Retailers Tout Value and Convenience as Consumers Brace for Recession

In the face of rising interest rates, record fuel prices, and inflation at a multi-generational high, consumers have begun to prepare for the building economic storm with an increased appetite for value, convenience and basic necessities from the nimble retailers that can offer it.

This, as most economists and market watchers are now projecting the U.S. is headed for its second recession in two years, while the Federal Reserve is poised to impose another round of rate hikes this week in hopes of dousing inflation at the expense of economic growth.

“People are worried that to bring down inflation the Fed will raise interest rates too much and bring down the economy too,” Peter Schiff, chief economist and global strategist at Europac.com said to his 750,000 Twitter followers. “What they should be worried about is that rate hikes will not be enough to bring down inflation, but that they will be enough to bring down the economy.”

Although an official declaration of recession may not happen until early to mid-2023, consumer lifestyle changes and household spending revisions are already underway with savvy customer-facing retailers in three distinct categories starting to clear out excess discretionary inventory in favor of necessities.

The Value Players

While lots of consumers — especially those with lower income — shop at deep discount stores no matter what the prevailing economic conditions look like, a growing number of merchants and analysts are predicting that a new tranche of bargain-seeking customers, who might not normally seek out such deals, will begin to do so. 

“Value and convenience are more important than ever to our shoppers and the communities we serve,” Dollar Tree CEO Michael Witynski told investors late last month on the retailer’s Q1 earnings call.  

“We are taking the necessary actions now to position ourselves for accelerated growth in what I view as the most attractive sector in retail, especially in the current economic environment,” he added, noting the company’s plans to capitalize on the current trends via investments to improve the shopping experience at its 16,000 stores.

It’s a sentiment that was echoed last week by Five Below, which told investors that its 4% slide in Q1 comp stores sales would be temporary thanks in part to the onslaught of macroeconomic headwinds.

“While the pressures facing some of our customers due to the reduction in stimulus and the current inflationary environment, weigh on our near-term results, history has taught us that consumers will seek out value even more when times are tough,” Five Below CEO Joel Anderson told investors on the company’s June 8 conference call.

Trade-Down

At extreme value retailer Ollie’s Bargain Outlet, a $3.5 billion business with 450 stores in 29 states, CEO John Swygert made a pair of predictions last week, telling investors on the company’s Q1 earnings call that there would likely be more big box store liquidations, such as those announced by Target earlier this month, as well as an uptick in the number of consumers trading down to lesser price brands.

“I think there’s still more to come and I think there’s probably another three to six months before we see the full benefit [of the trade-down] come through,” Swygert said, pointing to improved sales metrics in the first 6 weeks of Q2 as an early indicator. 

“In this highly inflationary environment, we believe that price becomes increasingly important,” Ollie’s CFO Jay Stasz added.

The outlook from Ollie’s was not all that different from insights given by Walmart U.S. CEO John Furner a month ago, where he characterized a marketplace that was seeing pockets of strength in select big ticket items, such as gaming consoles and patio furniture, alongside a growing number of shoppers who had begun to trade down in the food purchases from the nation’s largest grocery retailer. 

“We do see some consumer switching. We see categories like deli, lunch meat, bacon, dairy, where customers are trading from [national] brands to private brands,” Furner said, “so we see both of those things happening at the same time and we’re seeing a wide range of consumer behavior.”  

For the record, the AAA reports that the average price of a gallon of regular gasoline has risen another 13% to $5.01 since Furner made those comments in mid-May.

While Walmart has always positioned its super centers as convenient one-stop-shopping locations, the spike in fuel prices — especially among rural consumers who are more likely to drive large cars or pickup trucks — is improving the value metrics for the retailer’s newly expanded six-state drone delivery service.

“While we initially thought customers would use the service for emergency items, we’re finding they use it for its sheer convenience, like a quick fix for a weeknight meal,” Walmart U.S. Senior Vice President of Innovation and Automation David Guggina said of the $3.99 aerial delivery service.