June 12, 2024

Big-box retailers are duking it out when it comes to discount deals — and with each markdown, they hope their bargain will be the one to win over inflation-weary consumers.

While some retailers say they’re cutting prices to give shoppers deals, those efforts may be more aligned with their bid to offset declining sales. In recent weeks, a slew of quarterly earnings reports and other company announcements have underscored the extent to which customers are chasing deals and how quickly retailers are taking action.

“Retailers respond when consumer sentiment seems to hit a tipping point,” said Jerry Sheldon, vice president of technology at the market research firm IHL Group, in reference to the impact of inflation on American families. “The entire supply-demand and cost sensitivity tipping point is quite fragile it seems, and no retailer wants to be positioned as a price outlier from their self-defined peer group.”

That tipping point, further pushed by higher costs, may in part be why retailers are marking down items, Sheldon said, noting that he wonders “if consumers really understand how much influence they yield.”

Cheap item chatter

Recently, that sentiment has ricocheted throughout the industry. Just this week, Amazon Fresh and Walgreens said they would also join Target and Aldi in the bargain battle to capture customers’ dollars through deals of their own.

Aldi may have started the discount deal wave when it said in early May that it would be cutting prices on 250 items, but Target’s notoriety likely pushed the trend over the top.

Earlier this month, Target said that it planned to cut prices on nearly 5,000 everyday items during the summer. The retailer said it had already cut prices on 1,500 items, including vegetables, peanut butter, and coffee.

“Retailers like Target have proven especially capable at understanding that nuance and identifying the ideal places to reduce costs,” said Ethan Chernofsky, SVP of marketing at Placer.ai. “There are places where consumers are clearly looking to cut costs, but there are also others where value is less about cost reduction and more about the ideal product.”

The Walmart play

Walmart has been one of the few outliers that has managed to reach customers of all income cohorts.

“When you look across the board, people are trading down to get the best value, and retailers like Walmart are taking advantage of it,” said Mickey Chadha, a vice president at Moody’s, in reference to the low price points Walmart offers.

That strategy has worked well so far for Walmart, according to Doug McMillon, Walmart’s CEO. He told investors during the company’s earnings call in May that “whether the environment is inflationary or deflationary, whether customers have more money or less money,” if Walmart is providing items, prices, and services that customers want, it can continue to grow share.

Like other retailers, however, Walmart is cutting prices too. Earlier this month, John R. Furner, Walmart U.S. CEO, said that sales for the retail giant increased during the most recent quarter, thanks to a “rollback in prices” on 7,000 items.

Cost reductions may have a positive impact, but it’s also likely that the impact will not be the same across the board, Chernofsky of Placer.ai noted. But even so, it isn’t keeping other retailers from at least trying their hand at the bargain battle.

The smaller retail handbook

Amazon Fresh, the subsidiary of e-commerce giant Amazon, said that it planned to lower prices on 4,000 items by up to 30%. The grocery chain operator said the mark downs would apply to national brands, including Amazon’s private label, Aplenty.

Meanwhile, pharmacy giant retailer Walgreens said that it planned to lower prices on 1,300 national and store brand items across food, health and wellness, personal care, and seasonal categories. Those marked-down items include Igloo coolers, facial cleansers, and fans.

Chedly Louis, Moody’s vice president of corporate finance, said that it is pretty clear that consumers don’t think of food and groceries when they think of Walgreens, but that isn’t necessarily a bad thing, so long as the price cuts resonate with what customers want.

To the extent that Walgreens can implement a price reduction that is meaningful enough that consumers feel it in their pockets, then Walgreens stands to benefit, Louis explained.

According to Louis, if Walgreens focuses on the core parts of its business, which include speciality essential drugs and everyday essential items, it may “improve the stickiness of the customer,” and can in turn increase foot traffic.

Nonetheless, it is clear the competition among retailers for customers is getting fierce. Sheldon of IHL Group said it highlights that consumers feel retailers have pushed prices too hard and are finally pushing back.

“When the pendulum does swing, it swings hard,” Sheldon said.

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