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Are retailers finally easing up?

U.S. consumers, fatigued by a three-year bout of inflation, are clamoring for lower prices. Large retailers, who have hiked prices partly to offset their own rising costs, are beginning to heed customer concerns — albeit selectively.

Walgreens recently announced it was lowering prices on over 1,000 items. Target followed suit with modest price cuts on 5,000 food products and household goods. Craft and furniture stores like Michael’s and Ikea have also committed to dropping prices on popular items.

During recent quarterly earnings calls, a broader array of companies indicated plans to slow price increases and seek other ways to maintain profitability. Signaling empathy with customers facing higher living costs has become an increasingly important marketing strategy. Retail analysts suggest that this shift might help ease inflation in the coming months.

The retail industry seems to be entering a new phase. After a challenging period during much of the 2010s, when heavy discounts were the norm to gain or maintain market share, the pandemic significantly altered consumer habits. Federal emergency aid bolstered bank accounts, and with fewer in-person spending opportunities, consumers shifted their spending to goods. As the economy reopened, wages surged, and retailers easily passed on cost increases. However, much of the inflation was driven by rising production, labor, or transportation costs in 2021 and 2022. This period also saw some retailers enjoying hefty profits.

Recent economic data and corporate earnings reports reveal that retailers’ leverage over buyers — known as “pricing power” — is waning. Coca-Cola, for example, reported that while its overall revenue grew in the first quarter due to past price increases, its sales volume in North America remained flat. Similarly, Starbucks experienced a decline in foot traffic, and Kohl’s reported net losses, signaling that consumers have become more selective and value-conscious.

Over the past year, disgruntled McDonald’s customers took to social media to highlight what they perceived as overpriced orders. Responding to consumer sentiment, McDonald’s vowed to focus on affordability, promoting a $5 value meal. Burger King and Wendy’s have also introduced comparable value meals in response to customer demands.

Despite these price adjustments, retail analysts do not foresee a return to the aggressive price-cutting competition of the 2010s. Companies are looking for alternative ways to attract customers and assure them they are getting value for their money, even if overall prices do not revert to pre-pandemic levels.

Brands like Gap and Abercrombie & Fitch have posted impressive quarterly results following rebrands. Chipotle has also thrived by reducing wait times and marketing itself as a healthier option, even with costlier menu items. Walmart introduced a private-label food line with over 70 percent of the products priced under $5.

Industry analysts believe a race-to-the-bottom price cycle is unlikely because firms have developed sophisticated e-commerce strategies. These strategies leverage data such as credit card information and artificial intelligence to cater to various customer preferences and determine optimal pricing.