Home Business Walmart And Other Retailers Are Fighting For Bargain-Hunting, Inflation-Weary Customers. Here’s How

Walmart And Other Retailers Are Fighting For Bargain-Hunting, Inflation-Weary Customers. Here’s How

Photo 27938284 © Gary Arbach | Dreamstime.com
(Photo 27938284 © Gary Arbach | Dreamstime.com)

By Francisco Velasquez


Even big box retailers are feeling the pinch of pesky inflation — and it’s pushing them into a pitched competition for bargain-hunting consumers.

Inflation has declined from its 2022 peak but remains elevated, delaying the Federal Reserve’s plans to cut interest rates. And the high cost of borrowing is adding to concerns that consumers still have about what, by almost all measures, is otherwise a strong economy.

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“It’s a very price-sensitive and value-oriented consumer right now,” said R.J. Hottovy, Placer.ai’s head of analytical research. “Big box retailers are realizing that consumers have been pressured because of inflation.”

Target CEO Brian Cornell said that’s partly why the retail giant’s sales fell during the first quarter. “In today’s environment, consumers are looking for ways they can stretch their budgets in the face of stubbornly high prices,” Cornell said during an earnings call last week.

And that dynamic is leading to price cuts. In earnings calls, executives have said cheaper items will help them win back and keep inflation-weary consumers. It could work, even if it means companies have to “eat the cost increases on their end,” said Mickey Chadha, a vice president at Moody’s.

Target said last week that it’s planning to slash prices for almost 5,000 everyday items this summer, such as milk, fresh produce, and pet food. The retailer said it has already cut prices on 1,500 items.

Value discounters like Walmart and Target are aware that inflation is keeping some consumers from spending. And because those companies’ target demographic skews lower income, they can’t raise prices — causing a profitability problem, Chadha said.

Walmart has managed to thread that needle so far. The retailer appears to be attracting bargain-hunting consumers — including those with higher incomes. Walmart earlier this month reported quarterly earnings that showed even higher-earning shoppers turning to the big-box retailer for value.

Sales at Walmart during the period were up 3.8%, sending the company’s stock to an all-time high. Visits to Walmart increased 3.9% year-over-year, according to Placer.ai. And its e-commerce business, which includes pickup and delivery, grew 22% during the period.

“Whether the environment is inflationary or deflationary, whether customers have more money or less money if we’re doing a good job on the items, prices, and service we provide, we can continue to grow share,” Walmart CEO Doug McMillion said on an earnings call.

Jerry Sheldon, vice president of technology at the market research firm IHL Group, said Target is ‘without a doubt” feeling the heat from Walmart.

“The strategic changes that Walmart is invoking puts a lot of pressure on Target to say, ‘Hey, who do you want to be like?,’ Sheldon said. He pointed to Walmart’s early investments in artificial intelligence, which has helped it improve its transportation, forecasting, and distribution capabilities.

Getting customers back has been a challenge for fast food chains like McDonald’s, Wendy’s and Burger King. As consumers feel squeezed by higher food costs, their spending habits have changed. The chains are each launching low-cost meal deals in response.

“What we’re starting to see here is consumers are starting to push back a little bit and say, ‘Hey, are you being opportunistic? Are you being reasonable?’” Sheldon said.

McDonald’s said earlier this month said that it will introduce a $5 meal deal by the end of June. Less than a week later, Wendy’s announced a $3 breakfast meal deal. And Burger King quickly said it was preparing its own $5 meal deal.

As some food chains offer discounts, others are planning to close their doors. Restaurants such as Chili’s, Red Lobster, Applebee’s, IHOP, and TGIFridays are among those shutting down underperforming stores.

Not all chains are cooking under pressure. Bloomin’ Brands-owned Outback Steakhouse said it’s planning to open dozens of restaurants this year, even if that means closing other underperforming locations. Olive Garden, which is owned by Darden Restaurants, opened 16 locations during the most recent quarter and plans to open about 50 this year.

Affluent shoppers are still making their way to Macy’s — or at least to Macy’s-owned Bloomingdale’s and its cosmetics company Bluemercury. Sales were up at both chains during the first quarter, according to Macy’s latest earnings. Macy’s executives said the company’s “Bold New Chapter” turnaround effort is showing signs of progress. The strategy was announced in February when Tony Spring took over as CEO.

“Although early days, our investments in product, presentation and experience are gaining traction and reinforce our belief that longer-term, Macy’s can return to sustainable, profitable growth,” Spring said on an earnings call.

Macy’s remains in a proxy battle with shareholders who want to take it private. The company said it views 2024 as a “transition and investment year.”

In the world of more affordable shopping, TJX — the parent company of T.J. Maxx, Marshalls, and HomeGoods — isn’t faring all that poorly in the inflation economy. Sales across TJX rose 3% during its first quarter, largely due to an increase in customer transactions, TJX CEO Ernie Herrman said.

Herrman said the boost in sales was “an excellent indicator of the strength of our business.” He said the company “flexed” what it offered in its stores, giving shoppers items they were looking for.

And department store chain Ross Stores is still capturing the attention of consumers, even after it raised prices.

“Our low to moderate income consumer is still being squeezed,” Adam M. Orvos, Ross’ chief financial officer, said during the company’s earnings call this month. Even so, Ross beat Wall Street’s expectations for first-quarter earnings, which showed that sales rose 3%.

“All things being considered, if you look at the overall picture, consumers are holding up pretty well,” said Chada, of Moody’s.

But when it comes to big-ticket items, consumers are postponing purchase plans to spend that money elsewhere. So rather than sprucing up the front garden or upgrading the backyard pool, shoppers are using the cash on more immediate and affordable purchases.

That’s been a challenge for home improvement retailers like Home Depot and Lowe’s.

At Home Depot, chief financial officer Richard McPhail said sales have been affected in two key ways. First, higher interest rates have hurt housing sales — which hurts Home Depot’s sales. “When you think about it, the year in which a consumer buys or sells a home is a year in which they typically spend more than in other years,” he said.

Second, when it comes to large remodeling projects, McPhail said, “customers tell us that they are taking a stance of deferral,” and that “while they have the means to spend, they are simply taking the decision to defer larger projects that typically carry the need for debt financing.”

That hasn’t stopped Home Depot from trying to reach new customers. In March, Home Depot said it would spend $18 billion buying the roofing company SRS Distribution, its largest acquisition ever.

Lowe’s is navigating the same waters. The retailer said it’s still dealing with a slowdown in home sales, higher interest rates, and a pullback in consumer spending.

But that didn’t stop it from beating Wall Street’s sales expectations during the first quarter. Lowe’s reported revenue of $21.36 billion, about $3.06 earnings per share.

“I think we’re watching consumers continue to digest and adjust to the monetary tightening,” Lowe’s CFO Brandon J. Sink said, “which is working its way through the system and that continues to have an outsized impact on housing where we see affordability challenges and historically low turnover.”

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