John Hugh DeMastri, DCNF
Financial executives across the retail industry have been forced to adjust strategies to account for customer expectations as inflation puts pressure on outlets, The Wall Street Journal reported Friday.
Major retailers, including Macy’s and Target, who used discounts to clear excess inventory after overestimating demand for their products following a wave of pandemic-era retail spending, are being forced to develop strategies, such as reducing the size of bundles or subtly cutting down on discounts, to entice customers while protecting profit margins, the WSJ reported. Dollar stores have gained popularity as consumers struggle with inflation and — in tandem with the more aggressive discounting campaign by retailers — customers’ heightened demand for value has left some retailers concerned that customers might start to expect discounts that damage profits.
“If you start to do too much, without being intentional and using proper merchandising tactics for your markdowns, you’re going to start to train consumers,” said Shikha Jain, partner at business advisory firm Simon-Kucher & Partners. Jain also recommended that companies explicitly offer promotions on a time limit, to prevent the unintentional conditioning of customers to expect a deal.
Dollar General, $DG, CEO Todd Vasos said the retail giant has been attracting customers earning $100,000 a year in recent weeks, due to inflation.
— unusual_whales (@unusual_whales) September 23, 2022
Retailers in apparel and footwear were a prime example of the potential impacts of aggressive discounting in combination with inflation, with profit margins in the second quarter falling to 7.4%, compared to 11.4% just last year, according to the WSJ.
Some companies have adjusted their discounts to provide higher margins while retaining the appearance of a good deal, such as fragrance and soap company Bath and Body Works, the WSJ reported. While the company used to offer a promotion selling six bars of soap for $26, or $4.33 per bar, it now sells five bars for $25, or $5 per bar.
“Ultimately, we want our promotions to generate margin dollars. That’s our goal,” Wendy Arlin, Chief Financial Officer (CFO) of Bath and Body Works, said to the WSJ. “It’s a balance for us. So our customer loves a deal, and so we have to be very careful to price in a way that it still resonates with the customer.”
Some CFOs have been willing to sacrifice profit margins to remain competitive, Steve Caine, head of retail pricing at advisory firm Bain and Co., told the WSJ. The most intelligent CFOs, by Caine’s reckoning, are those who are offering discounts on only certain items, as opposed to cutting prices across the board.
Kohl’s CFO Jill Timm, on an investor call, suggested strategies that didn’t impact the price of items directly, such as offering coupons for 20% off instead of 25%, the WSJ reported. “It’s a way to take price without really changing anything. And the consumer is still seeing value in that coupon,” Timm said.
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