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KEY POINTS

  • Fung Global Retail & Technology expects US back-to-school sales to increase by 3%–4% this year, compared with our estimate of 2.5% growth last year. Based on data from the US Census Bureau, the average annual increase in back-to-school sales over the last 20 years was 4.1%. Over the last three years, sales in the July–August back-to-school period as a percentage of full-year sales have remained relatively consistent, at about 17%. Assuming that trend is sustained, that would imply sales growth during the period in the range of 3%–4% in 2017.
  • The economic backdrop in the US looks fairly positive for back-to-school sales. Positive indicators include a lower unemployment rate, higher consumer sentiment, higher college enrollment rates, modest wage growth, higher housing prices and lower gas prices. Negative indicators include a higher savings rate, a slowdown in consumer spending and fewer tax-free shopping days this year.
  • The National Retail Federation (NRF) projects that total back-to-school/back-to-college spending will reach $83.6 billion this year, up 10% from 2016. eMarketer expects back-to-school sales to increase by 4%, which is higher than the firm’s estimate of a 2.6% increase last year, but more modest than rates seen some other recent years.
  • Department stores are expected to lose back-to-school market share to mass merchants, off-price chains and online-only retailers. A category that could move the needle in a positive way is electronics. Amazon noted that its recent Prime Day set a record for device sales across all categories, including e-readers, tablets, Fire TVs and the Echo, and the company has seen continued strength in devices in the weeks since Prime Day.
  • Retailers introducing deals early in the summer could benefit even more, as both back-to-school and back-to-college shoppers are starting even earlier this year, seeking to take advantage of sales, avoid last-minute crowds and spread out their spending.

US Back-to-School 2017, Part 1: Projected 3%–4% Spending Growth Implies Solid Season with Room for Upside

Fung Global Retail & Technology expects US back-to-school sales to increase by 3%–4% this year versus our estimate of 2.5% growth last year and the average of 4.1% growth over the last 20 years. Our estimates are based on data from the US Census Bureau. The forecast and historical figures are based on US retail sales excluding autos, gas, travel, event tickets and restaurants during the back-to-school shopping season of July and August. Over the last three years, sales in July and August as a percentage of full-year sales have remained relatively consistent at roughly 17%. Assuming that trend is sustained, that would imply sales growth in the range of 3%–4% in 2017.

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The US back-to-school market enjoys a fairly positive economic backdrop this year. A healthy labor market driven by stronger employment levels and a continued increase in wages and more young adults enrolled in school will likely offset consumers saving more money and the rise of online shopping. The growth of e-commerce has left more retailers competing on price or striving to offer deeper discounts—factors that can depress sales growth.

Positive economic indicators include:

  • Lower unemployment: 4.4% in June versus 4.9% a year earlier
  • Modest wage growth: up 2.5% in June, but down 110 basis points from 3.6% growth in June of 2016
  • A higher S&P CoreLogic Case-Shiller 20-City Composite Home Price Index: up 5.7% in April, to 197.2, versus 186.6 a year earlier
  • Lower gas prices: $2.26 per gallon in June versus $2.30 last June
  • A higher University of Michigan Index of Consumer Sentiment: 93.1 in July preliminary reports versus 90.0 last July

Negative economic indicators include:

  • A higher consumer savings rate: 5.5% in May (an eight-month high), up from 5.1% last May
  • Slowed consumer spending: retail sales were down 0.2% in June month over month and have weakened for two consecutive months
  • Fewer tax-free shopping days this year: two days less than last year and one less state participating

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eMarketer Expects Back-to-School Sales to Grow by 4%

Research firm eMarketer predicts that back-to-school sales will grow by 4% over last year’s record-breaking levels, to reach $857.18 billion. The firm expects e-commerce platforms to continue gaining market share as older students head online for supplies before going back to the classroom. eMarketer projects that e-commerce sales will grow by 14.8%, to $74.02 billion, representing about 8.6% of total retail sales during the back-to-school season, up from 7.8% last year. eMarketer’s back-to-school estimates are based on US Census Bureau retail sales (excluding travel and event tickets) for July and August.

The NRF Expects an Uptick in Back-to-School and Back-to-College Sales

According to the NRF’s annual back-to-school and back-to-college survey, which is conducted by Prosper Insights & Analytics, back-to-school spending will reach its second-highest level on record this year, while back-to-college spending will hit an all-time high, driven by rising consumer confidence and more young people in school. Total back-to-school and back-to-college spending is projected to reach $83.6 billion, a 10% increase from $75.8 billion in 2016, according to the NRF survey.

Readers will note that the NRF’s growth projection is much higher than both our own estimate and eMarketer’s estimate. The NRF derives its estimates from surveys asking shoppers how much they expect to spend, and we think this is vulnerable to inaccurate forecasting by survey respondents. Our own estimates are based on US Census Bureau data and, in the context of a retail sector that grew by a seasonally adjusted 3.6% from January through June this year, we think a 10% leap in spending looks improbably high. Nevertheless, the NRF’s estimated segmentation of spending is of value in providing ballpark market sizes and trajectories for specific categories.

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The back-to-school/back-to-college season is the second-most-valuable holiday period for retailers. It is more than 3.5 times larger than the next largest holiday season, Mother’s Day, according to the NRF.

The NRF expects back-to-school spending to reach $29.5 billion this year, up 8.1% from $27.3 billion in 2016. Despite the increase, such spending would still fall short of the record $30.3 billion reached in 2012.

The NRF expects total back-to-college spending to be $54.1 billion this year, up 11.5% from $48.5 billion last year and surpassing 2012’s record of $53.5 billion. The increase is being driven in part by college enrollment, which has steadily increased over the last five years and is projected to reach roughly 21 million this fall, according to the National Center for Education Statistics.

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Apparel and Electronics: The Two Biggest Back-to-School Categories

Across the main back-to-school categories of apparel and accessories, electronics, shoes, and school supplies, the NRF forecasts that the average family will spend $687.72, up 2.1% from last year’s $673.57.

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The biggest back-to-school category is clothing and accessories (which is expected to represent 34.7% of shoppers’ spending this season), followed by electronics (which is expected to account for 29.7% of shoppers’ spending). According to the NRF survey, households plan to spend $239 on clothing and accessories and $204 on electronics this back-to-school season. Shoes ($130) and school supplies ($114) are expected to represent 19% and 16.6% of shoppers’ back-to-school budgets, respectively. While consumers surveyed by the NRF plan to spend more across all back-to-school categories this year, shoes and school supplies are the categories they expect to increase their spending on the most. The graph below shows that shoppers plan to allocate the majority (64%) of their back-to-school shopping budgets to apparel and electronics.

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College students and their families plan to spend an average of $969.88 on back-to-college items this year, compared with $888.72 last year, according to the NRF survey. Households plan to spend an average of $229 on electronics, $143 on clothing, $134 on food, $106 on dorm/apartment furnishings, $81 on shoes, $81 on personal care items, $70 on school supplies, $69 on gift cards and $57 on college-branded gear.

Spending on school supplies has lagged over recent years, likely due to the fact that today’s technology-based education system requires fewer traditional school supplies. This has also contributed to the shift toward more spending on clothing and accessories and electronics.

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Where Shoppers Plan to Shop: Department Store Sales Expected to Drop

While spending on back-to-school clothing and accessories is expected to rise this year, department stores and specialty retailers will likely see their market shares fall as consumers spread their spending across channels and shift to off-price retailers, online destinations and mass merchants.

According to an annual back-to-school survey conducted by consulting firm Deloitte—which polled 1,200 parents with children in kindergarten through 12th grade—81% of those surveyed plan to shop at mass merchants (e.g., Target and Walmart), a jump of 24% from 2016. Traditional department stores—such as Macy’s, JCPenney, Sears and Kohl’s—are likely to see less traffic this year. Younger consumers are shifting from a retailer-focused to a brand-focused buying mentality, and with more brands selling directly to consumers via channels such as Facebook, department stores will likely feel the impact during the back-to-school season.

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According to the Deloitte survey:

  • Department stores, which held the number two position last year (with 54% of shoppers surveyed saying they planned to purchase supplies from them), are expected to fall to number six (with 28% of shoppers planning to purchase supplies from them this year).
  • Off-price chains such as Ross Stores (which operates the Ross Dress for Less and DD’s Discounts chains) and T.J. Maxx are gaining popularity, with 28% of survey respondents saying they plan to shop at such stores this year, up from 10% in 2016.
  • Specialty clothing stores are expected to see a fairly dramatic decrease in traffic this year, with only 8% of those surveyed planning to shop at such stores, down from 25% in 2016.
  • Online-only retailers will attract 36% of shoppers surveyed.

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Back-to-school e-commerce sales in core categories (apparel and accessories, books, music and video, electronics, office supplies, toys, and sporting goods) are expected to exceed the quarterly growth rate for e-commerce overall at 15.8%, and to reach $37.56 billion in total, according to eMarketer.

A 2017 back-to-school survey published by mobile app and web provider Branding Brand surveyed 1,000 18–24-year-olds and found that 80% of those polled plan to purchase online and 62% plan to buy directly on their smartphones. The majority of survey respondents said they will go to a store if they need to return an online order, and two in three plan to purchase items at Target and Walmart this year, while half plan to purchase from Amazon. In addition, almost half of respondents said that they will spend more than or as much as they did last year on their mobile devices.

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Deloitte found that more than half of consumers surveyed will use smartphones at some point in their purchase process, and that 56% will research online before making a purchase in a store. When shoppers turn to purchasing online, their main focus is finding cheaper items or free shipping.

Social media will also play a larger role this season: according to Deloitte’s back-to-school survey, 75% of those using social media are primarily looking for promotions and ads. IKEA is taking advantage of this by teaming up with Snapchat influencers for its back-to-school campaign to advertise its dorm-ready products.

Retailers Should Be Rolling Out Back-to-School Deals Even Earlier

Retailers that introduced deals earlier in the summer could benefit from it, as back-to-school and back-to-college shoppers are starting even earlier this year, according to the NRF’s survey. Approximately three in 10 shoppers surveyed said that they plan to shop at least two months before school starts this year, up from 22% last year.

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More back-to-college shoppers are beginning earlier this year, too. Among those surveyed, roughly 32% plan to start their shopping two months before school, compared with 26% last year.

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Deloitte projects that those shoppers who start their back-to-school shopping before August will spend 16% more than those who start later.

Retailers Are Seeking to Draw Spending Forward

Some shoppers likely took advantage of Amazon’s Prime Day earlier in July to get a jump on their back-to-school shopping for the fall semester. Amazon had a very successful Prime Day on July 11 this year, with orders up 60% from last year. The company saw record device sales and is seeing positive and lasting effects on sales across its devices—Kindle e-readers, tablets, Fire TV and Echo—following Prime Day. The shopping event falls at the start of the back-to-school shopping season, and with electronics standing as the second-largest back-to-school category, Prime Day could have influenced the earlier start to the shopping season this year.

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Other retailers have moved their back-to-school promotions earlier. In previous years, back-to-school marketing began in mid- to late July, but retailers and brands looking to rebound from the disappointing 2016 holiday season are starting those promotions earlier this year. Several of the industry’s big names have already started promoting their back-to-school offerings:

  • Staples launched its Back to School Center on June 25. It is offering deals such as 28% off pencils and 66% off school glue.
  • Target kicked off its back-to-school sales on July 9 with ads that began showing up regionally before breaking nationally on July 23.
  • Walmart began displaying back-to-school merchandise in stores the first week of July. Its school-based TV ads launched on July 10.
  • Lands’ End and Office Depot started their back-to-school campaigns in June.

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Although consumers are focused on shopping earlier to take advantage of back-to-school sales, avoid last-minute crowds and spread out their budgets, they are also turning to online retailers early in the season to research products, view in-store assortments and access benefits such as free shipping. Nevertheless, we still expect the bulk of spending to take place from early July through August.

Recent Announcements as Retailers Gear Up for Back-to-School Season

Walmart is pushing to provide convenience during the back-to-school shopping season as it tries to better compete with Amazon. Walmart is not only offering sales in-store, but also online, with its own convenient feature: parents can browse Walmart’s website, type in their zip code, find their child’s school, and shop a list of supplies specifically created for their child’s grade. Walmart has also substantially increased the number of back-to-school and back-to-college items customers can order using the Online Grocery Pickup and Pickup Today services. The retailer also has introduced “Back-to-School Helpers,” who are store associates trained to help customers find shorter checkout lines and the items on their shopping lists.

Target raised its sales outlook for the second quarter, citing improved store traffic and sales in recent weeks. The retailer is focusing on new in-house brands, such as its recently launched Cloud Island baby offering, and testing new delivery methods such as curbside delivery.

Upcoming Back-to-School 2017 Reports

Keep an eye out for further reports in our Back-to-School series in the coming weeks:

  • Social Media and Back to School
  • Retail Technology for Back to School
  • School Uniforms
  • Top Five Trends for Back to School
  • UK Back-to-School Retail Preview 2017: Inflationary Pressures Set to Boost Discount Channels

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