in-app purchases or using Alexa to buy things. I can’t wait until it’s you trying to explain to the retailer or credit card company that “my AI shopping agent did it, not me!”
You could spend a ton of unintended money in the blink of an eye, haha, pun intended.
Retail Winners and Losers
So while Amazon’s flirtation with exposing import fees on its Haul site came and went faster than I could cover it, Temu and Shein did not feel any Presidential obligations here and both have started tacking on “import surcharges.” In the case of Temu, some of them have been as high as the expected tariff (145%), while Shein is taking a more nuanced approach – right now, prices are up about 50% on top health and beauty items and 30% in kitchen and home.
In the meantime, US-based sellers that import Chinese-made goods are starting to pull out of participating in the upcoming Amazon Prime Day, citing tariff uncertainty. They say they want to reduce the amount of merchandise they sell at a discount in order to protect what margin they can, and some report bringing in merchandise ahead of tariffs but not wanting to then sell it all out and at discounted prices.
In the UK, while retailers in particular cheered the government’s intended review of its own de minimis exception, others are starting to ask if ending the exception will only increase UK consumers’ challenges and pressures. This is getting argued everywhere – it’s the lowest income shoppers who lean the heaviest on Temu and Shein, so if the de minimis exception closes and they are suddenly far more expensive, then what alternatives do these low income shoppers have? Will it lead to inflation?
The thing is, that only looks at one slice of the equation. That loophole lay dormant for a long time before Chinese shippers found and exploited it – and got low-income shoppers addicted to it, with arguably larger TCO costs in terms of environmental impact, chemicals, waste and more. A more interesting question might be, why did it take so long to start taking a look at it?
Last week I was also ignoring the story about Marks & Spencer getting hacked. Retailers get hacked all the time, and big retailers are bigger targets, so that story seemed like a “dog bites man” story. M&S hasn’t seemed like they’re handling the communication to consumers very well, and as the week progressed it became clear that whatever damage was done was bigger than it initially seemed. However, the story has now spread to include Harrods and Co-op as well, which makes it seem an even bigger deal than M&S getting hacked and fumbling how to handle it. The UK classifies grocery retail as critical infrastructure. That likely does not include Harrods, but M&S and Co-op would both qualify.
Another thing you would be excused for forgetting all about is that fashion retailers got big into NFT’s for a short while this decade. I had not thought much about it other than, “I wonder what happened to all those NFT’s that brands sold?”. Well, the people who bought them remember that all very well, because some of them organized to sue Nike over shutting down their NFT business. Nike went so far as to acquire RTFKT (pronounced “artifact” and thanks to Jonathan Stempel for spelling that out because my mind went to a completely different place). The acquisition lasted 3 years – from acquisition in December 2021 to wind down in December 2024.
As other “celebrities” get sued for endorsing crypto vehicles that have since imploded, I am a bit surprised that Nike didn’t find some easier way to fend this off. I suppose they think they can win and have plenty of lawyers on retainer so perhaps this doesn’t cost so much to defend in their eyes, but I would think it’d be a lot cheaper to put together a luxury lounge in the lobby of Nike headquarters and say it’s exclusively available to NFT holders, and there you go, they have something of “immeasurable” value that almost none of them will ever use.
I wondered that before I read this next story, but if anything it firms up my opinion. At one point Matches Fashion was blazing hot in the luxury space – known for their “stores” that were really more like luxury homes that had closets full of clothes you could buy. Their downfall was fast and hard, and Frasers Group snatched up the pieces for a song. What does the company plan next for the brand? An exclusive members’ club. Think “Soho House of retail”. A website relaunch will come first and stores next. It’ll be invite-only from a board of tastemaker advisors and grow from there. Which, to me, sounds almost exactly like what NFT’s like Bored Ape Yacht Club promised at the height of their own ambition.
And while this week’s news is already way too long, I can’t help but include this last story, which is about Amazon expanding their ‘Shop the Show’ concept. While Amazon has and continues to play around with livestream shopping, this kind of shopping seems much more on point for the average American consumer, at least. While a show is streaming on the TV (via Prime), consumers can browse relevant products on their phones. Want the jacket Joel wears on Last of Us? It’ll show up right in the app for you to buy. And the mobile-only experience was by design, recognizing that plenty of consumers do two things at once, like watch TV and scroll on their phones.
What Did We Learn This Week?
Still waiting. Trouble is coming, that’s already baked in and too late to stop, and any good news that comes in April’s numbers will be from retailers and consumers both accelerating purchases ahead of the tariff’s hammer fall. How big and bad the trouble will be depends on how long the current status quo lasts – 10% on most, 145% on China and some blend for a few players in between. The longer this drags on, the more the impact will roll forward, into back to school, into holiday.
In the meantime, tech developments that impact retail roll on. Despite this giant storm cloud on the horizon, consumers still want what they want from retailers, whether it’s to solve climate change or end loneliness. Retailers still try new things like members-only clubs or shop the show. Or “pay with your eyeballs.” And I will be here to track and comment on all of that!
Program Note: next week is an Aptos customer conference, part of our city tours this year. Instead of keeping up with the news, which is difficult when traveling (not to mention emceeing a couple of days’ worth of content), I will bring the promised in-depth look at current events in AI and their impact on retail. I’ve held quite a few deep-dive stories and essays on the topic because I can see the shape of something bigger there and I want to put the pieces together.
Until next week!
- Nikki