US shoppers tighten budgets, but still find room for treats and splurges
Price cuts alone may no longer be enough to compel a reticent shopper.
Highlights:
- Walmart cuts prices on 11,000 items in three months through July
- July US retail sales post first decline in nine months
- Luxury and premium brands outperform as spending skews toward affluent shoppers
- Walmart's average basket size weakened despite steady traffic, signaling tighter household budgets
Walmart's disappointing sales and Home Depot's strength among budget-conscious do-it-yourselfers indicate middle-class American consumers are growing more tight-fisted, even as wealthier shoppers have kept supporting luxury brands like Ralph Lauren.
Earnings reports over the past month from a slate of US supermarkets, home improvement stores, restaurants and luxury brands have shown consumers directing most of their spending toward essentials and putting off big projects, while still making room for affordable treats and occasional splurges.
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While affluent shoppers continue to snap up Ralph Lauren linen shorts and prestige beauty products, lower-income consumers are stretching budgets at Taco Bell and Ross Stores, pairing value meals and discount apparel with essential purchases.
Aggregate spending has not collapsed, but "households are becoming much more deliberate about where their money goes," said Lale Akoner, global market strategist at eToro.
In an era of elevated gasoline prices, the trend is expected to carry into the key holiday shopping season. Retailers will probably rely on a mix of discounts, new merchandise and higher-end brands to keep customers coming.
"When fuel prices increase and get above $4, perhaps there's a psychological impact to that... consumers are making trade-offs," Walmart CFO John David Rainey said on Thursday after the company reported its slowest same-store sales growth in six years despite rolling back prices on 11,000 items.
Price cuts alone may no longer be enough to compel a reticent shopper.
At McDonald's, discounted meal options this quarter in an otherwise expensive menu failed to draw customers, who responded more strongly to fresh menu items at Yum Brands YUM.N stores such as Taco Bell, KFC and Pizza Hut.
Walmart, TJ Maxx owner TJX and Home Depot all warned this week that shoppers remain "selective" while US retail sales in July logged their first fall in nine months.
"Selectivity is visible in snacks and impulse, where the shopper will still pay up for the one item they came in wanting and skip the second one," said Joel Goldstein, president at Mr. Checkout Distributors.
Price cuts and pricey brands
Companies known for affordable luxury including Tapestry TPR.N, Estee Lauder and Birkenstock BIRK.N reported strong results on demand for apparel, bags, and fragrances priced well above $100. Coffee chain Starbucks has managed to recover sales for its pricey lattes as consumers rewarded improved service times and a better store environment.
Catering to both ends of the economy, retailers are combining price cuts with stocking higher-end labels. Target, for example, is expanding its private label food brand Good & Gather while stocking premium items like Bugaboo baby strollers.
It also priced about 95% of its back-to-school supplies around or below last year's levels.
Target as well as Walmart are putting back money received from sizable tariff refunds into lowering prices on pantry staples such as beef, which became costly over the past year, partly due to the import duties.
