Value Consumers: Some Are Trading Down, But Others Are Trading Up

Consumers are on the hunt for value wherever they can find it.

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The good news is that consumers are still spending, even as some continue to shift where they are handing over their hard-earned dollars. The U.S. Commerce Department last month upgraded its U.S. GDP estimate to an annual rate of 3 percent in the second quarter. The revised GDP for the first quarter was an increase of 1.4 percent. The significant change from quarter to quarter reflected, in part, increases in consumer spending.

“Solid consumer spending meant firms also grew more profitable in the second quarter,” Wells Fargo economists Tim Quinlan and Shannon Seery Grein noted in a research note. “While the slower pace of hiring signals some hesitation among businesses to take on additional help, continued consumer resilience, even as households are growing a bit more choosy in their purchases, is boosting profitability and allowed for continued growth through the first half of the year.”

Where consumers appear to be shifting their purchases—it remains a mixed bag—was noted by several retail CEOs during company conference calls last month when they posted second-quarter earnings results. Burlington Stores CEO Michael B. O’Sullivan suggested that as some lower-income shoppers have seen as easing of inflationary pressures, they could be choosing to increase their discretionary spend at retailers such as Burlington where there may be a perception of better value for the dollars spent.

“As inflation has moderated, the situation for lower-income shoppers has somewhat improved. In parallel, economic pressure and uncertainty has spread and broadened well beyond lower-income shoppers,” Burlington Stores CEO Michael B. O’Sullivan told analysts. “There is now greater focus on value across demographic groups and income bands. This greater focus on value is helping our business.”

The off-price retailer reported net income that more than doubled to $73.8 million, or $1.15 a diluted share, on total revenue that rose 13.4 percent to $2.47 billion, which included a 13.4 percent rise in net sales to $2.46 billion. Comparable store sales rose 5 percent.

O’Sullivan also said that the off-pricer’s focus on improving the mix of better brands has also helped to drive increased trade-down traffic to the company’s stores.

Mass discounters such as Walmart and Target have also focused on rolling back prices on many items, a move that could attract back shoppers who had traded further down on the retail totem pole.

“We continue to gain market share, including in general merchandise, and transaction counts and unit volume are up across markets,” Walmart CEO Douglas McMillon said. He noted that around the world, the discounter’s customers want value. “In Walmart U.S., we have more than 7,200 rollbacks across categories,” he said. “Customers from all income levels are looking for value, and we have it.”

He also said value matters to everyone, regardless of income level, as well as a behavior difference in the lower income cohort. In addition to a greater focus on opening price points and a different end-of-month behavior, “they still need us for general merchandise price points,” McMillon said.

The CEO also emphasized that Walmart is working with branded suppliers on pricing. He said that some have lowered pricing, but others “are still talking about cost increases, and we’re fighting back on that aggressively because we think prices need to come down.”

Walmart’s CFO John David Rainey told investors that the retailer is focused on everyday low prices and managing U.S. pricing aligned to competitive price gaps. He said that while upper income households continue to account for the majority of gains, the retailer is seeing higher engagement across income groups as it grows “sales and share among middle- and lower-income households.”

Target’s chairman and CEO Brian C. Cornell said the retailer “reduced prices on about 5,000 frequently purchased items in many markets, and we saw an acceleration in both our unit and dollar sales trends in these businesses.”

Cornell also said some shoppers are delaying purchases until the moment of need, focusing as well on the discounter’s “low everyday prices, including our recent price reductions on frequently purchased items.”

Newly-named chief commercial officer and executive vice president Rick Gomez told analysts that its customers are still “willing and able to spend,” although they’re also “still being choiceful.”

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Gomez also spoke about value and getting fashion and newness right: “Yes, they’re budget conscious. And yes, they’re hunting for deals and everyday value. But they’re also willing to shop when they find that right combination of fashion and newness at the right price.”

Target’s apparel assortment a posted low single-digit comp growth in the quarter, helped by newness in the range of offerings and in its performance category. Another highlight was the company-owned women’s contemporary brand Wild Fable and the relaunch of Target’s sleepwear line Auden.

Earnings reports from the dollar stores indicate that they’re starting to feel some shifts as their low-income customers pull back on some spending. With the rollback on prices from the mass discounters, it could be that middle- and upper-income consumers who traded down, as well as shoppers in the upper range of the low-income cohort, were taking a second look elsewhere as price rollbacks gave the perception of better value. For many shoppers, perceived value isn’t based just on price, but could include a combination of other factors, such as convenience, assortment mix, and merchandise availability.

Dollar General posted a 20.2 percent decline in net income to $374.2 million, or $1.70 a diluted share, on a net sales increase of 4.2 percent to $10.21 billion. Same-store sales rose 0.5 percent, below company expectations. The comps increase was driven by a 1 percent growth in customer traffic that was partially offset by a 0.5 point decline in the average transaction amount, driven by lower average unit retail price per item, said Todd J. Vasos, Dollar General Corp.’s CEO.

“The comp sales increase was driven entirely by the growth in our consumable category as customers continue to focus their spending on the items they needed most for their families. This growth was partially offset by declines in our seasonal, home and apparel categories,” Vasos said. He said the retailer’s core customer is predominantly from households with annual incomes of less than $35,000. Higher prices, softer employment levels and increased borrowing costs have negatively impacted sentiment for this consumer cohort.

“In our latest survey, 25 percent of our customers surveyed noted they anticipated missing a bill payment in the next six months,” he said. “While middle and higher-income households are seeking value as well, they don’t claim to feel the same level of pressure as low-income households.” Vasos also told analysts that the company will be increasing the level of markdown activity “in an effort to support our customers, further drive customer traffic, and improve sales.”

Michael C. Creedon, Dollar Tree’s chief operating officer, said sales came in toward the low end of the retailer’s outlook range, with Family Dollar’s comp in-line, and Dollar Tree’s comp positive but lower than expected. Over the last several quarters, demand from Family Dollar’s lower-income customer remains weak. Dollar Tree’s broader customer base has more middle- and upper-income households. But in the second quarter, the retailer “started to see inflation, interest rates, and other macro pressures have a more pronounced impact on the buying behavior of these customers,” he said.

According to Creedon, the middle-income customer, and those with annual household incomes greater than $125,000, shifted to buying for need versus buying for want. Price sensitivity on big-ticket items was the first clue, and as people tighten their belts, they are also behaving differently. People celebrating with a party this summer hosted few guests and had fewer parties. “When we look at all those things together, that really pressured us,” he said.

But even though consumers are spending more mindfully, Dollar Tree is holding its own with growing traffic. “We see we’re growing traffic. We see the 2.8 million new customers we’ve added,” the chief operating officer said.

Creedon said the company has reopened 85 former 99-Cents Only locations, 20 more this week and the balance of 56 doors by the end of the year. He also noted that while shrink has been a consistent problem, that appears to be stabilizing as the targeted actions and strategies to combat the problem has helped the quarterly shrink rate.

“We are running ahead of shrink expectations at Family Dollar and still have some additional work to do at Dollar Tree,” he said, noting the new shrink challenges that have come up following the introduction of more high-value, multi-price products to the assortment.” Creedon added that apparel was among the best-performing categories in the quarter at both banners.

For the second quarter ended Aug. 3, Dollar Tree posted a 33.9 percent decline in net income to $132.4 million, or 62 cents a diluted share, on a 0.7 percent revenue increase to $7.38 billion, which included a 0.7 percent increase in net sales to $7.37 billion.

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