The Consumer Spending Paradox: Why Healthy Toplines Are Masking a Structural Shift in eCommerce

On the surface, the consumer spending picture looks encouraging. Retail sales were up 8.4% year over year in March. Credit and debit card payment volumes remain healthy. Employment is solid. But peel back one layer and a much more complex, and strategically important, story emerges for eCommerce merchants.

A Moody's Ratings report published this week paints a picture of a consumer economy that is increasingly operating on two separate tracks. Higher-income households continue to spend freely, driving headline numbers that look reassuringly strong. But spending growth among lower-income households is decelerating, with these consumers prioritising essentials and actively trading down.

As Moody's noted, income-linked disparities are now embedded in the US consumption landscape, shaping credit conditions across multiple sectors.

This is not a temporary wobble. It is a structural shift that eCommerce merchants need to understand and respond to.

Reinforcing this picture, an Alvarez and Marsal report released this week found that grocery shoppers are not just switching to cheaper brands; they are switching to cheaper retailers entirely. 42% of surveyed shoppers said they plan to switch to less expensive stores this spring, up from 31% who said the same last fall.

The report noted represents a meaningful shift in how consumers approach grocery shopping. Consumers are actively seeking value not just at the product level, but at the retailer level.

While this research focuses on grocery, the implications extend across all of eCommerce. When consumers start evaluating not just what they buy but where they buy it based on perceived value, every retailer's competitive position is in play.

Adding uncertainty to the outlook, analysts from Telsey Advisory Group flagged that consumer spending could moderate the longer the national average gas price remains above $4.00 per gallon. With geopolitical tensions pushing energy prices higher, this is not a hypothetical risk. It is an active pressure on household budgets that disproportionately affects lower-income consumers who are already trading down.

For eCommerce merchants, higher gas prices have a dual effect. They reduce discretionary spending power across the board, but they can also shift some spending from physical retail to online, as consumers who cut back on driving may consolidate purchases through eCommerce channels instead.

Carter's Q1 results this week added another layer of complexity. The children's clothing company reported 8% sales growth but saw net income decline 7.7%, squeezed by tariff costs. The company has filed for approximately $130 million in refunds from IEEPA-related tariff charges, with interim CEO Richard Westenberger candidly noting that the business remains cautious about whether tariff pressures have passed.

Carter's effective tariff rate has jumped from roughly 13% to above 35%, with additional duties estimated to add over $200 million to their baseline costs. They are absorbing this through a combination of pricing increases, supply chain adjustments, and productivity improvements, a playbook that every eCommerce merchant selling imported goods is running some version of.

The days of treating "the consumer" as a monolith are definitely over. If your customer base skews toward higher-income households, your near-term outlook is strong - premium products and services are seeing sustained demand. If you serve price-sensitive segments, you need to assume that competition for their spending is intensifying and plan accordingly.

The Alvarez & Marsal finding that consumers are trading down on retailers, not just brands, is a wake-up call. Your pricing on individual products matters, but so does your overall value proposition as a shopping destination. Free shipping thresholds, loyalty programmes, bundle pricing, and transparent total-cost displays are no longer nice-to-haves - they're competitive necessities.

Carter's experience illustrates what many eCommerce merchants are navigating: you can grow revenue while margins compress. In this environment, operational efficiency - faster fulfilment, lower return rates, better inventory management, more efficient marketing spend - becomes more valuable than top-line growth.

This may sound unusual for eCommerce, but gas prices above $4.00 per gallon are now a meaningful variable in consumer spending forecasts. Track them as a leading indicator for your own sales trends, particularly if you serve middle-income consumers with discretionary products.

If tariff uncertainty continues - and Carter's CEO suggests it will - your pricing strategy needs to account for cost volatility. Consider more frequent, smaller price adjustments rather than infrequent large ones. Transparent communication about pricing helps maintain trust during inflationary periods.

There is a counterintuitive opportunity here. When consumers trade down on retailers, they create openings for eCommerce merchants who can deliver genuine value. The 68% of consumers who now agree that lower-priced retailers offer acceptable quality, per Alvarez and Marsal, represents a significant addressable market for online merchants who can compete on price and experience.

The merchants who will thrive in this environment are those who understand exactly which consumer they serve, align their entire operation from sourcing to pricing to marketing around that consumer's current reality, and invest in the operational efficiency that protects margins even as competitive pressure intensifies.

Healthy headline numbers are not a reason for complacency. They are a reason to look more carefully at what is happening beneath the surface.

At On Tap Group, we help eCommerce businesses navigate shifting market conditions with strategies built around operational efficiency, margin resilience, and sustainable growth. Get in touch with our team to discuss how these trends affect your business.