Tariffs and Affordability: The US Consumer In Limbo

Uh so today we're going to be recording three of our shows effectively. But before we get into those interviews and panels, we have a very special talk uh today. Um Matt Piscatella is the executive director at Data Specialist Circana. He has been tracking the games market in the US for decades. And today he's going to talk about the economic situation in the US and how that might impact our industry. So please welcome Matt Piscatella. Well well well hi everyone. I mean, who who doesn't want to talk about tariffs first thing on a Monday morning? Uh great job on the scheduling guys. It's a killer. Um you know, really start this thing off right. Look, I got 20 minutes and what I want to do is you know, we there's a lot of conversation, a lot of people saying a lot of things. People are really kind of confused and even really kind of tired of this topic. I wanted to give you the perspective of the consumer. We have done a lot of research. I've been talking

about this topic a lot. There is a lot of things out there that are wacky do. Um so hopefully you leave this having a little bit more of a foundation in terms of what we're looking at in the US market and its potential impact around the globe. So if I did that, great. If I made every presentation after this and topic more interesting, awesome too. I like to lower expectations. All right, let's do this. So uh first of all, yeah, uh I'm from Circana. If you don't know Circana, it is the merging of the NPD group, which if you've been around video games a while, you've seen that data forever. And IRI, which did similar things but in like the food and drug and mass categories. So now, you know, we cover just about everything from automotive to apparel, from food to books, from booze to weed. We've got it all under uh our coverage. We have about 3.3 trillion dollars of coverage in just these eight segments. And these are what we consider to be

discretionary spending categories, meaning not mortgages or car payments or things like that, but the choices that consumers make, whether it's I'm going to buy this grocery or I'm going to buy this shirt or I'm going to buy that later. Video games, we sit in the entertainment bucket for the most part. We touch tech as well. The video game category in the US is about 57 billion-ish if you just look at dedicated products. This is 3.3 trillion. I don't know if you're an analyst, but 3.3 trillion much bigger number than 56 billion or 57 billion. Um but it really what we're going to dig into a little bit is how the interplay between these categories is going to impact where the consumer is in terms of the gaming world. All right, so uh 18 minutes to do that. Let's talk a little bit about what we're seeing in the market. The consumer is in a really tough spot in the US. Uh it's been weird. We are in interesting times.

When we're looking at where the consumer is, we like to look at tailwinds and headwinds. The list of headwinds, I don't know if you've noticed, a lot bigger than than the list of tailwinds. What we have right now is cooling inflation and that's about the only thing we have going for us for the US consumer. A couple of years ago, inflation was quite high, especially around food products. A couple of years ago, food products were up about 8%. Now we're looking about 2 and 1/2%. So we're still seeing inflation, but we're seeing it a little bit lower rate than we had prior. But the list of headwinds, goodness gracious, uh the rise in prices in everyday spending categories over the last few years has really stretched the consumer thin. They've relied on their savings to a big extent. And for those folks on the lower end of the economic spectrum, they're even leaning into things like their 401ks to be paying for things like food at the moment. We're going to get into some of these areas about uh those areas

that are really impacting our consumer. But let's talk a little bit about where where consumer sentiment is in the US. Our friends at Civic Science uh do continuous tracking on consumer sentiment on the economy. And we did have an uptick going through the end of last year. However, over the last few months, that positive consumer sentiment in the market's fallen to some of the lowest levels we've seen uh in a while. In fact, lowest point since July of 2022. Now we have had a little bit of an uptick in the most recent period we've tracked. But ultimately, over these last few months, consumer sensitive or sentiment has really started to decline. Now when we look at some of the big macro numbers, in the first quarter this year, we did have a GDP contraction, right? So we did see a lowering of total uh gross domestic product. But if you look on the far right there, when you look at retail sales, despite that decline in GDP,

the consumer kept spending more. Retail spending was actually up 4.6% uh compared to the prior year despite what we were seeing in some of these other areas of the market. All of those headwinds, the consumer was still spending. Now this was in March, Q1 data. Q Q2 data could tell us something different. But leading into the summer months here, we've actually had a consumer continuing to spend. But we've seen a shift in that spending. Three buckets here, I'll let I'll show you. The top one is food and beverage. And this would include things like the grocery store, going out to a restaurant, food service. The middle bar we call non-edible CPG. That's those things in the grocery store or drug store you can't eat, basically. And on the bottom is general merchandise. This would include categories like apparel and tech and video games, right? So very essential everyday spend at the top. And then the general merchandise,

the most malleable. People can pick and choose when and what to buy. What we've seen uh this year compared to last, pink year this year, purple line last year, is a shift in dollars away from general merchandise spending towards retail food and beverage. People are spending more in retail food and beverage because prices keep going up in food and beverage. And now they're starting to take dollars away from other segments in order to pay for that. The other thing to notice is uh we have both dollars and units in that column there. The dollars are up, but units are flat or down, which means again, higher pricing is driving this. And consumers are now being forced to pull back on their purchases because they're getting tapped out from the higher prices. All right, so let's talk a little bit about affordability. It is the key issue to US consumers. Not voting rights, immigration, crime,

or anything else. It's about the price of groceries. But the consumer is under tremendous pressure across the board. These are just some of the areas in terms of the price points versus last year that people are spending so far this year. And whether you're talking about insurance or shelter or basically anything for everyday living, prices continue to grow at a pretty strong clip. There are a couple of areas where we've seen some declines, but for the most part, we continue to see prices increase, adding again more pressure on the consumer, forcing them to focus more on those everyday essentials. So that's one of the the big key takeaways I've said about three times uh in these last few minutes. Now a couple of crazy charts here. It's going to be okay. I'll get you through it. I know it's early, but you had coffee. I saw you. It's going to be fine. All right.

This is the big issue. Food cost is a major concern. On the on the left here, you can see those numbers. Those are big numbers of people that think that food is extremely concerning or somewhat concerning in terms of food cost inflation. And it's across the board when it comes to both generation and income level. Folks are extremely concerned about this. They're thinking about this a lot. They're making decisions based on food cost. It's one of the big drivers of what we're seeing in overall consumer behavior. Boop. So what are they doing to combat those higher prices in food that we're seeing? On the left here, you can see that concept of what people think about food prices and whether it's, you know, a much higher in purple or the pink being a little higher, 90% of consumers, those who oppose tariffs,

those who support tariffs, anyone, 90% of folks in the US think that food costs have gone a little or much higher versus a year ago. And what are they doing to offset that? Well, over on the right, I circled those two things. They're looking for sales and deals more often and they're cutting back on non-essentials. So they're really focusing on trying to find value. And like I showed you a couple pieces ago where the general merchandise spending has fallen and shifted to food, that's what we're seeing here as well. People are cutting back on those non-essentials. Apparel spending is down. Game spending is down. We'll see what happens with Switch, too. But every area of spend that is considered a little less than essential is seeing some drop. That That happened quick. What the hell? I didn't do that, did I? Look at this.

Million bucks drain. I'm killing it. Well, they'll they'll get that back up. Sorry about that, fellas. I must have pressed a button. So, we'll see what happens there. You know, hanging out, being groovy. Um Thank you very much. There we go. Allowed me to skip through. I can do that. You know, this is this is a refresh. It's all good. You know, it's live. We're not recorded. Doing well. Feeling good about this. Chris and Jeff are not regretting this at all. I appreciate you. All right. Okay, on top of that issue, consumers are also concerned about potential recession in the US. 80% of folks we talked to are either very or somewhat concerned about potential This is all great stuff, right? You're feeling really good and pumped up. So, look at what they're doing in terms

of their recession thoughts. Again, some big key themes. They're spending They're watching their spending more closely, and they're putting off big purchases. No matter when we talk to consumers right now, these are the two messages that come across most clearly. Consumers are very concerned about these issues. All right, talking a little bit about tariffs. I'm going to get you through this as well. Some charts. You're okay. You're going to be fine. Now, let's talk a little bit about tariff sentiment. Now, some crazy charts here. These are from January, March, and April when we talked to consumers about their experience on tariffs. Purple is support. People that support tariffs. The orange and uh maroon pink on the bottom are those that oppose, and then the gray is in the middle. They have neutral or no opinion. We've seen dramatic swings every time we've talked to consumers so far about where they stand on tariffs. About 35% of people we talked to in January probably didn't know what a tariff was.

They started to learn a little bit. They started hearing those news reports by March. And the opposition to tariffs strongly increased. So, in January, we had a net 9% support of tariffs. That was across the board. Democrat voters, Republican voters, Harris one states, Trump It doesn't matter. There was a 9% pro support margin for tariffs. By March, that had fallen to down 6%. In April, following the all the various announcements around it, it actually came back up a little bit to a net negative 1.1%. So, consumers are still figuring this out. And that group of people in the middle, that 30% of consumers that still don't know where they stand on tariffs, they're waiting to see the impact. They've heard about the impact, but they haven't seen it uh fully quite yet.

Now, two other kind of wacky charts. I'll get you through this. Regardless if people support or oppose tariffs, they both believe that it will lead to increased prices. That red line you see on the left, that's the folks that will believe that believe that tariffs will increase pricing in the US. It's gone to now 69%. Uh And again, on the right-hand side of that, whether again people support or oppose, the idea of tariffs increasing pricing is increasing with both groups. The key differentiator is the expected impact on wages and jobs. So, on the right side there, you can see those wacky lines going everywhere. This is the amount of people who believe that tariffs will lead to a positive impact on wages and jobs, a negative impact on wages and jobs, or those that aren't sure. We're seeing strong bouncing around in this measure. But the

differentiator, and you can see it on the right, those people who support tariffs believe it will have a positive impact on wages and jobs. The people who oppose tariffs believe it'll have a negative impact. That's the key differentiator whether people support or oppose the tariff situation in the US at the moment. All right. So, what does this mean? Well, about 40% of consumers are expecting the higher prices driven by potential tariffs to lead to a reduction in their spending. And where they're looking to cut back? All those areas in there right there in the middle are those categories that impact gaming. About 30% of those folks who say they're going to cut back on spending are going to try to cut back in areas of entertainment subscriptions and video games. Now, this isn't everybody, of course. But this is a portion of the market that will or are intending to pull back a little bit driven by these higher prices

we may be seeing. All right. So, last bit. Hopefully, you've gotten something out of this at 9:00 whatever time it is in the morning. Um but our outlook for the games industry spending in the US this year has also swung pretty wildly. Coming into this year, we had a 4.3% growth forecast. Of course, it helped that GTA 6 was still in the year. And it sure helped that we didn't have the tariff situation and some of these other situations we're seeing right now. As of the moment though, we're looking at about a down 4.7% outlook. Really impacting all areas of spend. Mobile's struggling a little bit this year. The console world, of course, has been struggling going into the launch of the Switch 2. We'll see how powerful and sustained that launch is. But generally, we have a consumer who's a little bit concerned. They're holding back a little bit. Uh and they really need to be pushed with the concept of value for

their uh gaming dollar. So, what to watch going forward? Number one, people still love video games. I mean, we've seen it the last couple of days. We've seen it in the response to Switch 2. People are still very, very excited. Of course, they are. Uh it's a wonderful category um that continues to to do some amazing things. But they're looking for certain things. Number one, they're looking for value. And I know we've been doing a lot of $80 games and subscriptions and free to play and all these other things happening. No matter what, the consumer has to believe they're getting a good value for their dollar. Number two, the ease of accessibility is a huge factor. Really, what I'm talking about here is the Fortnite factor. We have the $80 games, and that will work for some games and some consumers. But for younger consumers in particular, any The biggest competitor to any new game is going to be Fortnite because it's so easy to access. They can play it

wherever they are, uh whenever they want to. So, the more easily accessible games are, the better it's going to be in this particular market environment. Subscription boost may continue. We saw a subscription market boom in the pandemic window. And then it flattened. Was flat for a couple of years. It had a little bit of an uptick when Call of Duty made it to Game Pass. But after that, we saw an uptick again in February and in March and in April. Now, that could be content related, but it also could be consumers saying, "Hey, I want to have better value for my dollar. So, I'm going to, you know, lean into those categories that could deliver that." So, just keep that in mind. Keep an eye on that. I'll I'll keep talking about that in the future. And finally, one of the things that may impact It hasn't quite impacted us yet in all categories, although it has in some. Higher prices and and potential supply

shortages in the US could certainly exacerbate the challenges we're facing. So, big crazy market. But the key takeaways are we are seeing some shifting in dollars away from general Mercedes categories to things like food. The consumer is hyper-fixated on value. And the um consumer response to things like tariffs continues to be in flux. So, hopefully that gave you a little bit more of a foundation. Hopefully, that wasn't too painful. Uh and hopefully, the topics after will be a lot more fun uh to chat about. So, thank you, everybody.