Retailers presented a recession scenario
A woman carries bags of J.Crew, Nordstrom, UGG and Victorias Secret merchandise at the King of Prussia mall on December 11, 2022 in King of Prussia, Pennsylvania.
Mark Makela | Getty Images
The US economy may not be in recession, but it feels that way in many stores across the country.
Take Kroger for example. Inflation-hit customers are downloading more coupons, cooking at home and switching to cheaper private labels to save money, food giant CEO Rodney McMullen told CNBC’s “Squawk on the Street” earlier this month.
“What clients are telling us is they are already acting like they are in a recession,” he said.
Now the big retailers are bracing themselves for a recession, or at least a period of slower sales. In recent weeks, companies have unveiled their strategies in a more challenging environment, reporting holiday quarter earnings and sharing guidance for the full year.
Target is building up stocks of food and household items to encourage walking. Macy And walmart trying to win more sales from their most loyal customers. Best Buy and others are chasing new and exclusive products that can push customers to open their wallets and even pay full price.
As the travel and restaurant sectors bounce back, it looks like a “continuous recession” is coming to the retail sector, even if the economy remains strong. Many retailers are calling for lower sales this fiscal year, especially once the rise in inflation is ironed out. This is a sharp reversal from the early years of the pandemic, when retail spending was booming.
Let’s take a look at some retailer strategies.
Customers shop in the grocery section of a Target Corp store. in Chicago, Illinois, USA on Saturday, November 16, 2019
Daniel Acker | Bloomberg | Getty Images
Focus on everyday things
Gallons of milk, paper towels and soap. Retailers are stocking the types of everyday items that shoppers frequently restock as shoppers think twice about discretionary purchases.
Target, for example, stated that deliberately skewed its assortment towards food and essentials. As of the end of the fourth fiscal quarter, its overall stock was down 3% year-over-year, but discretionary stocks were down 13% over the same period.
Walmart, the nation’s largest grocer by revenue, gets a large share of its sales from groceries. He used products at lower prices to attract buyers across income levels, including more households with annual incomes over $100,000.
However, there is a downside to selling evergreens: they tend to be less profitable.
Walmart CFO John David Rainey acknowledged this during a late February call with investors, saying that “the change in product mix has negatively impacted our bottom line.”
A shopper carries a Bloomingdale bag on Broadway in the Soho neighborhood of New York, USA on Wednesday, December 28, 2022.
Victor J. Blue | Bloomberg | Getty Images
Building on loyal customers
The situation is getting more complicated, and retailers are turning their attention to a familiar audience: loyal customers.
Macy and Costco are among the retailers who want to get more sales from time-tested products. Some have even turned membership programs into money-making tools. Walmart is trying to attract more customers to its Walmart+ subscription service, which costs $98 per year or $12.95 per month. Best Buy has a Totaltech program that costs $199.99 per year. Lululemon has a free and paid membership program that debuted in the fall.
Costco, a membership-based warehouse club, is seeing more customers moving up to Executive, its top membership level. Chief Financial Officer Richard Galanti told investors during a phone call in early March that he had 30.6 million paying Executive members as of the end of the last quarter, about 45% of the total paying members and accounting for about 73% of global sales.
At Macy’s-owned Bloomingdale’s, Loyallist members accounted for more than 70% of sales in the same store, including their own brands and third-party brands. Participants in the program were spending 7% more year-on-year as of the end of Macy’s fourth quarter, CEO Jeff Jennett told investors.
Kroger’s McMullen said Wednesday at the Bank of America investor conference that his regulars tend to spend 10 times more than casual shoppers. He said the company wants to get more of its dollars by engaging “people in the reward cycle” and better personalizing their experience.
TVs are sold at Best Buy in New York.
Andrew Kelly | Reuters
In pursuit of novelty and value
As shoppers become more wary, retailers are rushing to the next hot item, or at least the one they have.
“In an environment where consumers make compromises, the same thing won’t work,” Christina Hennington, director of development at Target, said at an investor event in New York.
Value is a key part of retailers’ fresh offerings. At Kroger, shoppers can find the new exclusive Smart Way brand, which offers staples like sliced bread and mustard at the lowest price.
And Best Buy CEO Corey Barry said innovation will help motivate shoppers to upgrade their phone or switch to new game consoles, especially in the second half of the year.
“We believe there will be a desire to incentivize these replacement cycles in the future,” Barry said during a call to reporters in early March. “Obviously, our suppliers are very interested in building the next hot product, and we are the best place — and really the only one — for them to talk about these new technological advances.”
Marco Geber | DigitalVision | Getty Images
Savier about discounts
As sales drop, retailers want to make sure every dollar counts.
Profit margins are getting more and more attention from investors, especially as retailers endured a year of higher labor, merchandise and shipping costs while getting hit by markdowns on excess inventory.
Some retailers are rethinking their approach to discounts, questioning other costs such as free or unconditional shipping.
Macy’s has become more strategic in pricing. Instead of lowering the price of items online and in every store, it can use dynamic pricing to adjust where that price change might make a difference. It can send targeted discounts to a specific customer based on what he or she has viewed or bought.
In a phone call with CNBC, CEO Jeff Jennett said the company is “in the early stages of developing personalized offerings, but there are huge dividends to pay for it.” He cited this as one of the company’s growth drivers for the coming year.
Some retailers have also turned free shipping into a perk only for active or more expensive customers. Nikefor example, offers free shipping to customers if they share their personal details by joining its membership program.
Amazon, the retailer often associated with free shipping and delivery, has also recently made notable changes. Starting in late February, the e-commerce giant began charging delivery fees for grocery orders under $150. It previously offered free Amazon Fresh shipping for Prime members who spent over $35.
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