U.S. consumers, fatigued by a three-year wave of inflation, want lower prices. And major retailers, which have increased prices, in part to deal with their own rising costs, appear to be responding – to some extent – to customer concerns.
Walgreens announced last week that it was cutting prices on over 1,000 items. Target recently announced minor price cuts on 5,000 groceries and home goods. Arts and crafts and furniture stores such as Michael’s and Ikea have also announced they will be reducing prices on popular items.
A broader range of companies have indicated in quarterly earnings releases that they plan to slow price increases and look for other ways to boost profitability.
Signaling compassion to customers facing higher costs of living is an increasingly important marketing strategy, retail analysts say. But whatever the motivation, a shift is afoot that could help bring inflation down in the coming months.
“Retailers have realized they need to make a difference in pricing as the customer is now at the point where they are buying more and reducing the amount they buy,” said Neil Saunders, managing director at GlobalData Retail Research and consulting company.
In some ways, the industry appears to be entering a new phase.
After much of the 2010s saw retailers struggling to gain or maintain market share with deep discounting, the pandemic changed consumer habits. Suddenly, bank accounts were bolstered by emergency federal aid, and millions of consumers unable or unwilling to spend money on personal services shifted their focus to purchasing goods.
Then, as reopenings stimulated the economy, wages rose and retailers passed on markups with relative ease. Much of the inflation was related to increases in production, labor or transportation costs that companies faced in 2021 and 2022. For some this was not the case and they contributed to high profits.
However, recent economic data and corporate earnings show that this influence over buyers – known as “pricing power” – is weakening.
Coca-Cola, for example, reported that while its overall sales increased in the first quarter, largely due to previous price increases, its sales volume in North America was flat.
Julia Coronado, a former Federal Reserve economist and president of MacroPolicy Perspectives, has argued that “easing pandemic distortions mean that consumers have become price sensitive again and pricing power has evaporated.”
According to the Fed’s preferred measure of inflation, overall goods prices rose just 0.1 percent last year.
Disappointing earnings from upscale brands like Starbucks, which saw a decline in customer traffic, and department stores like Kohl’s, which reported net losses, showed that a number of companies are facing a consumer base that has become more selective and looking for value.
Last year, a number of outraged McDonald’s customers took to social media and posted receipts about orders they said were overpriced. (In 2019, the average cost of a McDonald’s Big Mac was $4.39. Now it costs $5.29, a 21 percent increase.)
When its chief financial officer acknowledged in February that “consumers are more cautious and tired of pricing,” the company promised to focus on affordability. Now McDonald’s is advertising a $5 meal. Burger King announced last week that it would offer a comparable meal for $5.
Another fast-food giant, Wendy’s, faced scorn online in February after executives told investors that the company planned to experiment and price items according to demand at certain times. The chain quickly assured that it had “no plans” to “increase prices when our customers visit us most often” and this month turned to promoting a $3 breakfast.
While this feels like a price-cutting competition that was more common a decade ago, retail analysts — who cover a range of snack makers, clothing brands, restaurant chains and general merchandise companies — don’t see a major turnaround afoot.
“Not only do these companies want to stay profitable, I don’t think they have any desire to run lower,” said David Silverman, retail analyst at Fitch Ratings.
The race to best sell in the 2010s was big business for consumers. Prices of goods often remained flat or fell (a rarity in the service industry) as decades of globalization and technological innovation reduced labor and production costs. But this attempt to lure consumers with low-cost options often limits potential profits across the industry.
Companies have little interest in renewing this dynamic. They are looking for other ways to attract customers and reassure them that they will get their money’s worth, even if overall prices never return to 2019 levels.
1990s darlings Gap and Abercrombie & Fitch posted impressive quarterly results thanks to rebranding. Executives at Chipotle, where profit margins rose and store sales rose 19 percent last year, say the company is thriving despite its pricier burritos by cutting wait times and marketing itself as a healthy option that’s just a few dollars more expensive than the fast food competition.
In April, Walmart introduced a private label grocery line and said more than 70 percent of the products in that range would cost less than $5.
Another reason industry analysts and insiders believe a downward price cycle is unlikely is that since 2020, companies have built sophisticated e-commerce businesses to pay using vast troves of data like credit card information and artificial intelligence.
Deborah Weinswig, managing director of Coresight Research, a research and consulting firm whose clients include Microsoft, Kroger and Walmart, says her team has done more work than ever in the past year to help companies with dynamic pricing. These projects involve greater flexibility in setting prices based on competition, each customer’s background, and their propensity to purchase an item at a given time.
Ms. Weinswig is aware that some find this practice disturbing. She understands that, she said, but sees it as an inevitable technology-driven trend. “It’s so funny; “If you change the zip code of where you shop,” which can result in a much higher product price, “it’s pretty outrageous in a way: ‘Why should I pay more?'”
Mr Silverman said retailers need to adapt to the underlying desires of customers at this moment. He believes companies—whether they sell lunch bowls, sandals, or garden tools—will do best by offering convenience or satisfaction, even if it doesn’t come at the lowest price.
“These companies don’t have to compete to be the provider with the lowest price,” he said, “because they offer other things that the consumer wants.”
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2024-06-03 20:22:05
www.nytimes.com
