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May 22, 2024

Record Online Holiday Spending Driven by Discounts and BNPL

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Jan 4, 2024

U.S. online holiday sales rose 5% during November and December to a new high of $222.1 billion as deep discounts and the growing use of installment plans fueled spending, according to Adobe Analytics data released Thursday.

Online Spending Exceeds Expectations

The strong online sales defied most predictions from top forecasters like the National Retail Federation and at least one Wall Street firm of slower growth this holiday season. Mastercard SpendingPulse had forecast online sales growth of 2.8%, for example.

Several factors contributed to the better-than-expected growth. Retailers offered discounts of up to 70% on some days in the holiday season to clear excess inventories. Consumers also increasingly took advantage of buy now, pay later (BNPL) plans that allowed more purchases without paying the full amount upfront.

Adobe’s digital economy index measures direct sales from websites but excludes sales through third parties like Amazon Marketplace. So the actual total for online spending is even higher.

Key Highlights

  • Online sales jumped 10.3% year-over-year from Nov. 1 through Dec. 31, reaching a record $211.7 billion. Sales for the full year were up 4.9% to top $1 trillion for the first time.
  • The overall holiday increase was the highest since Adobe started tracking online sales in 2014.
  • Top categories included toys up 6%, jewelry rising 14%, apparel gaining 11%, and electronics advancing 6%.
  • Cyber week from Thanksgiving through Cyber Monday remained a major driver of spending, hitting $35.3 billion. That was up 4% versus the prior year.
  • BNPL made up 9% of overall online spending during the holidays, significantly higher than the 3% penetration a couple years earlier. Clothing and accessories remained the most common categories for installment plans.

“Consumers capitalized on steep discounts across categories, driving online spend to record levels,” said Patrick Brown, vice president of growth marketing and insights at Adobe. He added that affordability tools like BNPL plans “drove growth both before and after Christmas to help consumers manage budgets.”

Deep Discounts Aided Growth

Retailers attempted to clear excess inventories in 2022 by offering some of the steepest discounts in recent years, especially for apparel, toys, and electronics. Discounts averaged around 25% across categories over the holidays but peaked as high as 70% in early December.

The heavy promotions helped drive online growth and clear out old products ahead of new 2024 merchandise. But it came at the expense of profits. Stocks of major chains like Macy’s, Kohl’s and Best Buy all fell sharply right after Christmas based partly on margin concerns.

Looking ahead, the pace of discounts should ease in early 2024 as retailers carry less old stock into the new year. But broader economic uncertainty could still weigh on consumer demand and limit retailers’ pricing power.

BNPL Expansion

Consumers utilized buy now, pay later programs in record numbers over the holidays to finance purchases interest-free over several installments. The services let shoppers split costs over a few payments rather than paying the full amount upfront.

Top BNPL providers like Affirm, Afterpay, Klarna and PayPal all saw strong growth over Black Friday and Cyber Monday weekends. Affirm’s sales jumped 78%, for example, while Klarna’s were up 45% in early December versus the 2021 kickoff.

The flexible payment options particularly appeal to younger consumers with tighter budgets or those making larger discretionary purchases. Over 40% of shoppers aged 18-34 used BNPL over the holidays, for instance.

Provider Holiday BNPL Growth
Affirm 78%
Afterpay 63%
Klarna 45%

The rapid expansion does carry some risks, however. BNPL plans make it easier to overspend beyond a comfortable budget. And missed payments can still damage credit scores despite marketing claims about improving financial access. So expect more debate around appropriate BNPL regulation in 2024.

Outlook for 2024

While holiday sales managed to beat forecasts, confidence about sustaining that growth into 2024 remains mixed among analysts. Shoppers still face pressure from high inflation and rising interest rates that could curb spending as the year progresses.

On the positive side, the labor market remains very strong with unemployment still near 50-year lows. Average hourly earnings are also growing at a decent clip around 5% annually. So consumers have job security and growing wages to support at least some discretionary shopping in the coming months.

But inflation eating into household budgets and the potential for an economic slowdown or recession by late 2024 present challenges. Mastercard SpendingPulse expects overall retail sales growth to decelerate from roughly 7% in 2022 down to 2.8% in 2023 due to “rising prices and worries about the economy.”

Higher income households should fare reasonably well navigating the uncertainty with savings built up and buffered investment/retirement accounts. But lower income consumers are more vulnerable to cutbacks if conditions deteriorate. Their spending is critical for retailers given shifts towards more discount-oriented chains in recent years.

So while the holidays ended on an unexpectedly strong note, slower growth seems probable at some point during 2024. But another wild card is whether heavy discounting becomes more normal if consumers resist full-price purchases. That could support sales volumes but would pressure retailer margins and profits.

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AiBot scans breaking news and distills multiple news articles into a concise, easy-to-understand summary which reads just like a news story, saving users time while keeping them well-informed.

To err is human, but AI does it too. Whilst factual data is used in the production of these articles, the content is written entirely by AI. Double check any facts you intend to rely on with another source.

By AiBot

AiBot scans breaking news and distills multiple news articles into a concise, easy-to-understand summary which reads just like a news story, saving users time while keeping them well-informed.

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