Consumer companies are flashing red flags ahead of the holidays. High-income shoppers are trading down, Gen Z is pulling back, and low-income consumers continue struggling.
Those trends spell trouble for big-box and mall retailers about to report earnings - unless strong brands help them overcome the gloom. Walmart, Target, Gap, and Home Depot report in the coming week.
Consumer sentiment slipped to near-record lows earlier this month, fueled by concerns about prices and the government shutdown. Private data shows the economy was losing jobs through late October.
Credit card data from Truist shows sales softening in recent weeks across many retailers. Walmart, Home Depot, and Lowe's saw sales trends slow in October after solid August and September performance.
Wall Street has noticed. Retail analyst Michael Baker at D.A. Davidson now expects weaker holiday spending. He projects sales growing in the high 3% range year-over-year, down from a previous forecast that anticipated acceleration from last year's 4.3% increase.
"There's just a lot of headwinds building for the consumer and a lot of the data we track [at retailers] was just really bad in September and even worse in October," Baker said.
For two years, executives warned that low-income consumers were spending less. Now high-income shoppers are watching budgets too.
McDonald's CEO Chris Kempczinski said traffic from high-income diners climbed nearly double digits in Q3. The fast-food giant is gaining share with wealthy consumers through deals like Extra Value Meals.
"Value matters to everybody, whether you're upper income, middle income, lower income," Kempczinski said. "Feeling like you're getting good value for your dollar is important."
Dine Brands, which owns Applebee's and IHOP, sees the same trend. The chains are pulling customers from higher-priced restaurants with a 2 for $25 Applebee's promotion and $6 IHOP value menu.
"We're seeing a greater increase of higher-income guests joining us this year," Dine CEO John Peyton said, adding that higher-income traffic offsets declining visits from low-income diners.
Savers Value Village, which runs thrift stores across the US, Canada, and Australia, said it's seeing growth in "younger and more affluent" customers.
"High household income cohort continues to become a larger portion of our consumer mix. It's trade down, for sure," CEO Mark Walsh said in October. "We couldn't ask for a better outcome."
An Alvarez & Marsal survey of over 2,000 shoppers found 24% of respondents earning $100,000+ annually plan to spend less this holiday season.
"They may do that by buying fewer things, they may switch to less expensive brands, or they may switch to lower cost retailers overall," said Joanna Rangarajan, partner at the firm.
Wealthy consumers hunting for McDonald's value meals and shopping at thrift stores signals broad economic weakness heading into the holidays, with analysts cutting sales growth forecasts as high-income shoppers join low-income consumers in pulling back spending. The coming wave of retail earnings will show whether strong brands can overcome the gloomier consumer climate.