Several Factors Driving Retail Price Cuts
Retail price cuts have been prominent in headlines across the industry during the year’s second quarter. As consumers continue dealing with high prices impacting nearly every product on the shelves, some of the nation’s biggest chains announced price rollbacks on select items across the store.
While these announcements make for good headlines, ultimately what are the motivating factors behind these decisions? While offering shoppers lower prices is the obvious answer, retail experts say there is more at play. Will retailers’ desire to lower prices offer new opportunities for private label growth, and will the cuts have a significant impact on the shopping behaviors of consumers?
Elizabeth Lafontaine, director of Research with Placer.ai, feels the price cuts announced by retailers in recent weeks are the result of continued shifts in store traffic seen in recent months as consumers increase their visits to retailers offering products at lower prices.
“What we’ve seen so far this year is that value continues to be a major motivating factor for consumers when they’re choosing the retailers they want to visit,” she said. “Dollar stores and discount value-based grocery stores are the ones winning consumer traffic and we continue to see their store visits grow over time.”
“Mass merchants know they are losing out with lower-income consumers who are trading to other channels. But it’s not enough to have low prices. That’s important, but retailers also need to have unique products at the same time.”
— RJ Hottovy, Placer.ai
To Lafontaine’s point, Placer.ai statistics show a clear difference in retail foot traffic growth seen in the first quarter, even among those chains many would consider offering products at low prices. Visits at Dollar General in Q1 were up 12.6%, up 12.4% at Dollar Tree, and up 10.9% at Ollie’s Bargain Outlet. Target’s shopper foot traffic in Q1 was up 3.5% with visits at Walmart stores growing 3.9%.
Among the retailers who have announced price cuts in recent months are Target, Walgreens, Michaels, Giant Food, and Aldi. Target and Michaels each announced price cuts on 5,000 items, Walgreens reduced prices on more than 1,300 items, and Aldi lowered prices on 250 products. Giant Food cut prices on hundreds of private label items while also expanding its Flexible Rewards program with an enhanced focus on store brand products.
R.J. Hottovy, head of Analytical Research for Placer.ai, said while consumers continue to show a propensity to spend on special events and occasions, they are looking to save money and stretch their budgets when shopping for everyday products.
“If we look at the success stories of the past year (at retail), it’s retailers such as the Trader Joe’s and Aldis of the world that are innovating around low price points,” he said. “Mass merchants know they are losing out with lower-income consumers who are trading to other channels. But it’s not enough to have low prices. That’s important, but retailers also need to have unique products at the same time.”
Others feel retailers are using the lure of lower prices to boost shopper loyalty, something that has diminished in recent years as consumers jump from store to store seeking the best prices for the products they want.
Zarina Stanford, chief marketing officer with Bazaarvoice, said a retailer’s success hinges heavily on consumer loyalty, and retailers today are working harder to maintain a high level of engagement with shoppers. Tactics include everything from recent price cuts to offering percentage discounts on purchases made on a return trip to the store.
“When thinking of this from a marketing perspective, it’s all about eyeballs,” she said. “If you don’t have eyeballs, your product doesn’t move. As a result, retailers have to figure out how to get more people to look at their products. And pricing discounts is a very effective approach to getting the attention of consumers.”
Securing and maintaining the attention of shoppers who, perhaps more than ever, are focused on their personal bottom lines, is more of a necessity today as traditional shopping habits have altered. Hottovy noted the shift by lower-income shoppers to dollar stores and value grocers from superstores seen in 2023 has continued this year. That trend has evolved to also include middle-income shoppers, many of whom have made a similar change in their shopping habits to find products at lower prices.
“It’s been a waterfall effect,” he said. “The dollar stores have reported seeing a pickup in middle-income consumers in their stores, with one noting this group is its largest growth category.”
While price cuts may allow retailers to claw back some of those shoppers they have lost to competitors over the past two years, Stanford said chains that implemented price reductions must also closely watch other aspects of their business. This includes profitability, maintaining a strong supply chain, and maintaining strong relationships with suppliers.
“Retailers are looking at all angles of their businesses,” she said. “It’s vital today to diversify to keep the business running, which is why we see so many of them with marketplaces today."
The other tool at the disposal of retailers is the continued growth of private label assortments. As lower prices chip away at the profitability of products, own brand items allow retailers to offer their shoppers a broad selection of items that carry lower prices than their national brand counterparts, but provide more margin for retailers.
“I think more is coming,” Hottovy said of additional private label growth. “Based on discussions we have had with people in grocery and CPGs, it does seem like we’re going to keep moving towards a higher percentage of products coming from private label. That’s going to be partially the way to preserve some of the margins (retailers) may be giving up on these price cuts.”
And what does the future hold? Will there be additional price reductions from retailers?
“Absolutely,” said Stanford. “Unless we see major changes to current macroeconomic conditions, we will see more cuts. Retailers watch other retailers and they will react to competitive pressures.”