A “low price” sign hangs on a shelf at a Target store in Miami, Florida, on May 20, 2024.
Joe Raedle | fake images
AimThe weak quarterly earnings underscored why it cut prices on thousands of household staples: It's struggling to win over bargain hunters.
Discount stores are not alone.
Target's first-quarter results released Wednesday not only show that American consumers are more selective about their spending in the face of sustained inflation that has squeezed their budgets for nearly three years. The company's sales decline also illustrates how the battle for shoppers' wallets has intensified as retailers (and even some restaurants) compete to outdo each other on low prices.
Walmart said last week that its grocery “reversals,” short-term deals on specific items, rose 45% year over year in April. The discounter also introduced a new premium grocery brand with most items under $5.
Elsewhere, Aldi lowered prices earlier this month on more than 250 items, including chicken, steak, granola bars and frozen blueberries. and even McDonald's will debut a limited-time $5 meal at the end of June, as some diners scoff at the price of fast food.
Target made its move Monday, saying it has already reduced prices on about 1,500 items and plans to reduce prices on thousands more this summer. Many of those items are staples like milk, peanut butter and diapers.
Several major grocery stores and restaurants cutting prices or offering deals could offer relief at the checkout, at a time when consumer prices are still up more than 3% from last year. It could also give the Federal Reserve more confidence to cut interest rates. Still, the revenue lost from lower prices could force companies to cut back elsewhere, potentially on labor costs.
Analysts on Target's earnings call Wednesday asked about the timing and reasoning behind the price cuts and whether the retailer or its suppliers are footing the bill. The company declined to share details of that split, but Chief Growth Officer Christina Hennington said Target suppliers know the company is committed to passing savings on to its customers to drive traffic.
Some companies have retained customers even with the same or higher prices: Chipotle and Sweetgreen, for example, have offset the slowdown in consumption.
Target in front of Walmart
Target's earnings report revealed at least part of the reason it's joining the race to cut prices. Sales of discretionary merchandise, such as clothing, fell year over year. But so did sales of higher-frequency items, such as groceries and paper towels.
Some customers may make those purchases at Walmart. Transactions on Walmart's website and stores rose 3.8% in the most recent quarter, and its e-commerce purchases soared 22% in the U.S., the company reported last week.
In an interview with CNBC, Walmart CFO John David Rainey said the retail giant is gaining share of higher-income households. He added that some consumers are coming to their stores to eat because of the impact of labels on fast food chains.
“We have clients coming to us more frequently than before and newer clients that we haven't traditionally had,” he said.
On Target's earnings conference call, analysts asked tough questions about whether the retailer is losing ground with shoppers or is considered too expensive outside of sales events.
CEO Brian Cornell said Target is putting value at the forefront as it strives to return to growth.
“We want to make sure America knows that Target is a great place to shop and that we have great value every time you engage, whether in-store or through our digital channels,” he said, adding that the company is in on track to reverse sales declines in the second quarter.
When Target cuts prices, customers notice and respond, Hennington said on the earnings call. For example, he noticed that he didn't have the low-priced tech accessories that customers wanted, such as charging cables and phone cases, he said.
Those items became part of Dealworthy, a new private label launched in February that offers Target's lowest prices on staples like laundry detergent and paper plates.
“When we introduced the right pricing on Dealworthy, guests noticed right away and that drove acceleration of units and traffic in those categories and that's what we're doing on a business-by-business basis,” he said.
He will soon do a similar work with seasonal items, he said. After Target “took a closer look at some of the most popular products in last year's summer assortment,” customers can expect to see cheaper pool noodles, floats, and coolers.
— CNBC's Amelia Lucas contributed to this report.
