Price-Sensitive Consumers Drive Holiday Deals

This holiday season, most U.S. consumers will put their hard-earned dollars toward experiences such as travel and vacations, while scaling back on buying computers, kitchen gadgets and other goods—and they will be extra vigilant about looking for deals as economic uncertainty continues to affect buying behavior.

In fact, an overwhelming majority of shoppers—70%—are waiting for stores to offer discounts before they start buying, per a new Morgan Stanley Research survey of some 2,000 U.S. consumers. Rising prices are their top concern, with even more price sensitivity reported this year than last.

“It is no surprise that the headwinds of the past year are catching up to consumers and forcing them to be more conservative this winter,” says Sarah A. Wolfe, a Morgan Stanley economist. “We see persistently higher inflation, rising interest rates and fading excess savings as the main obstacles to holiday shopping this year.”

Here are the survey’s five key takeaways:

While consumers are largely keeping holiday shopping budgets in line with last year, the majority are waiting to see discounts of at least 20% before filling up their carts. With inflation their top concern, about 43% of those surveyed said they will buy fewer items if stores raise prices, while a third said they would buy “a lot less” if the cost of goods goes up. On the other hand, continued growth in jobs and wages should support spending budgets. 

Retailers face a very different selling environment than last year, when shoppers raced to clear shelves of dwindling stock as supply chains buckled. This year, with inventory piled up in stores and distribution centers, consumers have the upper hand, meaning companies will have to offer competitive prices to entice shoppers—but with risk for the bottom line. “Retailers will compete for a similarly sized revenue pool as last year, without the same demand,” says Kimberly C. Greenberger, an equity analyst covering specialty apparel, footwear, department stores and brands. “Department stores and specialty retailers have a tendency to slash prices when consumers are hesitant to spend, so those offering the biggest discounts will be able to grab the largest wallet share, but at a hit to margins.” 

Respondents said they were much less likely to buy in several popular categories, including electronics, luxury goods and sports equipment—all areas that saw elevated purchasing during the pandemic. Consumers plan to spend 25% less on electronics this season, a concern for retailers whose year-end revenue totals depend heavily on holiday sales. Home furnishings, appliances and sports equipment will also take a hit, since these categories have both experienced some of the largest price increases and have been the most purchased over the past two years “As such, it is no surprise there is less appetite among consumers to pay up for these items this year,” says Wolfe. 

Spending plans on holiday gifts are negative across categories. 

While most consumers indicated they were unlikely to trim grocery budgets, a significant portion plan to cut back on dining out (74%) and meal deliveries (61%), disproving the theory that consumers would spend in these categories after years of cooking in during the pandemic. It is an obvious positive for food retailers, which should be better positioned than discretionary retailers.  In addition to groceries, survey respondents said they are also likely to maintain spending on household items and supplies.

Air travel should be robust this season, with demand well above 2019 levels. Airlines haven’t seen a slowdown in demand or experienced fare destruction so far, despite consumers’ ongoing concerns about the macro-economic environment. Consumers’ budgets for airfare should hold up throughout the next six months, in line with expectations from last year.

For more Morgan Stanley Research insights and analysis on consumer spending and the impacts of high inflation on buying behavior, ask your Morgan Stanley representative or Financial Advisor for the full report, " Holiday Spending Preview: Is Santa or the Grinch Coming to Town?" (Nov. 10, 2022). Morgan Stanley Research clients can access the report directly here . Plus more Ideas from Morgan Stanley’s thought leaders