Economic pressures push retailers to cut costs and add new revenue streams, while TikTok and streaming TV entertain consumers like never before.
Mixed headlines continue for retailers as economic uncertainty deepens. But the Gen Z-TikTok effect, bold new partnerships, and an exploding retail media market offer opportunities for brands in 2023. Those that remain nimble will come out on top.
TikTok Makes Them Buy It: Gen Z’s Social Commerce Habits Are Shaped by Chinese Players
Gen Z’s favorite platform has started testing TikTok Shop with select US merchants. The company’s latest corporate reshuffle and hiring plans point to a focus on commerce, which will offset a lowered ad revenue outlook. US ecommerce livestreaming and owned fulfillment centers are on the horizon—building on the #TikTokMadeMeBuyIt phenomenon (30 billion views and counting) to entice young shoppers.
TikTok is poised to crack the elusive US social commerce nut:
- TikTok parent ByteDance pursues global growth. The ecommerce gross merchandise value on Douyin (China’s TikTok) quadrupled to $100 billion from 2019 to 2021. TikTok took this “made in China” model to Southeast Asia and the UK and is now aiming for the US.
- US social commerce will grow twice as fast as China’s through 2026. Almost all new US digital buyers will be Gen Zers, whose shopping habits are still evolving.
- Early US leaders like Facebook and Instagram pull back. Companies are moving away from social commerce and doubling down on core advertising. TikTok’s share of users who are social buyers will surpass Facebook’s in 2024, per our forecast.
TikTok isn’t the only Chinese player aiming for Gen Z. Ultrafast-fashion brand Shein has a 40% US market share and is expanding into fulfillment centers. Pinduoduo’s new marketplace Temu has been topping US app download charts. And Alibaba’s AliExpress has grown its share of ecommerce traffic substantially since 2020.
Forecast
Forecast
- A major push into live streaming will focus on Gen Z consumers and creators. Sellers from China are already livestreaming to US users, but transactions aren’t frictionless. TikTok needs to find the right influencer-product-audience fit. The platform is also laying the groundwork for a professionalized livestreaming environment, limiting broadcasting to ages 18 and older.
- Chinese players will seek cross-border ecommerce. The US has a receptive audience of young, budget-conscious consumers looking for trendy goods—Shein’s massive popularity reflects this, and now TikTok and others want in.
The Struggle of Mid-Tier Brands
Consumer bifurcation hollows out the middle.
Consumer bifurcation hollows out the middle.
Recession threats, rising interest rates, and persistent inflation force households to rethink budgets. After experiencing wealth-accumulation growth over the past five years, the middle class is seeing it dwindle more quickly than other income brackets, according to Realtime Inequality.
On the other hand, wealthy consumers are fueling a boom in the ultra-luxury market. High-end fashion houses are spending freely on marketing—and some brands are being resold at a premium. Luxury retail sales will grow 6.7% next year. This confluence of factors leads to mixed results:
- Macy’s Inc. higher-end banners Bloomingdale’s and Bluemercury grew in Q3, while namesake mid-tier Macy’s reported soft sales. Kohl’s also revealed a slowdown, noting its core middle-income consumers have been squeezed.
- Neiman Marcus Group reported 70% of its stores had its highest revenue in 10 years—adding that its high-income consumer spends on average $25,000 annually. They’re not alone: LVMH Moet Hennessy Louis Vuitton recorded a sales jump as demand remained strong.
- Meanwhile, Walmart, Dollar General, and off-price behemoth TJX experienced stronger-than-expected sales. Many are expanding: Ross Stores, for instance, opened 99 doors this year. Discount and dollar stores’ October foot traffic was up 9.2% year over year, per Placer.ai.
Consumers have learned to be flexible in the face of recent stock shortages. Consequently, more than 50% of Americans are now less brand-loyal, per Dynata. Walmart’s recent earnings revealed that 75% of its market share gain in grocery came from households that make more than $100,000 a year.
Forecast
Brands and retailers that try to be everything to everyone will suffer. While ultra-luxury brands will remain relatively unscathed, aspirational luxury retailers will be hardest hit if they can’t reposition themselves. The most at risk in 2023? Mid-tier brands that aren’t financially secure—like Bed Bath & Beyond.
Return Policies Will Make or Break Retail Loyalty
Free returns are no longer the norm.
Feeling the strain of slimmer margins, retailers aren’t willing to eat the cost of shipping and processing returns. Heavyweights like H&M and Zara have recently joined JCPenney, J.Crew, and others in charging return fees for online orders.
Meanwhile, other retailers are removing friction. Tactics include leveraging strategic partnerships and investments in last-mile delivery.
- Walmart+ members can schedule returns to be picked up at their homes.
- Walmart and Target offer a curbside option—no need to get out of the car.
- Overstock and UPS are piloting a program for returns to be picked up at home without customers needing to package the items.
Consumer appetite for returns has grown. “Bracketing” is partly to blame—the practice of buying the same item in multiple sizes and returning the pieces that don’t fit. In 2021, 16.6% of total US retail sales were returned, up from 10.6% in 2020, per NRF.
Forecast
- The reverse last mile will become a focal point in reducing friction around returns. Amazon will add an at-home pickup option for Prime members. Instacart and DoorDash will see returns as a new avenue for growth, partnering with retailers that don’t have their own last-mile delivery network.
Retail Media Is Ready to Disrupt the $70 Billion Linear TV Ad Market
Retail media moves aggressively into streaming TV.
The US retail media market is evolving beyond search into upper-funnel advertising formats with streaming TV capturing the attention—and budgets—of major brands. This is the holy grail for advertisers.
Top retail media networks accelerate streaming TV content ambitions:
- Amazon Thursday Night Football advances down the field. Already the dominant retail media network, Amazon is deploying its high-powered targeting and attribution apparatus against highly rated TV programming. In 2023, Prime Video will host the first Black Friday NFL game, offering brands valuable—even Super Bowl-esque—airtime.
- Walmart’s partnerships with The Trade Desk and Paramount+ promise data-powered connected TV (CTV) inventory. Brands are gaining access to display, video, and CTV inventory. And the Paramount+ deal may signal a deeper partnership to extend Walmart’s footprint to more screens.
- Kroger’s Roku partnership proves the power of closed-loop attribution for TV ads. The grocery chain is deploying best-in-class data to drive commercials on Roku’s ad-supported CTV content—closing the loop on sales. With the proposed Albertsons Companies merger promising industry-leading scale, brands will take notice.
Off-site retail media ad spend growth will more than double on-site. Onsite search has propelled the rise of retail media, but its future is increasingly tied to display, video, and CTV ads outside of ecommerce sites. On-site ads will rise 18.0% in 2023, while offsite ads will jump 37.7% to $6.54 billion—up from just $512.8 million in 2018.
Forecast
- Amazon will advance its streaming-TV ambitions through hardware, content, and ads innovation. Amazon will push Fire TV Omni Series via deep Prime Day discounts and ramp-up voice-enabled shoppable ads to bring performance advertising to TV.
- Look for Instacart to ink major CTV partnership—possibly with Microsoft. Instacart has fallen behind its peers in the CTV realm, but the company could become the CPG data source for Xandr and its in-game advertising portfolio.
- Walmart and Kroger will tighten closed-loop reporting on CTV ads. Huge troves of first-party data haven’t yet become huge advantages—so expect investment in omnichannel data architecture to bring real-time data to CTV measurement that will lure bigger brand budgets.
Profitability Requirements Put Pressure on Business Models
Brands strain to find and keep customers profitably.
The pandemic-induced ecommerce sales bump, supply chain snarls, waning loyalty, inflation, and data-collection restrictions are full-speed ahead. As acquisition costs continue to soar and changes in iOS privacy weaken the power of digital advertising, digitally native vertical brands (DNVBs) need to view their business model through a new lens.
Sales strategies mixing direct-to-consumer with wholesale channels online and offline will prevail. Brands will look for ways to widen reach and protect their bottom line:
- Increase (wholesale) distribution. Along with creating wider reach, increased distribution spreads inventory liability. Peloton recently inked deals with Dick’s Sporting Goods and Amazon, and Allbirds continues to add wholesale partners, including Nordstrom last summer.
- Increase scope. Focusing only on the core product or originally intended consumer is no longer viable. Wayfair is courting the pro consumer for repeat business with higher basket sizes. And BaubleBar is launching Minibar, a kids’ line.
- Increase footprint. Physical retail drives sales and discovery: By 2026, only 20% of sales will be online. So Warby Parker’s revelation that 60% of pre-pandemic transactions took place in-store—and that it continues to expand its store fleet—isn’t a big surprise.
Specialty stores are capitalizing on Amazon’s power as the No. 1 search starting point. Retailers are pouncing on the opportunity to broaden distribution points beyond their namesake brand. Gap Inc. launched a new home collection on Walmart last year and recently unveiled two new categories on Amazon. And Victoria’s Secret just purchased DNVB Adore Me.
Forecast
- Economic pressure will bring new twists to collaborations. Retailers struggling with profitability are looking to optimize scale and amortize costs. Ailing specialty retailers, such as Ann Taylor and J.Crew, will turn to marketplaces like Amazon to build reach. And cash-flush retailers will take on DNVBs that bring new technology or a coveted customer—like LVMH-owned Sephora buying Glossier.