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Alix McCabe: It's a time of year that's critically important to many industries, but perhaps most obviously, the retail sector.


Cashier: Happy holidays.


Alix McCabe: The holiday shopping season can be make or break for many businesses, and it's also a big deal for the economy as a whole.


Cashier: I'm sorry, your card was declined.


Alix McCabe: So like the star on top of a Christmas tree, up it goes on...


Audience: Wheel of Risk.


Alix McCabe: Welcome to Wheel of Risk, proudly presented by Allianz Trade. I'm your host, Alix McCabe. On every episode, we spin the wheel, land on a new worry, and then tackle it head on by bringing you expert insights and advice to help you keep your business solvent, secure, and well ahead of the competition.

Today, I'm joined by a man who never makes it onto Santa's naughty list. Dan North is Allianz Trade's Senior Economist for North America, and a regular contributor to this podcast. Dan, welcome back to the show.


Dan North: Hey, thanks for having me back. Happy to be here.


Alix McCabe: Thank you for being here. All right, so why don't you get us started by giving that old wheel a big spin?


Dan North: All right, here we go.


Alix McCabe: Ooh, wonderful. You've landed on frightful or delightful, a deep dive into the importance of the holiday shopping season.


Dan North: Who can not be interested in that?


Alix McCabe: Yeah, everybody, right? Pour yourself an eggnog, Dan, and let's jump in.


Dan North: All right, let's go.


Alix McCabe: The period between Thanksgiving and Christmas is super important to the economy. It generates more sales than any other time of year for most small businesses, accounting for a full fifth of annual sales across most industries. But the holiday shopping season is also rife with risk, for a variety of reasons that we're going to talk about today. Plus, consumer spending can be dramatically affected by a bunch of external economic conditions. Dan, what's your take? How important are holiday sales, both to specific sectors and the economy in general?


Dan North: Well, you were mentioning that holiday sales can account for a fifth of all annual sales. Well, that's across all industries. If we dive down into retailers, it's actually more like 40% of revenue is generated in holiday sales. So you can see that really is make or break. If you don't have a good holiday season, you become very vulnerable as a retailer.


Alix McCabe: So then, what are the risk factors facing businesses that do depend so heavily on less than just two months of the year?


Dan North: It's really tricky, because you have to have ordered the goods that you're going to sell, going to put on the shelf, months ahead of time. For retailers, ordering is finished by August, so it's a pretty good trick for retailers to figure out what people are going to want four months from now, and how much they're going to want. And then they can run into shipping problems, and maybe have ordered the wrong things. Like a few years ago, they ran short of things like Tickle Me Elmo. Suddenly everybody wanted to Tickle Me Elmo, and they ran out of all those. And I remember a few years ago, my little daughter wanted the Barbie with the big airplane, and I couldn't find that either. So it's pretty tough for retailers to figure out.


Alix McCabe: You were stuck.


Dan North: I was. I drove all over the place to try and find it, and I didn't.


Alix McCabe: We've all done that, right? So you have to look into the future a little bit with your crystal ball if you're a retailer.


Dan North: Yeah. How are you going to know? And they do all kinds of research. Big retailers in particular do research well ahead of time, but sometimes they miss that big thing, and that can turn into a problem.


Alix McCabe: So which external factors or, I guess, economic conditions tend to maybe predict consumer spending over the holidays?


Dan North: Well, there are all kinds of things that go into consumer behavior. Like for instance, over the past year, and even this year to a certain extent, is inflation. And then gas prices, which can be volatile, are up and down all the time. And then the labor market is actually weakening. Maybe people could be losing jobs or unable to find jobs, and we've seen labor strikes, and now unfortunately we have two wars going on, and it can really interfere with consumer confidence and consumer behavior.


Alix McCabe: Okay. So what would you say are usually the most reliable or accurate predictors of holiday spending?


Dan North: Well, I kind of like to say, with tongue in cheek, there are none, because again, it's to a large extent driven by consumers. So you might think, for instance, consumer confidence is really helpful in terms of predicting sales. Well, it's not. It can be, but it's not all the time. And you might think it might be income, for instance, the job situation, well, it's not, can be sometimes, but it's not. And you might think it would be spending patterns throughout the year, but that can change, so it's not. Some of those things, they can be useful sometimes, but not always. You never know really what's going to come to the fore there. So it's pretty tough to pick one that works all the time.


Alix McCabe: I guess the other thing that's hard to account for with those surveys, is the whole human factor, because people don't always do what they say they're going to do in the survey, right?


Dan North: Absolutely, and I see this a lot. When you're looking at the consumer confidence data compared to retail sales, they'll often say, "Yes, very confident," and then "No, I'm not going to spend." What makes it difficult, in any sort of economic forecasting, is economic decisions and retail purchases are made by human beings, and human beings aren't rational, so they're very hard to predict. For instance, the income may be low or they may be really worried about the future, and they'll say, "Well, the future looks bad, might as well go spend it anyway." Or they haven't been spending, because they're trying to save up a little bit, and now it's revenge spending, or they won't spend it all. So it's that irrational behavior that makes things, that human behavior makes it so hard to predict.


Alix McCabe: The human factor.


Dan North: Yeah.


Alix McCabe: So if we look back at the past few years, say since the start of the pandemic, have any interesting trends emerged? I'm thinking of the shift to online shopping, for example.


Dan North: Yeah, well, during the pandemic when people were locked down in their homes, e- commerce, Amazon went nuts. There was tremendous demand for stuff that was going to get delivered to your door. So e- commerce took a real boost during the pandemic, but since then it's come back down to levels it was beforehand. And I think a lot of people will be surprised that e- commerce really takes up only about 12% of all retail sales.


Alix McCabe: Interesting.


Dan North: People think Amazon is running the retail world. Well, it has a very big chunk, but overall it's 12%. It's not nearly as much I think as a lot of people would expect.


Alix McCabe: I don't go to stores anymore, Dan. I don't physically go to stores anymore. So it's interesting that it's just 12% of total sales.


Dan North: Yeah, I'm kind of the same way.


Alix McCabe: I feel like I make up more than that myself, personally.


Dan North: I don't go to stores. I mean, holiday shopping used to be nightmarish for me, walking around Macy's and saying, "Oh mom, like this? I don't know what size, what color." So yeah, I don't do that much anymore either. It's been kind of very, very useful to have Amazon right there.


Alix McCabe: So what about the actual things that people are buying and the timing of those purchases? Are there any trends worth watching there?


Dan North: So last year, and really the year before that, consumers were waiting, and waiting, and waiting later in the holiday season to actually make their purchases. Kind of like they were daring the retailers and saying, "I'm not buying yet, you got to discount. I'm not buying yet. You better discount some more."


Alix McCabe: Put it on sale.


Dan North: Exactly. And it worked. And there's some predictions this year as well, from other retailers I've seen, that yeah, we're going to have to do even bigger discounts this year. So shoppers keep pushing out to Christmas and in many cases, even wait till after Christmas is over, because that's when they're going to get real deals. Who cares when you got the present?


Alix McCabe: Yeah.


Dan North: Really going shopping after Christmas, which is pretty new. And in terms of what they're buying, a couple of years ago, again, when people were buying just out of the pandemic, people were looking for big stuff, particularly, "Bring me a new TV, I'm stuck inside, I want a new TV." And then things turned a bit more nervous and instead of looking at TVs, people were shopping for leggings and that sort of thing. So it was a big change.


Alix McCabe: Why are you quoting my buying habits, Dan?


Dan North: Is that what you did? TVs to leggings?


Alix McCabe: Pretty much, yeah, pretty much.


Dan North: Okay, I'll leave that alone then.


Alix McCabe: Okay. What about credit card usage? I know people tend to lean on credit more heavily in tough times. Do we see any patterns there in the past few years?


Dan North: Well, just recently this year, credit card usage has definitely accelerated, no two ways about it. The amount of credit card debt outstanding has accelerated very noticeably. However, the US consumer now has a pretty good balance sheet. And what I mean by that is, they're not really very indebted. Before the great recession, Americans were highly indebted, and then the recession came along and they cut that debt down, and it stayed down. So even though we're getting more and more use of credit cards, Americans are still in a good position to do that because their debt levels, relative to their income, are very low. However, that said, rates are unbelievably sky- high.

The average rate is 21%, and on some cards, depending on who's applying for it, it can go over 30%. So those are really outrageous rates, and that's probably one of the reason why defaults are starting to rise. Again, it's like the ability to take on more debt, because we are in good position, defaults are rising, but from a very low base. So it's still not bad, but it is going the wrong way. It's kind of an interesting combination there, what's going on in credit card, but people are using them more at higher rates, and starting to default a little bit more.


Alix McCabe: Interesting. So I think we've covered the various indicators and economic factors that can affect consumer spending over the holidays. So I'd now like to sort of jump into your actual predictions for the season. What do the numbers look like?


Dan North: Okay, well, before I get into that, let me just say I spoke with our retail team at Allianz Trade just yesterday about retailing, and they had actually had a number of meetings with the really big retailers, and got a good feeling about what they're thinking, and they're all a little bit worried. And they cite kind of the same worries about gasoline, which could affect people traveling to the store, high interest rates, student loans, that's something they've been citing currently as well. And talking about predictions, there are all kinds of analysis that make predictions on what's going to happen on the holiday season. So it gets a little messy.

There's the National Retail Federation, Deloitte makes a prediction, so does Ernst and Young, Adobe, and then throughout the season you get data from Shopper Track, and credit card companies. And the problem is they all cover different periods. So one of these will make a forecast for just Black Friday, or another one will be Black Friday weekend, or another one will be Cyber Monday, or the entire holiday sales November through December. So it's a little bit hard to say.

However, in looking at all these, it kind of falls in a range of 3% to 5% over last year, okay? That's a bit slower than last year's holiday sales, which was growing at 7%. So it's a little slower this year. And also, if you have inflation at 3. 7% and you're only growing somewhere between 3% and 5%, that's pretty lukewarm. That's pretty lukewarm. So it's a very cautious season.


Alix McCabe: Not good news for some retailers.


Dan North: It's going to have to play out, but it's not particularly great at the moment.


Alix McCabe: So I want to try something a little different, a sort of rapid fire section if you will, where I will throw out some terms, and you can give me your take on whether you think they could affect this year's shopping season or not. Okay?


Dan North: Okay.


Alix McCabe: First one, supply chain issues.


Dan North: Okay, well, I don't think that's going to be so much of a problem this year. The two years prior to this, it was definitely an issue, because we did have that total mess up in the global supply chain, and it was very hard to get items that manufacturers, retailers, consumers all wanted. I think that's pretty well been cleared up, so I don't think that's really going to be a problem.


Alix McCabe: Okay. High gas prices.


Dan North: That is a factor. As I mentioned, the retailers are concerned about that. And what happens is, with gasoline, it makes up a larger portion of the budget for lower and middle income people. So that could really crimp their spending, because they have less flexibility in the budget after gasoline prices.


Alix McCabe: All right, next. Food inflation.


Dan North: Definitely. Again, something to be concerned about, and people kind of forget that inflation is cumulative, if you will. So you're buying a Turkey that's more expensive than last year, and that was more expensive than the year before that. So inflation builds up. And again, just like gasoline, food can make up a larger portion of the budget, because people have to eat, and have the larger portion of the budget of lower and middle income people. So that could affect Christmas spending in that group.


Alix McCabe: And last but not least, seasonal creep. My favorite.


Dan North: Well, I think at the beginning of this, what's this episode called? Delightful or frightful? Well, I think it was in August. I went into our local Lowe's and was stunned to see Halloween goods.


Alix McCabe: Halloween, right?


Dan North: Halloween's-


Alix McCabe: Yeah.


Dan North: Yeah. Halloween's two months away. It's in August and you have those goods out now, and it does kind of creep up more and more every year. I don't think that that's really going to have that big an influence on the spending.


Alix McCabe: It does influence me though. I will buy things very early when I see them. I'm a sucker for that.


Dan North: Like those leggings.


Alix McCabe: Exactly.


Dan North: Like those leggings, right?


Alix McCabe: Exactly. So Dan, one of the themes that keeps kind of popping up on this podcast is how businesses can protect themselves in times of uncertainty, with a product like credit insurance. So how does trade credit insurance figure into this whole holiday sales equation?


Dan North: Well, Allianz is exposed to a lot of retailers, both directly and indirectly. Many of our clients are manufacturers of goods that would then be sold to retailers, really big ones or smaller ones. And if a retailer who has to make it in that holiday season doesn't do well, and they have to file a bankruptcy, well that could have a ripple effect up and down the supply chain. If it wasn't mentioned earlier, it might be worth relating that the spike in retail bankruptcies usually comes in January, because that's when retailers have the most cash on hand, so that they can pay at least some vendors something. They declare bankruptcy before the first payments are due, so that's when you see a surge in retail bankruptcies.


Alix McCabe: So if your company does do business with any retailers that are heavily dependent on holiday sales, it sounds like that's where working with Allianz could pay off.


Dan North: Well, yes, for every super high quality company like Walmart or Target, the really big box stores, there are hundreds and thousands of smaller retailers that you may not know anything about. But Allianz Trade does, because we have a database of 83 million businesses worldwide. We know about most of those medium and smaller businesses that you would want to sell to. So that's when trade credit insurance goes from this simple protection of just preventing losses. But it can be an actual growth tool, because clients can say, "Hey, I want to sell to this guy. I don't know if they're safe to sell to on credit, can you help me figure it out?"

And we say, "Yeah, of course." And the answer might be, "Yeah, they're good for credit, you can sell to them and grow your sales that way." And a lot of our clients actually use that for us as the primary purpose. So sales growth is really important to most of our clients.


Alix McCabe: Particularly as we head into that holiday season.


Dan North: Indeed.


Alix McCabe: So this has been a very festive conversation, Dan, but that music we're hearing means that we're almost out of time. I can't believe it. We have beautiful parting gifts for you backstage to say thank you for being on the show.


Dan North: Thank you.


Alix McCabe: You can't wait, right? But before I let you go, I want to give you a chance to sum up what we've talked about today. So do you think this holiday season will actually be frightful or delightful, and why?


Dan North: Well, I hate to do the economist thing of, on the one hand X, and on the other hand Y, so I won't, I'll say it's not frightful or delightful. I think it's somewhere in the middle. And particularly, if you're looking at the forecast growth rates and they may be less than inflation, that's a worry. That's pretty lukewarm growth, or even no growth. And in talking to the big retailers, they're kind of ringing their hands as well. So it's not a particularly solid looking season, I'm afraid.


Alix McCabe: Okay. You heard it here first, folks. Thank you, Dan, as always, for being on Wheel of Risk and happy holidays to you.


Dan North: Thank you, Alix. Always good talking to you.


Alix McCabe: My guest today has been Dan North, Senior Economist for North America at Allianz Trade. I'm Alix McCabe, and this is Wheel of Risk, brought to you by Allianz Trade. Thank you so very much for listening. If you learn something, which we hope you did, we'd appreciate it if you could leave us a positive review.

To find out more about how a partnership with Allianz Trade can benefit your organization, please visit Allianz- trade. us/ podcast. That's A- L- L- I- A- N- Z- trade. us/ podcast. Thanks, and talk to you soon.