Consumer goods industry outlook: Winter 2022

INSIGHT ARTICLE  |  November 02, 2021

After a decline in consumer spending at the outset of the COVID-19 pandemic, apparel companies have benefited from pent-up consumer demand, back-to-school shopping and additional spending capacity, bolstered by the expanded child tax credit. However, apparel companies are facing significant headwinds this holiday shopping season due to challenges related to sourcing product from suppliers in Asia, most notably Vietnam.

Supply chain impacts

Over the last five years, 50% of domestic apparel imports (in metric tons) has been sourced from China and Vietnam, 14% from the latter. Unlike China, where the vaccination rate as of September was 75%, Vietnam has struggled, with only approximately 10% of the population currently vaccinated. This lagging vaccination rate has had a significant impact on the apparel industry. Recent commentary from the Vietnam Textile and Apparel Association estimated one-third of apparel and footwear factories were closed due to COVID-19 outbreaks.

While domestic imports from Vietnam in the first nine months of 2021 did exceed the same period in 2019 prior to the pandemic, in September they contracted by 20% when compared to September 2019. On recent earnings calls both Nike and Lululemon executives confirmed that uncertainty within Vietnam will have an impact on inventory and sales expectations for the remainder of the year. According to the U.S. Census Bureau, as of July, the latest month for which data is available, the inventory-to-sales ratio—a key metric to evaluate whether inventory can meet sales demands—was 1.9% and 1.8% for apparel retailers and wholesalers, respectively. Those figures are lower than the averages of 2.4% and 2.1% during the three years preceding COVID-19.

Apparel companies with a high reliance on retailers and no established direct-to-consumer platform will likely experience a negative impact on sales for the remainder of the year. While companies such as Nike or Lululemon have a significant online presence—and the ability to sell gift cards, which increases cash flow while deferring inventory fulfillment to a later period—companies without established online platforms will likely miss out on gift card and product sales during what is expected to be a strong buying period this holiday season.

Additionally, middle market apparel and footwear companies should evaluate current supplier relationships and take the opportunity to diversify suppliers to limit potential geographic impact in the future. Companies should also look at limiting the effect of tariffs on foreign imports, which are directly reflected in consumer prices.

Home furnishings trends

While consumption of furniture and home furnishing products remains strong, growth rates on a year-over-year basis have declined from their peak of 59% in April to 12.6% in August, a level still exceeding pre-pandemic averages of 5%.

Factors contributing to this growth since the start of national lockdown restrictions remain significant, as businesses continue to delay planned office returns or adopt a hybrid business model in the face of COVID-19 outbreaks. These factors, combined with discretionary income above pre-pandemic levels, put furniture and home furnishings companies in a strong position to continue to draw consumer discretionary dollars. However, in the immediate term, these companies have several challenges to navigate to sustain the growth levels experienced over the last 14 months.

Supply chain and freight challenges

In September, overseas imports of furniture and home furnishings fell to 3.9 million metric tons, the lowest level since February and a 10% decline from August. This decline is likely due to challenges facing the Asian market as COVID-19 outbreaks have led to factory closures and port congestion, rather than signaling waning consumer demand.

Pricing pressure

In August, import prices for furniture and related products increased 3.2% on a year-over-year basis as certain input costs—including hourly labor, ocean freight and raw materials—all experienced increases. Additionally, based on the producer price index, household furniture, household appliances and home electronic equipment all increased between 3% and 9% year over year. Companies have been passing on these costs to customers as CPI for household furniture and supplies increased 3.3% over the same period. While price increases associated with wage gains are likely to continue, increases attributed to elevated input prices should fall in the coming months as supply bottlenecks ease. 

New-home sales

While new-home sales spiked in the early months of the pandemic—a contributing factor to the growth in consumer goods sales in 2020—in August 2021 they declined to 740,000, down from 977,000 in August 2020.

Better times ahead

While the macroeconomic pressures described above may affect consumers’ holiday shopping plans, consumer goods companies that demonstrate the ability to streamline production, mitigate the impact of shipping challenges and provide customers with unique offerings in a timely manner will continue to perform well. Going forward, we anticipate consumer goods companies to continue to attract discretionary dollars as consumers adapt to new hybrid work environments and supply chain pressures ease.

Increased travel and restaurant bookings drives beauty resurgence

Beauty and personal care companies have continued to benefit from consumers’ willingness to travel and dine out in 2021. In August, U.S. cosmetic purchases reached an all-time high of $66.9 billion, even as restaurants and travel had not yet returned to pre-pandemic levels. Consumption as compared with 2019 has averaged a 17% monthly increase in 2021. As the number of vaccinated Americans grows and consumers gain comfort in their willingness to return to pre-pandemic activities, beauty and personal care companies are poised to capitalize on consumers’ additional discretionary dollars. 

The increase in beauty and personal care spending is reflected in multiple product verticals; however, natural and specialty products have continued to outperform conventional products in year-over-year sales increases. As Americans prepare to return to work and other in-person functions, brands should continue to develop personalized service and delivery options consumers utilized during the pandemic. Based on the latest information available from the IRI E-Market Insights’ E-Commerce Demand Index, which measures consumer spending changes from the previous year across e-commerce sales and fulfillment types, click-and-collect continues to outperform other consumer delivery options.