The New Consumer Divide: How Generational Spending Shifts Are Reshaping Retail Investing

The U.S. consumer is at a crossroads. Rising tariffs, lingering inflation, and a shifting generational landscape are forcing households to recalibrate their spending priorities. While Baby Boomers and higher-income groups cling to established habits, younger generations and lower-income consumers are adopting radical cost-saving strategies. For investors, this divergence presents a clear roadmap: favor essential retailers and private-label brands while avoiding discretionary sectors exposed to tariff-driven price hikes. The clock is ticking—consumers are already adapting, and portfolios must follow.

The Generational Divide in Spending Habits

The May 2025 retail sales data reveals a stark generational split. Gen Z and Millennials are leading the charge toward cost-cutting, with 51% of low-income households trading down to cheaper meat and dairy brands—a 10 percentage point increase from early 2024. Gen Z, in particular, is embracing secondhand markets: 40% now buy vehicles and apparel used, even when budgets allow new purchases. This cohort's pragmatism extends to delaying discretionary spending on electronics and dining out, with 50% of younger consumers planning to postpone such purchases.

In contrast, Baby Boomers are proving more resilient in essential categories. While they cut nonessentials by 12 percentage points more than average, their core spending on groceries and health care remains steady. Wealthier Boomers are even splurging on travel and home improvements, reflecting confidence in their financial stability. Yet their loyalty to discretionary categories like luxury goods is fading: only 20% intend to splurge on jewelry or high-end apparel this year, down from 28% in 2024.

Income as a Key Determinant of Resilience

Income further sharpens the divide. Lower-income households, regardless of age, are aggressively trading down to generic brands (51% for meat/dairy) and secondhand goods. Middle-income groups, meanwhile, are paradoxically splurging on travel and dining—a sign they prioritize experiences over material goods even amid cost pressures. Higher-income households, though less price-sensitive, are not immune: 63% of high-income Millennials plan travel splurges, but 30% report delaying auto purchases due to tariff-fueled price hikes.

The data underscores a bifurcated consumer base:
- Essentials Hold Steady: Grocery stores (-0.7% May sales) saw minimal declines, buoyed by bulk buying and private-label adoption. Health and personal care rose 1.1%, reflecting inelastic demand.
- Discretionary Volatility: Auto sales plummeted 3.5% as buyers pre-empted tariffs, while furniture and electronics sales dipped 0.6%. Only online retailers (+0.9%) and thrift markets thrived.

Tariffs and Inflation: The Catalyst for Shifts

Tariffs are the silent accelerant. Companies like Picnic Time saw tariff costs triple year-over-year, forcing price hikes (e.g., a $120 chair now $137). Consumers are responding swiftly: 40% of retailers reported delayed orders, and 25% of buyers switched to generic brands. Even essentials face ripple effects: Walmart's private-label groceries now capture 20% of shelf space, up from 15% in 2023.

The lag effect is critical. While May sales reflected pre-tariff buying frenzies, the full impact of 2025's tariffs will materialize in Q3. Analysts warn that sectors like automotive and home goods, already reeling from 3–5% price increases, face a perfect storm of higher costs and cautious buyers.

Investment Implications: Where to Focus—and Avoid

The writing is on the wall for investors:
1. Favor Essential Retailers:
- Walmart (WMT) and Target (TGT) dominate private-label brands, which now account for 18–20% of sales. Their grocery and health divisions offer stable revenue streams.
- Costco (COST) benefits from membership loyalty and bulk purchasing advantages, though its discretionary exposure (e.g., appliances) requires monitoring.

1. Embrace Secondhand Markets:

2. ThredUp and Poshmark are early winners in Gen Z's shift to secondhand. While unprofitable today, their valuations reflect long-term demand for affordable, sustainable fashion.

3. Avoid Tariff-Exposed Discretionary Sectors:

4. Auto manufacturers (F, GM) face declining demand as prices rise.

5. Home improvement retailers (LOW, HD) are vulnerable to both material cost inflation and delayed home projects.

6. Watch for Middle-Class Splurges:

7. Travel stocks (CCL, MKTO) could benefit from Boomers' and middle-income buyers' travel intent, but monitor inflation's bite on discretionary budgets.

Conclusion: The Time to Reallocate Is Now

The consumer landscape is fracturing along generational and income lines. Investors who cling to traditional discretionary darlings risk being left behind as tariffs reshape spending habits. The data is clear: essential retailers, private-label brands, and secondhand platforms are the anchors of resilience. Discretionary sectors, especially those exposed to tariffs, are best avoided until the dust settles. Act now—by Q4 2025, the lagged impact will be undeniable.