Pendulum price swings Back to discounts, within limits

American consumers, fed up with a three-year run of inflation, want lower prices. And the big retailers that have raised prices, in part to deal with their rising costs, appear to be responding to customer concerns to some extent.

Walgreens said last week it was cutting prices on more than 1,000 items. Target recently announced modest price cuts on 5,000 grocery and household items. Craft and furniture stores such as Michaels and Ikea have also said they will cut prices on popular items.

A wider range of companies have indicated in quarterly earnings calls that they plan to slow price increases and look for other ways to expand profitability.

Signaling empathy with customers facing higher living costs is an increasingly important marketing strategy, retail analysts say. But regardless of the motivation, a shift is afoot that could help ease inflation in the coming months.

“Retailers have realized they have to make some moves on price because the customer is now getting to the point where they’re buying more, they’re reducing the quantity they’re buying,” said Neil Saunders, managing director at GlobalData Retail, a research and consultancy. strong

In some ways, the industry seems to be entering a new phase.

After a setback for retailers during most of the 2010s, when they often used deep discounts to gain or maintain market share, the pandemic changed consumer habits. Suddenly, bank accounts swelled from federal emergency aid, and millions of consumers unable or unwilling to spend on personal services shifted to buying goods.

Then, as reopenings revived the economy, wages rose and retailers passed prices with relative ease. Much of the inflation was related to the increase in production, labor or transportation costs that businesses faced in 2021 and 2022. Some was not, and helped drive fat profits.

Recent economic data and corporate earnings, however, show that this leverage over buyers known as pricing power is waning.

Coca-Cola, for example, reported that although its overall revenue rose in the first quarter, largely due to past price increases, its North American sales volume was unchanged.

Julia Coronado, a former Federal Reserve economist and president of MacroPolicy Perspectives, has argued that the fading of pandemic distortions means that consumers have returned to their price-sensitive ways and price power has evaporated.

Overall commodity prices rose just 0.1 percent over the past year, according to the Fed’s preferred gauge of inflation.

Sluggish earnings from high-end brands like Starbucks, which saw a drop in foot traffic, and department stores like Kohls, which reported net losses, showed that a number of companies face a consumer base that has grown more selective, in value search.

Over the past year, a number of angry McDonalds customers took to social media and posted receipts for orders they felt were overpriced. (In 2019, the average cost of a McDonalds Big Mac was $4.39. It’s now $5.29, a 21 percent increase.)

In February, as its chief financial officer admitted that consumers are more cautious and price-weary, the company pledged to focus on affordability. Now, McDonalds is promoting a $5 meal. Burger King announced last week that it would offer a comparable $5 meal.

Another fast-food giant, Wendys, faced online scorn in February after executives told investors it planned to experiment with pricing items based on demand levels at certain hours. The chain quickly gave assurances that it had no plans to raise prices when our customers are visiting us the most, and this month returned to promoting a $3 breakfast meal.

While this might seem like the kind of price-cutting competition more common a decade ago, retail analysts covering a range of snack makers, apparel brands, restaurant chains and general merchandise companies don’t see a major change in development.

Not only do these companies want to stay profitable, but I don’t think they have the appetite to race to the bottom, said David Silverman, a retail analyst at Fitch Ratings.

That race in the 2010s to deliver the best possible sale was a big deal for consumers. Commodity prices were often flat or falling (a rarity in service industries) as decades of globalization and innovations in technology lowered labor and production costs. But this effort to woo consumers with cheap options often places a low ceiling on potential industry-wide profits.

Companies have little interest in renewing that dynamic. They are reaching 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 darlings Gap and Abercrombie & Fitch posted impressive quarterly results on the back of rebrands. Executives at Chipotle, where profit margins soared and store sales rose 19 percent over the past year, say it is thriving despite the pricier burrito by lowering expectations and marketing itself as a healthy option just a few dollars more expensive than fast food competitors.

In April, Walmart introduced a private-label grocery line and said more than 70 percent of the products within that assortment would cost less than $5.

Another reason industry analysts and insiders believe a race-to-the-bottom pricing cycle is unlikely is that firms have built sophisticated e-commerce businesses since 2020. They are able to cater to a variety of tastes. and estimate how much customers are willing to pay using large amounts of data such as credit card information and artificial intelligence.

Deborah Weinswig, chief executive of Coresight Research, a research and consulting firm whose clients have included Microsoft, Kroger and Walmart, says her team has done more work than ever last year to help companies with dynamic pricing. These projects include greater flexibility in setting prices based on competition, the background of individual customers and their propensity to purchase an item at a given time.

mrs. Weinswig is aware that some find this practice troubling. She sympathizes, she said, but sees it as an inevitable technology-driven trend. It’s so funny; if it changes the ZIP code of the country you’re buying from, which can lead to a much higher product price, it’s pretty outrageous in a way: Why should I pay more?

God. Silverman said that at this point retailers must be attuned to the basic desires of customers. As he sees it, businesses whether they sell lunch bowls, sandals or garden tools will do best by offering convenience or pleasure, even if it doesn’t come at the lowest possible price.

These companies don’t have to compete to be the lowest-priced provider, he said, because they have other things they’re offering that the consumer wants.