After a solid holiday season, small businesses face uncertainty in 2023

The 2022 holiday season turned out better than expected for small business owners, even with inflation rising to 7.1% this year. Despite higher prices for many items and concerns about a looming recession, consumer enthusiasm for the holiday season did not wane.

Mastercard SpendingPulse^TM Reported U.S. retail sales excluding cars rose 7.6% year-over-year this holiday season, from Nov. 1 through Dec. 24. Mastercard measures in-store and online retail sales for all forms of payment and is not adjusted for inflation.

The report found some key trends:

• The growth of e-commerce continues: Online sales grew by 10.6% compared to the same period last year, according to preliminary insights. This holiday season, e-commerce accounted for 21.6% of total retail sales, up from 20.9% in 2021 and 20.6% in 2020. Tech-savvy small businesses and start-ups created during the pandemic benefited of digital acceleration. They embrace electronic ordering and payment systems, such as Paste and invested in secure e-commerce.

“As customers use the app more often, Slice gives them discounts and coupons for free items to encourage repeat use,” said Greg Kowalczyk, owner of Fabio’s Bistro in Fanwood, NJ, who gets a significant percentage of his business through the app. “It is convenient for the user and directs customers to us. It’s an easy app; you order before you leave work and the food is ready when you get home.”

Online shopping continues to grow, not only because of the convenience, but also because of the discounts available online. Even those who visit physical stores can look at price comparisons on their phones. Retailers are also reducing the time they spend shopping by encouraging customers to buy online and pick up from their local stores. So if customers want to buy something and pick it up quickly, they can do so, but if they want to shop around, they can do so with the confidence that they’ve already found something they want from the retailer.

• Weekend shopping predominates: Black Friday retained its title as the best spending day of the 2022 holiday season, up +12% year-over-year (excluding cars). This was closely followed by Saturdays in December, according to Mastercard SpendingPulse^TMwhich reports on national retail sales for all payment types, such as cash and check.

“Inflation changed the way U.S. consumers approached their holiday shopping — from seeking out the best deals to making compromises that stretch gift-giving budgets,” said Michelle Meyer, chief economist for North America, Mastercard Economics Institute. “Consumers and retailers weathered the season well and showed resilience amid rising economic pressures.”

• Restoration of restaurants: Building on continued demand for experiences, in-person dining continued to show strong momentum with restaurants rising 15.1% year over year. From get-togethers with colleagues to dinners with friends and family, the festive season drew consumers in for the holiday season. Part of this may be related to pent-up demand for restaurants and travel options that were cut during the pandemic lockdowns. In general, people have longed for a return to normalcy, and in 2022 many will return to previous behaviors.

“Despite record levels of inflation, rising interest rates and low confidence, consumers have been firm in their spending and remain in the driving seat,” said chief economist for the National Retail Federation (NRF). Jack Kleinhenz, said on Nov. 4, just as the holiday season began. “Consumers are generally buying new outfits for travel occasions, along with food and items they bring as gifts, which could be positive for retail, even if some spending is diverted to dining out, gas and plane tickets.”

Even in these inflationary times, small business owners are reinvesting in their businesses. The most recent NFIB Small Business Optimism Survey (November 2022) found that 55% of owners reported capital expenditures in the past six months, up one point from October. Nearly four in ten (39%) said they bought new equipment, 19% bought vehicles, 12% upgraded or expanded facilities, 11% bought new fixtures and furnishings, and 5% bought new buildings or land for expansion.

The question will be whether or not business owners will continue to reinvest as the Federal Reserve has indicated interest rates are expected to rise again in 2023. These are challenging times for companies seeking financing as the cost of capital has risen, while small business loan approval rates declined at banks. Financing is still available from non-bank lenders, but the interest charged by those lenders is typically higher than that charged by the banks.