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If you only read the headlines, it’s pretty hard to miss that retailers are going out on a limb to announce price reductions. How will these price reductions impact unit volume and long-term shopper behavior?

HOW LOW WILL PRICES GO?

“Target dropping prices on 5,000 everyday items.” The mass merchandiser announced in May that it would be lowering everyday prices on approximately 5,000 frequently shopped items across its assortment. A deeper look reveals that most of these decreases will be in the single digits and cover all types of consumer products, both branded and private label. This is a two-wave implementation with 1,500 items already reduced and 3,500 more planned this summer — a small fraction of the items stocked at Target.

Grocery retailers need to give shoppers reasons to buy.

Aldi looks to sharpen its cost-cutting edge by lowering the prices on 250 items this summer, which could save shoppers $100 million. Aldi already is the lowest of the low and will strengthen its position with lower- and middle-income shoppers.

Earlier this spring, Walmart announced expanded price rollbacks on nearly 7,000 grocery items. These rollbacks are typically in the 10% range and are designed to appeal to shoppers preparing meals at home. Walmart’s CEO Doug McMillon said, “We’re going to lead on price, we’re going to manage our profit margins, and we’re going to be the Walmart that we’ve always been.”

‘We have reached the point of diminishing returns as higher prices no longer yield higher dollars and profits.’

Walgreens also announced price decreases on 1,300+ items, while Amazon Fresh is slashing grocery prices up to 35% on up to 5,000 items. This is an incredibly large number of items for Amazon Fresh. Price reductions were also announced at select grocery retailers, including Giant Food. Gary Millerchip, Costco’s new chief financial officer, announced soon-to-come price reductions to add incremental value for club members. “We believe our strategy of delivering value to drive unit volume and member satisfaction is the winning combination for us.” Costco remains committed to its $1.50 hotdog and soda (with free refill) as it has for nearly 40 years.

MAKE THE MOST OUT OF PRICE CUTS

• Retailers and manufacturers should partner to pass savings to shoppers and reverse negative unit trends.
• Target icon items, especially on all key seasonal events.
• Leverage all your brands, including value and private labels, to draw shoppers in, increase loyalty, and increase sales and profitability.
• Hit hot price points deeper and more frequently. BOGO is not a bad term.
• Address broadscale price declines head-on.

SHOPPERS VALUE GOOD DEALS

Consumer confidence remains low, with more focus on bargains, trading down to value or private label products, and switching to lower-priced retail outlets such as Walmart, Aldi, or Costco. According to industry experts, “value” grocery products have grown market share from less than 40% in 2019 to nearly 50% in 2024. Retailers have been targeting specific price cuts and subsidizing them, to some degree, at the expense of their profits but also at a cost to manufacturers.

• Manufacturer spending with retailers is projected to be up considerably in 2024. We will share more data in our next article.
• Trade promotion spending at leading retailers has ticked up several points compared to a year ago, driven heavily by everyday low-price (EDLP) spending.
• Retailer media consists of dollars retailers spend on internal and external media These investments have exploded over the past two years.

Most of these price cuts are on selected “icon” items. These are frequently shopped items that are often price comparison shopped and also catch the shopper’s eye. The reality is that units are still declining, and shoppers have now cycled through over a full year of the reduction in SNAP benefits (average of $1,000 annually) and many months of significantly reduced inflation. However, units have not responded.

WILL BRANDS PASS SAVINGS TO CONSUMERS?

The reality is that grocery prices are quite sticky on the downside. Manufacturers rarely reduce list prices as it is difficult to fully pass through reductions at retail. Recently, shoppers experienced an overall price reduction of 0.2% compared to a year ago, which is less than 1/100 of the increase that grocery shoppers have experienced over the past four years.

Manufacturer margins continue to increase even though some input costs are either stabilizing or declining. A conversation with a leading CPG manufacturer indicated that raw material inputs are down 10% to 20% this year. While this may not be true of all raw material costs and certainly doesn’t include labor, it indicates an opportunity to pass some of these savings to the shopper.

Loyalty incentives can assist in driving sales.

There is a massive disconnect between what shoppers think and what the government statistics report nationally. Consumers are less interested in the growing GDP, the low unemployment data, or the declining inflation rate; their pocketbooks are what matters. Every day, shoppers notice the price at the pump and the price in the grocery store.

While the government has taken some actions to help reduce prices at the pump, it has also ramped up criticisms of consumer packaged goods (CPG) companies and retailers for continuing high prices against the backdrop of record corporate profits. The Federal Trade Commission (FTC) is exceptionally vigilant and aggressive in attacking manufacturers for excess profits and anticompetitive actions. If the amount of time spent evaluating the proposed Kroger/Albertsons merger is any indication, we can expect intense scrutiny on other major retailers and manufacturers. It almost appears the FTC wants to return to the era of mom and pops, greengrocers, and farmers’ markets. This could be great for competition, but whether it would lower prices is unclear.

‘Declining units and stable fixed costs mean just one thing — more closures, less variety, and declining sales and profitability.’

The Robinson-Patman Act, passed in 1936 to outlaw price discrimination by manufacturers, has risen from the ashes championed by groups such as the National Grocers Association. The goal of this act, which hasn’t been enforced for decades, is to ensure that all retailers can buy on equal terms from manufacturers. The act requires manufacturers to sell the same goods to competing retailers or distributors at equal prices unless there is a justified cost difference in doing business. Under Lina Kahn, the FTC is announcing new investigations. We’re not sure how this will affect price reductions at the point of purchase, but it certainly adds a new twist to an already complicated scenario.

Manufacturers also need to face the reality that simply repackaging a product may or may not offer more value to shoppers. Price/pack architecture has again come to the forefront and can be implemented to deliver increased value. But, if you ask a politician, it’s just another term for shrinkflation, smaller packages, and higher prices. In reality, it’s much more nuanced. Manufacturers sincerely seek to add value, satisfy consumer needs, and increase sales and profitability. It is less evident than an absolute price increase and can often deliver more value to consumers.

It’s time to get units back to where they belong, on the upswing. Declining units and stable fixed costs mean just one thing — more closures, less variety, and declining sales and profitability. We have reached the point of diminishing returns as higher prices no longer yield higher dollars and profits. It’s time to grow again!

Don Stuart is a managing partner at Cadent Consulting Group, with offices in Wilton, Conn., and Evanston, Ill. He can be reached at [email protected].