Listen: The Decisive | Episode 21 - 2024 Holiday Sales: Trick or Treat?

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Kristen Hallam  

When most people think of Halloween, they conjure up images of ghosts, ghouls and an assortment of characters on a quest for candy. When our experts think of Halloween, they look into their magic mirrors and ask if it will be the fairest of them all for the economy or a nightmare featuring bloodied supply chains and killer prices. I'm Kristen Hallam, your host for this episode of The Decisive podcast. We have a thriller in store for you today. Joining me for this discussion are my Monster colleagues from S&P Global Market Intelligence, Michael Zdinak, Director on the U.S. Economics team, who leads the U.S. Consumer Market Service; and Chris Rogers, our Head of Supply Chain Research. Michael and Chris, welcome back to the podcast. So let's start with a fun little icebreaker question. Michael, what is your favorite candy for Halloween or for every day?

Michael Zdinak  

I got to be honest, I'm a traditionalist. I'm a Reese's cup man. I'm a confessed chocolate lover and peanut butter addict. And other than a little bit of shrinkflation in the last couple of decades, I think that recipe has been unchanged since about 1928. So I'm sticking with that.

Kristen Hallam  

Chris, how about you?

Chris Rogers  

I mean Halloween has never been as big a deal over here in the U.K. as it has in the U.S. But for me, chocolate means Cadbury Dairy Milk or bust.

Kristen Hallam  

For me, I'm going to have to go with candy corn. That just says Halloween to me. It's not everyone's favorite, but I can't get enough right now.

Michael Zdinak  

It's nice to see it get a little bit of love and not just the jokes about how they made one batch back in 1928 and are still selling it.

Kristen Hallam  

Yes, the old Lewis Black bit. I'm familiar with that. Now that we've made everyone want to wolf down some sweets, Michael, what can you tell us about the outlook for U.S. candy sales this Halloween season?

Michael Zdinak  

Yes. We have a really interesting story to tell this year. Headlines have been dominated by the surging cost of inputs. The cacao that's used in chocolate manufacturing and raw sugar in particular, is up like 12% and 50% year-over-year, respectively. And that has candy makers really creeped out. Margins are lower, sales are slowing, and it's not a fun time to be in that business. But for parents and the consumer broadly, they get to breathe a bit of a sigh of relief this year. Slowing sales mean chocolate manufacturers haven't been able to pass those price increases on as much as they would probably prefer to. And so we're looking at year-over-year candy prices being little changed from last year, up about 1%, but that's a big difference than the terrifying 14% rise we saw last year. And that means that in real terms, people are going to bring home more candy. So break out the pillow cases and go crazy. There's going to be less chocolate offerings. But on a household level in terms of what the consumer is going to spend broadly, we're looking at sales to rise around 2.8%, a little less than 3%. You could say a bat's wing short of that. But the big news is this is the year we break the $4 billion mark in candy sales. And so while that's not a large amount of spending in terms of the economy broadly, people spend about twice as much on candy now as they did a decade ago.

Kristen Hallam  

So that kind of naturally leads into my next question, Michael, which is what about prices for candy? Are they going to put us 6 feet under? Or have they been slashed from their inflated levels?

Michael Zdinak  

That's where the really good news is here and where we're telling a very different story than I think a lot of people will be reading elsewhere. And that's that when we look at the basket of candy broadly represented in terms of the consumer price index or the personal consumption expenditures index that feeds into our measure of ultimately gross domestic product, that's little changed this year, like I said, about 1% up. And that's a big difference to the 6% rise we saw in 2022 and the 14% rise we saw in 2023. So that means that in real terms, candy sales are actually going to grow this year. That's a measure of candy volumes. Kids, just like economists, enjoy quantity more than quality sometimes, at least in terms of sales. And so in terms of real sales, after 2 years of falling, we're expecting that to rebound this year.

Kristen Hallam  

All right. Well, now let's talk about the supply chain that gets that candy on the store shelves. Chris, how would you describe Halloween supply chain activity in 2024?

Chris Rogers  

It's been a big year for Halloween products generally. I think most of the candy that's sold in the U.S. is produced largely in the U.S. As Michael mentioned, the materials come from around the world. And in that regard, obviously, supply chains generally have had a pretty terrifying year this year. The good news is that everything appears to be getting through. When we look at total supply chain activity inbound to the U.S. in terms of Halloween products, then actually 2024 is a record high. 2023 was quite weak. There had been a period of destocking, so reduction in inventories by retailers generally. But year-over-year imports of Halloween products aside from candies made overseas that also includes clothing and decorations and all that sort of stuff. That was up by around 19% year-over-year. To put that in context, by the way, if you've ever seen one of those big containers that are around about 40 feet long, it's equivalent to around 16,000 of those containers packed with everything from bat outfits to 12-foot tall skeletons. So yes, there's a lot of this stuff moving around.

Kristen Hallam  

I feel like I've seen a lot of 12-foot tall skeletons around my part of the world here in Charlottesville, Virginia. So it's definitely been a lot of those in stock for sure.

Chris Rogers  

They've been selling those much earlier than ever. We started to see the sales pick up in kind of April time. So clearly, any time of year is a good time of year for a 12-foot tall skeleton in your front yard.

Michael Zdinak  

I think you have a store in your front yard because I'm gobsmacked as to where people store these when they're not using them. That's what -- how large do they break down? I've never been in the market for buying one, but I certainly don't have room in the basement for a 12-foot skeleton.

Kristen Hallam  

I guess you just have to make room if you get one of those. Chris, you also mentioned clothing there, and I'm curious about what the trend is for costumes. What do the trade data tell us about which costumes we're likely to see hunting our doorsteps this year?

Chris Rogers  

Witch -- I see what you did there. I saw what you did. Yes. So one of the nice things with the trade data that we track is that we can apply keyword searches to it. So we can look very precisely for types of things rather than just using the codes that the customs and border protection folks use when they're judging tariffs. The good excellent news, and this is just my personal thing, is the imports of clown outfits are down by around 1/3 after growing for 2 years. So thankfully, the clown wave has broken. The other piece of good news is that outfits for pets have increased. I've got 2 small dogs. One of them doesn't mind getting dressed up and the other one will quite happily savage you if you try and put so much as a bat wing on her. But we have seen an increase there. What's done particularly well this year has been movie tie-ins, particularly Beetlejuice, and I'm only going to say that once for obvious reasons. There's around -- I would avoid that. There's 500 containers of Beetlejuice-related --

Kristen Hallam  

That's 2.

Chris Rogers  

That’s 2 -- I've got one more -- from around 100 containers. So about fivefold increase as a result of the movie. Others that have been doing well, Minions, we just had the new movie there. Marvel has done very well, particularly with Deadpool and Wolverine, whereas some of the others where there were movies last year or the franchise are dying back a bit like Barbie and Star Wars, we've seen less of those. So this is a real challenge for the retailers, right, because these things tend to be quite fashionable or they come in and out of trend. And so making those judgments months ahead of time. Remember, a lot of these goods are shipped over the summer and they're manufactured in the spring. So they've got to be ordered like late last year, early this year. That's really a tough job.

Kristen Hallam  

It sounds like based on what you're saying, there's a bit of a disparity between the surge in imports and the modest growth in sales. Does that mean we can expect some good sales on Halloween items on November 1? Or do these items go back in the box until next year?

Chris Rogers  

Yes. So I think firms would obviously rather push inventory through as quickly as possible. Now that interest rates are actually a thing, the cost of keeping inventory for months or years on end is really not something most firms are going to be happy to do. At the same time, you also have the wave of the next seasonal imports coming through. So that is toys and holiday decorations. And then almost as soon as that's cleared out, then you start to see the spring garden goods come in, whether that's gardening equipment or gazebos or palapas or whatever it is, people want to check in their garden next year. So there isn't a lot of space for those to be kept. So if we don't see the sales boom, then yes, maybe some discounting might be in order.

Michael Zdinak  

Piggybacking off of what Chris said, each season of shopping helps inform the next. And so when retailers are planning for the holiday season, those decisions are going to be influenced by not just what happened at the Halloween season, but in the back-to-school season and in the spring shopping season before that. That's what they used to determine the right mix of goods. So if things don't sell well this Halloween, it's a bad sign for Christmas, but that's not what we expect to see. Quite the opposite, actually.

Kristen Hallam  

All right. Thanks for that. Now Chris, as you alluded to earlier, shipping for Halloween items, candy, costumes, decorations, all of that started well before the recent U.S. port strike. But were there concerns about that strike that influenced imports?

Chris Rogers  

Yes, absolutely. The U.S. port strike was like that seen in the kind of the teenage horror movie when they know they're selling down in the basement, right? You know it's there. It's probably going to try and like do something horrendous, but somebody still goes down in the basement. So we've known for really more than a year that there was likely to be a port strike, right? Labor has become more active since inflation went up. We saw that with the United Auto Workers last year. And so there was plenty of signal that there may be a strike. At the same time, there were the uncertainties around shipping through the Red Sea and the Panama Canal. And thankfully, the Panama Canal issues got sorted out. And so the consumer goods firms generally, not just those shipping for Halloween had plenty of time to build up. And what we saw across consumer discretionary goods was that imports began to scale up more rapidly than they normally do. So effectively, the peak season started a bit earlier in June and July. We then had a little bit of a slowdown in August. Normally, August imports are higher than July. This year, they're a bit lower. And then in September, there was another boom just ahead of the 3-day strike. So what we saw there, I think, was firms trying to modulate their shipping just to make sure they didn't get caught out by the strike, which in the end only lasted 3 days, right? They got down in the cellar and it wasn't a clown. It just turned out to be a werewolf or something.

Kristen Hallam  

It was Mr. Edwards in the werewolf mask -- and he would have gotten away with it too, if it weren't for those meddling kids, for you Scooby Doo fans out there. Well, as you said, Chris, the U.S. strikes are gone, but they're not forgotten because there's an unsettled question that's coming back up in January. Will we see or are we seeing a shift in supply chain activity leading up to that date?

Chris Rogers  

The strike is likely to be a zombie that arises on January 16. What we saw in the initial agreement and the reason that the strike only lasted 3 days was they reached a deal on pay and pay deals are pretty easy. I offer 50, you want 75, I offer 62.5, we're done. The bigger issue and really the reason why there wasn't a conclusion reached sooner is over port automation. Most ports in the world now have a high degree of automation. So those big cranes and the big carriers that move things around generally are running robotically. They're dispatched centrally. For most U.S. ports, however, there isn't really much in the way of automation. And obviously, as a labor union, you're concerned about that. For the ports, it's really necessary for automation to come through if they're going to become more efficient and compete. However, it is existential for the staff. So there are no easy answers here. Fortunately, the strike will be happening during the off-peak season, but we probably will still see firms preload some of their imports, particularly in terms of those seasonal goods that I mentioned, so seasonal apparel, also garden goods, all of those sort of things that you get in the March, April time. We may also see, depending on where government policy goes early next year, we may see more tariffs coming through. That may also lead importers to front load as well. So I think there's a reasonable chance that we get another wave of shipping coming through December, January time.

Kristen Hallam  

All right. Now Michael, Halloween is kind of this nexus between the goods and the services economies. How have consumer goods and consumer services been faring so far this year? Is it more of a trick or a treat scenario?

Michael Zdinak  

I'll say frighteningly well. It makes the narrative tough to tell at times because there's been a lot written in the last year about how the experiences bubble has been popping, unless you have a kid who's dressed up as Taylor Swift this year and the juggernaut of summer concert sales that she was, those sort of sales broadly were down. But in our forecast, in our view, that's a pretty small part of what is traditionally thought of as discretionary spending. So 2 treats for consumers this year and 2 tricks that were played on economists were the revisions to the national income accounts. Personal income, in particular, was revised up substantially in the first and second quarters, almost a 10% annual rate in the first and 5% in the second. And that's like the fastest growth we've seen in a couple of years. And that shows that if your question is, are consumers not spending because they don't have money versus do they just not want to buy tickets to see a 75-year-old rock star, -- it kind of tips the balance one way or the other. And that's all been driven a lot by solid gains in wages and salaries, which in our Halloween forecast are up about 6% for last year. So that's the good news for consumers. The even better news is that disposable income is up, and that's up because inflation is -- CPI prices are about 2.5% change year-over-year. That's down from about 4% last year. And all that means is that there's more money in consumers' pockets to spend on what they want to spend. And we're seeing that. There's been a lot of volatility across retail channels month-to-month. And a lot of that's due to the fact that some channels are more or less tied to interest rates like motor vehicle sales and/or housing, like building materials and furniture stores. But broadly, out-of-pocket items, consumers are still willing to spend on those. And so they're cautious about inflation and what its outlook is going forward, but they're still willing to spend now. And we see that in the latest retail sales numbers. We just got those for the third quarter, and that has sales growing at an annual rate of about 5%. And that's again, the fastest rate that we've seen in about a year. So there's a lot of green lights flashing heading into the holiday season that matches with our outlook in a lot of ways where sales are going to be soft but steady this year. Looking ahead, we're starting to be more and more optimistic about what sales are going to look like for the holidays and for next year.

Kristen Hallam  

I do want to talk a little bit more about the outlook for the holiday season. Before we get there, the last time we had you both on the podcast, we were talking about the prospects for the back-to-school season in the U.S. How did that go?

Michael Zdinak  

That's a perfect example of the case in point of what we're talking about here. Our expectation there was that sales were going to be slow but steady. We were going to see modest growth of around 3% and consumers actually surprised us in the back-to-school season, which we define as July through September and all retail, excluding gasoline stations, motor vehicles and liquor stores and bars and restaurants that might be where parents are going to celebrate back-to-school season, but not what the kids are going to spend money on. Instead of our expectation of about 3%, those numbers came in closer to 4%, driven particularly by sales at non-store retailers. So those who are going to buy their school shopping online, really gave a boost to sales in the third quarter that led to higher overall back-to-school sales. Again, another green light heading into the holidays.

Kristen Hallam  

So let's head into the holidays. What is our crystal ball telling us about the rest of the holiday shopping season in the U.S.

Michael Zdinak  

Well, because so much of what is written is done in terms of current dollars or nominal sales and lower inflation actually lowers nominal sales. We're not going to see the gangbuster years that we saw coming out of the pandemic or even when inflation spiked. In terms of year-over-year current dollar sales, we're looking at another modest year. But in terms of real sales, again, the quantity of candy that kids take home in terms of holidays or the number of presents under the tree, this should be the best year we've seen in a couple, and we'll have those numbers out a little later this month.

Chris Rogers  

I think when we're looking at what's going on in terms of the supply of holiday goods and toys, certainly from the toys perspective, the volume of shipments is up quite strongly. The data for September was up 20% year-over-year, but that was the very tail end of the destocking process. When we take a look at our forecast for total trade inbound to the U.S., excluding any supply chain weirdness, which would be the first time for a while if there wasn't something, we'd be looking for growth of around 3% year-over-year during the fourth quarter. And clearly, we have had this big wave of shipments come in during the September period and October may well be quieter because of that expectation of the strike. But at least from a fundamental volumetric perspective, we'd be looking for a little bit of normality, both in terms of physical activity and in terms of corporate strategies.

Kristen Hallam  

Earnings season is upon us, speaking of corporates, what, if any, buzzwords should we be listening for on third quarter earnings calls, Chris?

Chris Rogers  

Yes, around about this time of year, you'll tend to see a lot of the consumer firms, particularly talk about whether they've got their inventory right, not just in terms of the right volume, but also in terms of the right assortment. You'll hear discussion of assortment quite a bit. And that's really important for the toy season in particular, and we're going to be publishing on that in the next couple of weeks or so. We'd also be keeping an eye out for any mentions about early discounting or early sales. It's been notable over the past couple of years that we now have 2 Amazon Prime Days, for example, one in July and one in early October. That push for earlier promotion might just be a grab for market share, but it's also partly linked to having the goods here earlier because you're worried about not having them here at all. So we'd be looking for signs of promotions. Also any mention of delays that may have occurred as a result of that just 3-day strike. And the final thing, not to put a downer on the day, but we've had some really kind of tragic weather incidents over the past month or 2. Those will naturally have had an impact on the operation of individual companies' supply chains. But generally speaking, this year, the imports have been a lot stronger than last year. Firms are more likely to have the right stuff in stock. So we expect it to be reasonably upbeat.

Kristen Hallam  

So let's wrap up our discussion with some key takeaways for our listeners, starting with you, Chris. Spook now or forever rest in peace.

Chris Rogers  

Yes. So we're not out of the woods yet. I think there's plenty of jump scares in 2025, whether it's the potential for strikes or tariffs or all the usual issues. But once again, logistics has found a way at using early shipments and have been particularly important for new franchises like Beetlejuice.

Kristen Hallam  

It's the third time.

Chris Rogers  

That's me gone.

Kristen Hallam  

All right. How about you, Michael?

Michael Zdinak  

I think forever is a keyword in the question that you asked, and we're going to pose that to the consumer. Two trends that consumers are seeing this year because of the shrinking margins that chocolate makers are facing and the slowing sales are a shift towards offering more non-chocolate candies and the appearance of seasonal sweets on shelves even earlier this year. I was e-mailing back and forth with a colleague this morning who was at the store today and saw a Christmas candy already out next to the Halloween candy. And that's a special kind of madness. If you're out buying your Halloween candy, you're like, you know what, I'm going to pick up some Reese's Christmas trees as well. I need those and my Reese's Pumpkins. But thanks to the miracle of supply chains, I don't have to ever worry about that because I'm a last-minute candy shopper, and I have to say I've never been able to not get enough chocolate to sustain myself. But that shift does represent something that's very, I think, different about the consumer after the pandemic that we don't talk about enough. And that's this idea of the forever shopper or if you're a Glengarry Glen Ross fan, the ABCs of the U.S. consumer, always be consuming, because they're always looking for a deal, and they're always looking to spend money. Don't bet against them because they will spend the money. And if you're listening to earnings calls and people are talking about a challenging macroeconomic environment, ask yourself, are they really adjacent to a challenging macroeconomic environment? Or do they just have the wrong mix of products on the shelves or the wrong strategy for the current economic conditions? Because people have jobs. They have money. Inflation is coming down. The Fed is cutting interest rates. Heading into next year, there's a lot of reasons that we expect sentiment to improve and for the outlook to look a lot less like below-trend growth, which is where we started this year and a lot more like trend-like growth of around 2% for the economy. That's a challenge for businesses and consumers and economists because that means that our expectations for unemployment rising and inflation coming down faster are being challenged. That's where we're going to -- the serious discussions we're going to have headed into next year of where do we think unemployment will end 2025 and what do we think that means for not just consumer demand broadly, but inflation because when people have jobs, they're still willing to spend, that puts upward pressure on prices.

Kristen Hallam  

That's a wrap, as the mummy would say. So all that's left for me to do is to say fangs to Michael and Chris for sharing their insights and their word play with us and fangs to you for tuning in. Until next time. Thank you for listening to The Decisive podcast from S&P Global.