Retailers are responding to the affordability crisis this holiday season.
In recent earnings calls, Target, Walmart, and Sally Beauty Holding addressed the cratering consumer sentiment and discussed their pricing strategies as the busiest time of year for shoppers approaches.
Consumers are feeling the pinch. According to the University of Michigan’s survey of consumers, sentiment dropped to 51 points in November, which is the second-lowest score the index has ever recorded since 1952, narrowly topped only by a score of 50 in June 2022.
Mark Cohen, the former director of retail studies at Columbia Business School, said that retailers are responding by investing more in lower-priced items and “adjusting their assortments” to give their customers the opportunity to buy from them at a lower price.
“Retailers have been getting more and more promotional for years in the main, but now they’re doing it with their feet standing on thin ice because they don’t know what to expect,” said Cohen. “The last thing they want is to have overhang inventory for the holidays when the season is over, so they have been discounting frantically.”
In Target’s third-quarter earnings call, Rick Gomez, the executive vice president of Target, said that because consumer sentiment is “at a three-year low amid concerns about jobs, affordability, and tariffs,” shoppers are looking to “celebrate with loved ones without overspending.”
“Guests are choiceful, stretching budgets and prioritizing value,” said Gomez. “They’re spending where it matters most, especially in food, essentials, and beauty, while looking for trend-right deals in discretionary categories.”
“Given our focus on affordability, we recently lowered prices on thousands of everyday food and essential items to help families further manage their budgets,” Gomez added.
Target is struggling with declining sales and had to cut its profit guidance for the end of the year, but companies that are faring better have similar concerns.
In their respective Q3 earnings calls, Home Depot said that “consumer uncertainty and continued pressure in housing” is driving down demand for larger home improvement projects, Lowe’s is expecting comp sales to remain “roughly flat” due to “a cautious consumer,” and Sally Beauty Holdings said it saw shoppers “leaning into value a bit more,” especially for those with low-income.
“The disparity in wage growth between those cohorts was as large as it’s been in almost a decade,” said John David Rainey, CFO of Walmart, during the company’s Q3 earnings call in reference to the relatively stagnant wage growth for low-income households.
“If pocketbooks are being stretched and consumers are being choiceful and value seeking, it stands to reason, if there’s more pressure on the consumer, they’re only going to become more so,” Rainey added, citing the value Walmart provides as a reason why the company is gaining market share in this economic environment.
The Federal Bank of New York wrote in its latest report that total household debt has reached a record high this year, totaling $18.59 trillion from July through September. Compared to the end of 2019, before the pandemic, overall debt levels have increased by $4.4 trillion.
Not every retail company is feeling equally cautious this holiday season. Best Buy hiked its sales forecast on “better-than-expected” sales in the third quarter because of strong results across computing, gaming, and growth in wearables. Gap Inc., in its Q3 earnings call, said that external data points to “macro pressure on the low-income consumer,” but the company raised its full-year guidance.
A change in messaging
Dax Dasilva, the CEO of Lightspeed Commerce, a retail analytics company, told Business Insider that shoppers now are “highly price-savvy” and drawn to transparency in pricing and offers that are easy to understand.
A consumer sentiment survey from Lightspeed Commerce found that of the 1,500 respondents in the US market, almost one in four of the surveyed individuals said they will use Black Friday only for everyday essentials, such as groceries and household basics, while 13% said they weren’t planning to spend at all.
“The brands winning right now are those showing empathy, not extravagance,” said Dasilva. “Messaging that celebrates practicality like ‘shop smarter,’ ‘stretch your dollar’ resonates far more than indulgent tones like ‘treat yourself.’”
Dasilva added that despite low consumer sentiment, sectors like bike, outdoor, sports, and self-care are still performing resiliently, which gives some indication toward what consumers are currently willing to invest in.
Jean-Pierre Dubé, professor of marketing at the University of Chicago Booth School of Business, said that retailers are developing strategies to offer deals without permanently lowering prices, in fear that this may “recalibrate consumer price expectations” to be lower.
“Retailers like promotional discounts because they are temporary in nature, facilitating a necessary price reduction without leading the consumer to expect the lower price to persist,” said Dubé.
Dubé pointed to the rise of the “everyday-low-price” model, now widely used by chains like Walmart and T.J. Maxx, which he said is experiencing surprisingly good results because of the guarantee of consistent low prices within a specified period, without needing to wait for a big annual sale.
“Depending on how much inventory retailers acquired for the holiday season,” Dubé added, “I anticipate some exceptionally aggressive discounts and promotions.”