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NEW YORK — While some economists have declared the recession over, discount retailers that have benefited from the downturn are wagering that consumers will continue to make price their highest priority for this year.
While some economists have declared the recession over, discount retailers that have benefited from the downturn are wagering that consumers will continue to make price their highest priority for this year.
With considerable fanfare, Walmart dropped prices on about 10,000 items, particularly in grocery, at the start of this month, a move that some expected to put additional pressure on traditional supermarket competitors. The latest price rollback followed surprisingly weak sales in Walmart’s fourth quarter (which ended January 31) and management’s prediction that first quarter domestic sales would be difficult, with comparable-store sales excluding fuel expected to be flat.
During a presentation at the Bank of America Merrill Lynch Consumer Conference last month, Bill Simon, Walmart’s executive vice president and chief operating officer, described the environment as challenging despite some encouraging economic signs, pointing to continued high unemployment and escalating gasoline prices.
Nonetheless, some analysts have questioned whether the latest round of price rollbacks is more hype than substance. According to The Wall Street Journal, JPMorgan Chase & Co. analyst Charles Grom found that the bill for a list of items surveyed monthly was up 2.3%. Moreover, he found that the price difference between baskets of identical items purchased at Walmart and at major competing grocers had shrunk to 12% from 18% a year ago.
In any case, Walmart executives are not alone in forecasting continued frugality on the part of most American shoppers. During Dollar General Corp.’s recent fourth quarter conference call, chairman and chief executive officer Rick Dreiling described the behavior of the chain’s customers.
“We continue to see signs of this new consumerism where people are shifting channels, they are trading down, they are changing their habits,” he said.
Besides expanding the share of wallet of its core customers, Dollar General has succeeded in attracting more affluent shoppers, Dreiling added. In fact, the retailer’s fastest-growing customer segment consists of those with annual incomes above $70,000.
Even more significant, the company’s consumer research indicates that 97% of those shoppers will continue to shop Dollar General when the economic environment improves.
A similar note was struck by Howard Levine, chairman and CEO of Family Dollar Stores Inc., during that company’s recent second quarter conference call.
“In this environment value and convenience is the place to be,” he said. “Not only are we seeing growth in core customers, but we’re also seeing what we call a ‘trade-in’ customer shopping our stores, who would in most cases be a light or medium shopper who is beginning to shop us more frequently, and we believe we have a great opportunity to continue to grow that area.”
While low prices are certainly the foundation of the success achieved during the depths of the recession by Walmart and such extreme-value retailers as Dollar General and Family Dollar, both of the latter chains have increased their appeal by substantially improving their product offerings through sophisticated category management processes. Both Dreiling and Levine referred to customer relevance, combined with value and convenience, as being an important driver in their recent success.
