Retailers raise prices and squeeze consumers. They might just blink

Retailers raise prices and squeeze consumers. They might just blink

Retailers are nervous. Consumers don’t shop like they used to. In the game of chicken between stores and shoppers, it’s the stores that seem to pay off first, by lowering prices on thousands of products.

The price cuts come as inflation has pushed prices higher for the past two years, squeezing Americans and forcing them to choose between wants and needs.

That’s a problem not just for individual shoppers or large retail chains but for the entire American economy, about two-thirds of which comes from consumer spending.

A number of retailers in recent weeks have announced price cuts as they seek to lure consumers into stores and entice them to spend money on items such as new clothes, home decor and arts and crafts or hobby kits.

Ikea has reduced prices on hundreds of products. In April, an 18-piece dinnerware set at Ikea was marked down to $29.99 from $49.99, a glass door bookcase is now $189 down from $229 and a bed frame with storage and headboard is $499 down from $549.

It’s telling that this is a category that’s considered a discretionary purchase, meaning things that are nice to have but may not be daily necessities in the same vein as groceries and medicine.

Buyers have been pulling back for a year now because costs have risen 20% to 30% higher than last year and because earnings have failed to keep up, said Sarah Wyeth, managing director, retail and consumer with S&P Global Ratings.

This makes consumers across income levels look for deals.

“‘Budget-conscious’ consumers are no longer just those with low or moderate incomes. By far, the sharpest drop in intentions to spend came from high-income groups, and those who were previously most immune to the economic downturn are now tightening their belts,” said Chad Lusk, managing director of global consulting firm Alvarez & Marshal’s consumer and retail group. “Retailers should consider targeted offers on higher priced discretionary items as well, to increase purchase frequency.”

The end result is a significant sense of concern from the industry.

“Retailers have been nervous for some time,” Wyeth said. “It’s just less dollars for consumers to spend.”

The challenge for retailers now is to shake consumers out of that frugal mindset.

Juice sales
“Retail sales overall weren’t bad, but they weren’t great either,” said Zak Stambor, senior analyst, retail and e-commerce, with market research firm eMarketer in an interview with CNN.

Retail sales rose 0.7% in March from the previous month, a slower pace than the upwardly revised 0.9% rise in February, according to the latest government report. That beat the 0.4% rise economists had projected, according to a FactSet poll. The figure is adjusted for seasonal changes but not inflation.

Retail spending has risen in seven of the past 10 months through March. During that period, spending has been a mixed bag, boosted by purchases of high-ticket items such as cars, robust online purchases and spending on services such as restaurants, tourism and entertainment. But elsewhere, spending on furniture, clothing, sporting goods and electronics remained weak.

Businesses want to change that, Stambor said.

“Many retailers have said that discretionary spending is slowing. People buy essentials, they also lower prices and then call it a day,” said Stambor. “If you want to convince consumers to shop, you have to give them a reason to do so. Lower prices are a clear opportunity to drive people to store or online.”

It’s a lever that Walmart, he says, has been pulling forever. Walmart said in December that lower retail prices were coming this year. “It’s a very effective lever. It’s a great marketing strategy to get consumer awareness, get them into the store and convince them to open their wallets and spend,” said Stambor. “There’s a perception of value, and value is the primary focus for consumers. even when they continue to spend quite a bit.”

Jesper Brodin, CEO of the Ingka Group (the Dutch parent company of Ikea Retail) told CNN in March that Ikea is “lowering prices more than it has ever done.”

“It’s not really rocket science, we’re lowering our prices, especially when we’re at a time when people have less money in their pockets,” Brodin said. “The last six to eight months have definitely been slower than we’ve seen.”

Michaels, an arts and crafts destination with more than 1,300 stores nationwide, in early April said it was lowering prices on 5,000 products. “It’s more important than ever to provide exceptional value for every customer looking to stretch their dollar,” said Ashley Buchanan, CEO at Michaels, in a statement announcing the new discounts on April 18.
Specifically, the retailer said shoppers will see prices on frequently purchased products such as paints, markers and pens reduced by up to 15%; the cost of stickers, paper and stickers is cut by up to 20%; and canvas paintings up to 35% cheaper.

Clothing chain H&M told analysts during its latest earnings call that it will also lower prices. “At the end of the year, we believe we will have lower prices than we did at the beginning of the year,” H&M CEO Lars Daniel Ervér told analysts on a call in March.

Other businesses competing for consumer dollars are stepping up with price-cutting measures of their own.

Frida, a maker of baby care products, announced in February it had dropped the price of NoseFrida, its flagship product, to its original 2014 launch price of $14.99 from $17.99 and reduced prices on other products.

Last week, restaurant and children’s entertainment chain Chuck E. Cheese announced what it called a “budget-friendly” effort to make it a more affordable destination for families. The company said it is lowering the price of games and offering 50% off food and drinks as part of a new discount summer promotion.

Stambor expects retailers will also look beyond price cuts to a wider variety of levers to use “such as highly customized offers in loyalty programs or special limited-time offers” in their ongoing efforts to increase sales.