• Juanita Schwartzkopf

Should Retailers Worry About Consumer Credit Levels? The Holiday Season is Approaching!


Retailers have been through a multitude of changes since the Covid-19 pandemic shutdowns in March of 2020. In considering the future of retail, let’s use the holiday shopping season as the backdrop for the changes.


Holiday Shopping Seasons Over Time


During the 2019 holiday shopping season there were increases in online shopping, but 84.2 million people went to retail stores on Black Friday. Much of the seasonal shopping occurred around Thanksgiving, with 40% of the 2019 holiday shopping purchases occurring on Black Friday and Cyber Monday. Consumers were comfortable holding off on purchases assuming they would get better deals and products would still be available later into the holiday season.


The 2020 holiday shopping season was the first season with the impact of Covid-19. While retail stores had begun to re-open for the 2020 holiday shopping season, stores had mask requirements and sanitation protocols. There were capacity limits and appointments to shop. Retailers replaced Black Friday with early shopping deals because shipping problems were anticipated as the season progressed. Black Friday foot traffic reduced by more than 50%, and Walmart and Target closed on Thanksgiving Day. Black Friday digital sales rose by double digits and curbside pick-up increased over 50% from the prior year. The reliance on online shopping continued to grow.

The 2021 holiday shopping season was focused on supply chain fears and constraints. China had implemented a strict no tolerance policy for Covid infection which caused unexpected shutdowns in major ports and in manufacturing centers. Consumers worried about empty shelves and bought at higher prices. Consumers also purchased items earlier to reduce availability fears.


The 2022 holiday shopping season will be marked by inflationary fears, anxiety tied to a recession, and consumer debt worries. Consumers have expressed concern for “shrinkflation” and have indicated a move toward focusing on sale prices and cheaper brand names. The government stimulus money is no longer in the mix and consumers are worrying about the increased cost of living and rising consumer debt. Retailers may be caught with the wrong inventory or too much of certain items and sales prices are expected to be used to convert inventory to cash. Industry experts expect consumers to reduce big ticket purchases and expect retailers to focus on sales events beginning in October. A recent survey of consumers indicated 40% of those consumers surveyed will do the majority of shopping online – compared to 30% in 2019.


Consumer Debt Levels


The New York Fed tracks and reports consumer debt levels. This graph shows consumer housing and non-housing debt from Q1 2004 to Q2 2022.

The mortgage balances on consumer credit reports increased to $11.39 trillion as of June 30, 2022 compared to $10.44 trillion one year ago. The Q2 2022 increase in mortgage debt was $207 billion. A 1% interest rate increase on 50% of the mortgage debt would take $57 billion out of consumer purchasing power.


Home equity lines of credit increased $2 billion after many years of declining balances. Credit card balances increased $46 billion during Q2 2022 and are still slightly lower than pre-pandemic levels. During the first year of the pandemic, consumer credit card balances decreased, and those balances have now increased to close to pre-pandemic levels. Auto loans increased $33 billion in Q2 2022.


The average credit card interest rate reached 18.79% in the October 5, 2022 weekly reporting from creditcards.com. For new rewards cards, the starting APR is now 18.63% compared to 15.94% one year ago. For new travel cards, the starting APR is now 18.38% compared to 15.46% last year.

According to moneygeek.com the average US credit card holder had $5,769 in credit card debt in Q1 2022, compared to $5,611 in Q1 2021. During this period 31 million more credit card accounts were opened.


A 23% interest rate on $5,769 of debt will cost the average consumer approximately $1,325 per year.


The pressure on consumer purchasing power is clear when you consider the combination of increased consumer debt and increased consumer interest costs.


What could this tell us about the 2022 holiday shopping season?


Retailers need to consider these possibilities as they forecast their ability to convert inventory to sales during the 2022 holiday season:

  • Consumers have indicated a preference for sale items.

  • This preference shift also includes moving toward lower cost brand alternatives, including private label products.

  • Changing product preferences are continuing. For example, returning to gyms has reduced the sales of home fitness equipment. Also, the return to the office has changed clothing purchase selections.

  • Consumers may reduce spending on gifts during the holiday season as travel, food and energy costs are increasing.

  • There is a trend toward more home-made presents.

What do lenders need to watch for?

  • Inventory values will continue to be pressure points in the borrowing base structures.

  • Caps on lines of credit may be challenging.

  • New appraisals with current sales conversion rates may increase ineligibles.

  • Seasonal products may slip to aged seasons on the borrowing base as consumers change spending habits.

  • Return allowances and expectation for additional markdowns and allowances may impact ineligibles or the implementation of reserves.

Inflation and interest rate increases will impact retailers as consumers change their spending habits. Lenders and retailers will need to closely analyze consumer spending habits and inventory roll forwards during Q4 of 2022. Retailers may need to offer discounts earlier to capture consumer interest. Inventory orders with suppliers may need to be reduced, changed, or cancelled.


Detailed analysis by product line, by SKU, by location, etc. is required to survive this 2022 holiday season. Inventory roll forwards by category can help identify areas to further analyze and adapt. The US consumer is typically resilient, but the 40-year high inflation rates, the rising energy costs, and higher interest expense may challenge even the most resilient consumer’s buying strategies for the remainder of 2022.


Retailers and their lenders will need to keep a close watch on weekly financial performance and working capital management moving through the remainder of 2022 and in to 2023.