Can Apple Drive Enough Q4 Spending?

The biggest surprise in August’s retail sales numbers was actually of no surprise to Sarah Quinlan, SVP of MasterCard’s Market Insights. Quinlan’s read of those tea leaves all along pointed to continued spending. Yet Quinlan told MPD CEO Karen Webster that she’s not as convinced that Apple’s new iPhone will juice overall retail sales in Q4. You might be surprised at what – and from where – she thinks sales volume will come.

KW: We always have such great discussions on what consumers are buying or not buying. To get us started, give me your sense of what you saw in the August SpendingPulse Report results that really surprised you.

SQ: I think the most important thing is not a surprise, which is the fact that the consumer continues to be very strong in their spending. We’re excited to see the ongoing health of the US economy coming through. We saw that in the sense that total retail sales grew by 4.1 percent year over year, with a slight step down.

Interestingly enough, the biggest thing that was weighing on the spending was actually gasoline sales, which dropped. But the reality is that’s actually good news – it means that consumers are flying to vacations as opposed to driving. Therefore, it makes sense for gasoline sales to drop, yet we saw increased spending in the number one category in August: lodging.

If you take out gasoline spending, retail sales actually grew 4.8 percent year over year.

KW: Interesting. So let’s talk about other things people do in August – wind up their vacations and get ready for back-to-school. That generally drives spending as well – what did you see?

SQ: Unfortunately, that wasn’t the case here. We saw good spending in electronics, but apparel was almost flat for the month. We’re really seeing the same thing we saw a year ago, which is this delayed spending in back-to-school apparel until the weather actually shifts and it is required. That’s an ongoing trend that we’re continuing to see in apparel.

KW: So what will the implications be for the holiday season, based on what you’re observing?

SQ: We believe that retail sales will be at a 5 percent growth year over year for the holiday season. We think it will be very strong. Now, there’s this trend that we’ve seeing all year long with experiential spending that will be an important indicator, so some of the traditional things that people look for people to purchase during the holiday season might not have that growth rate. But I fully expect jewelry, which has now had 18 months of growth year over year, will be an extremely strong category, as well as dining out, which will be part of the holiday season spending that will add to the increase.

KW: So are you seeing that consumers are spending, but spending on different things? So maybe apparel isn’t ringing their bell, but things like jewelry and travel are?

SQ: Absolutely. It’s all about the experience, and it makes sense. The grinding, painful recovery from the recession leaves people wanting to feel good again. Now that they are feeling confident enough to spend their hard-earned money, they want to actually go out and enjoy time with family and friends. That’s the spending that we’re seeing on a consistent basis.

KW: So I know August didn’t reflect the spending of the new Apple iPhone and Watch, and I know you won’t really be able to buy the watch until next year anyway, but how do you think that will influence spending, particularly in the electronics category?

SQ: Well I think this year we’ve noted that electronics has really lagged, because there’s been nothing new and exciting. So when we see something like this from Apple, it is something that we fully expect to drive increased sales there.

That being said, will it move the meter on total retail sales? Probably not, because it has to do with a very small audience relative to total retail spending. I’m looking across the board to understand bigger trends, but there’s no doubt that Apple’s new products will drive sales. And then the key question becomes, once we get those early adopters, will we get that second and third level of adoption?

KW: Right. How are you looking at things that retailers are doing to drive spending – offers, promotions, and more. Do retailers have to do as much of it as they have in the past to get consumers to open their wallets?

SQ: Well, I will suggest that this is more focused on certain segments. Department stores and apparel stores have clearly had to up promotions to get any sort of traction, in terms of positive sales growth year over year. Others have not had to do that, in fact only in the last two months has there been any sort of discounting in the airline industry, for example. They’ve actually had pricing power – they’ve been able to raise prices over the course of the last year.

So it really depends on the segment, because again it’s about supply and demand. In the areas that people are less excited about like department stores, apparel, and furniture and furnishings, we’ve seen increased discounting.

KW: You seem like you’re telling a strong story about consumer spending. Are there things that worry you?

SQ: Well, we have to think about the inflection points. One of the things that was most distinctive in the data, post-recession, was the volatility of the data. Say that there’s been increased economic performance over the last 5 years, we’ve still seen ups and downs with how consumers react.

Obviously, there would be concern if we saw change in consumers’ psyches and spending with respect to what’s going on overseas. So far, we haven’t seen that in the data, but that’s something we’re always looking for – external things that could lead to a change in consumers’ spending behavior. There’s always that outside risk.

KW: You talked about the differences by category, but I’m curious to get your perception of the differences by size of the retailer – the national guys versus the local SMB retailers. Do you have a sense of who is performing well and who isn’t? 

SQ: Yes, and this is fascinating. Our SpendingPulse Small Business report that came out for August showed that SMB is actually doing better than total retail sales – about 3.3 percent better. On a monthly basis, they’ve really been able to capture market share. And I think it goes back to the experiences consumers want – when you’re dealing with a small boutique, people want that service and knowledge of the proprietor, for example. We even see that in the apparel industry. If we take, for example, specialty apparel for the month of August, it was up over 9 percent, whereas total apparel was flat in the regular report.

You can see that these numbers are very distinctive, and small business is definitely what’s driving the U.S. economy. I think that’s great and very healthy.

Sarah Quinlan
Senior Vice President of Market Insights, MasterCard Advisors

Sarah Quinlan is a Senior Vice President at MasterCard Advisors, responsible for Market Insights, which produces MasterCard SpendingPulse, a macro-economic indicator. Her team develops products that utilize MasterCard’s aggregated anonymous transaction data to delineate actionable trends. Prior to joining MasterCard Advisors, she was the Founder and CIO of Katen Capital, a global macro hedge fund manager. Previously, she was the Chief Investment Officer and Head of Alternatives for Saad Financial Services, S.A.  Prior to joining Saad, she was a portfolio manager at UBS, and at Lloyds TSB focusing on alternative investments. She was co-founder and portfolio manager of TwentyFirst Century Advisors, a small and mid-cap long/short hedge fund which was ranked in the Top 10 of Mar Hedge.

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