American consumers, fatigued by a three-year inflationary streak, want lower prices. And big retailers that have raised prices, in part to address their own rising costs, appear to be responding to customer concerns, to some extent.
Walgreens said last week that it was lowering prices on more than 1,000 items. Target recently announced modest price cuts on 5,000 food and household items. Craft and furniture stores such as Michael’s and Ikea have also said they will lower prices on popular items.
A broader range of companies have indicated in quarterly earnings calls that they plan to curb price increases and look for other ways to expand profitability.
Signaling empathy with customers facing higher costs of living is an increasingly important marketing strategy, retail analysts say. But regardless of the motivation, a shift is occurring that may help ease inflation in the coming months.
“Retailers have recognized that they have to make some changes to prices because the customer is now getting to the point where they buy more, they are reducing the amount they buy,” said Neil Saunders, CEO of GlobalData. Retail, a research and consulting company.
In some ways, the industry seems to be entering a new phase.
After a tough slog for retailers through much of the 2010s, when they often resorted to deep discounts to gain or maintain market share, the pandemic upended consumer habits. Suddenly, bank accounts were boosted by emergency federal aid and millions of consumers who couldn’t or wouldn’t spend on in-person services shifted to purchasing goods.
Then, as reopenings accelerated the economy, wages rose and retailers passed on margins with relative ease. Much of the inflation was related to increases in production, labor or transportation costs that companies faced in 2021 and 2022. Some were not, and they helped generate considerable profits.
However, recent economic data and corporate earnings show that this leverage over buyers – known as “pricing power” – is declining.
Coca-Cola, for example, reported that although its overall revenue grew in the first quarter, largely due to earlier price increases, its sales volume in North America remained stable.
Julia Coronado, a former Federal Reserve economist and president of MacroPolicy Perspectives, has argued that “fading pandemic distortions mean that consumers have become price-sensitive again and pricing power has evaporated.”
Overall goods prices have risen just 0.1 percent over the past year, according to the Federal Reserve’s preferred inflation gauge.
Disappointing earnings from luxury brands like Starbucks, which saw a decline in foot traffic, and department stores like Kohl’s, which reported net losses, showed that a variety of companies face a consumer base that has become more selective, seeking of value.
Over the past year, a number of outraged McDonald’s customers have taken to social media and posted receipts for orders they considered overpriced. (In 2019, the average cost of a McDonald’s Big Mac was $4.39. It now costs $5.29, a 21 percent increase.)
In February, when its chief financial officer acknowledged that “consumers are more cautious (and weary) of prices,” the company promised to focus on affordability. Now, McDonald’s is promoting a $5 meal. Burger King announced last week that it would offer a comparable meal for $5.
Another fast-food giant, Wendy’s, faced online scorn in February after its executives told investors it planned to experiment with pricing items based on demand levels at certain hours. The chain quickly said it had “no plans” to “raise prices when our customers visit us more,” and this month resorted to promoting a $3 breakfast.
While this might seem like the type of price-cutting competition most common a decade ago, retail analysts (who cover a variety of snack makers, clothing brands, restaurant chains and general merchandise companies) don’t see a change. important in progress.
“Not only do these companies want to remain profitable, but I don’t think they feel like running to the bottom,” said David Silverman, a retail analyst at Fitch Ratings.
That 2010s race to deliver the best sales possible was big business for consumers. Prices of goods often remained stable or fell (a rarity in service industries) as decades of globalization and innovations in technology reduced labor and production costs. But that struggle to attract consumers with affordable options often puts a low bar on potential profits across the industry.
Companies have little interest in renewing that dynamic. They are looking for other ways to attract customers and assure them they are getting their money’s worth, even if overall prices will never return to 2019 levels.
1990s favorites Gap and Abercrombie & Fitch posted impressive quarterly results thanks to brand changes. Executives at Chipotle, where profit margins have grown and store sales are up 19 percent over the past year, say it is thriving – despite more expensive burritos – by reducing waits and marketing itself as a healthy option. Just a few dollars more expensive than fast food competitors. .
In April, Walmart introduced a line of private label foods and said more than 70 percent of the products within that assortment would cost less than $5.
Another reason analysts and industry experts believe a race-to-the-bottom price cycle is unlikely is that companies have built sophisticated e-commerce businesses since 2020. They can cater to a variety of tastes and measure how willing customers are. pay using large amounts of data, such as credit card information and artificial intelligence.
Deborah Weinswig, CEO of Coresight Research, a research and advisory firm whose clients include Microsoft, Kroger and Walmart, says her team has worked harder than ever over the past year to help businesses with dynamic pricing. Those projects involve greater flexibility to set prices based on competition, individual customers’ backgrounds, and their propensity to purchase an item at a given time.
Weinswig is aware that some find this practice annoying. She understands it, she said, but she sees it as an inevitable trend driven by technology. “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 kind of quite outrageous: ‘Why should I pay more?'”
Silverman said that right now retailers need to be attuned to customers’ underlying desires. In his view, companies (whether they sell lunch boxes, sandals, or gardening tools) will do better if they offer convenience or satisfaction, even if they don’t have the lowest possible price.
“These companies don’t have to race to be the lowest price provider,” he said, “because they offer other things that the consumer wants.”