Goldman Discovers "Trade-Down Phenomenon" Affecting Both Affluent and Low-Income Consumers

Goldman's Private Real Estate Retail Webinar

Goldman recently hosted a Private Real Estate Retail (shopping center) Webinar. The panelists included Mary Rottler from First Washington, Daniel Zatloukal from Inland Real Estate, and Joseph Tichar from Raider Hill. The discussion covered a range of topics such as consumer behavior, same-store NOI growth projections for 2025, retailer bankruptcies, the transaction market and cap rates, as well as the financing environment.

Trading Down Among High-End and Low-End Consumers

The webinar focused on the trend of both high-end and low-end consumers trading down. This phenomenon is a result of mounting macroeconomic challenges such as high inflation and rising interest rates, a consequence of 'Bidenomics' backfiring. Trading down generally happens when incomes fail to keep pace with inflation or when purchasing power diminishes.

Key Takeaways from the Webinar

A team of Goldman analysts led by Caitlin Burrows summarized the key points from the discussion about high-end and low-end consumers trading down: 1. Both high-end and low-end consumers are trading down, despite the strength of the high-end consumer and the softness of the lower-end. 2. For high-end consumers, traffic remains strong in grocer-anchored centers catering to the upper quartile of demographics. August traffic increased by 8.7% year-on-year, with positive monthly trends throughout 2024 and double-digit traffic growth compared to 2022. This has led to optimistic expectations for the holiday season. 3. For low-end consumers, demand for essentials and services remains robust, but discretionary spending on luxury items and cosmetics is weak. As a result, holiday sales will depend on how retailers encourage customers to shop. 4. The trade-down phenomenon is evident in both high-end and low-end consumers. For instance, sales at Nordstrom (a luxury department store chain) are flat or declining, while sales at Nordstrom Rack (an off-price department store chain) are increasing. Similarly, low-end consumers are feeling the pinch and are opting for discount retailers like Walmart, Target, and Sam's.

Implications of the Trade-Down Phenomenon

The last time "trading down" mentions spiked on earnings calls was during the Global Financial Crisis. The latest inflation data for September came in hotter than expected, and persistent inflation has severely impacted low/mid-tier households. The note from Goldman further indicates that the consumer downturn is now affecting wealthier households.

Revisiting the '70s?

The financial condition of consumers has never been worse, with record-high credit card debt and depleted personal savings. Could we be heading for a replay of the '70s?

Consumer Baskets Analysis

Goldman's consumer baskets show that middle-income consumers are outperforming high-end consumers, while low-income consumers are under increasing pressure.

Concluding Remarks

The key takeaway is that the consumer downturn theme persists and may now indicate stress for wealthier households as the Biden-Harris inflation storm continues. Food inflation seems to be a universal concern. Moreover, an energy price shock could be on the horizon if Israel bombs Iran's crude oil export facilities. Such price shocks could potentially trigger a recession.

Bottom Line

The "trade-down phenomenon" is a significant trend affecting both high-end and low-end consumers. The continuing consumer downturn, coupled with the persistent inflation storm, is causing stress even for wealthier households. Could we be on the brink of a replay of the '70s? What are your thoughts on this development? Share this article with your friends and let us know your views. Don't forget to sign up for the Daily Briefing, which is delivered every day at 6pm.