Retail Pricing Strategies in Flux as Economy Wilts

Success in traditional retailing hinges on the ability to anticipate and shape trends, forecast demand, and efficiently price goods. In the past couple of months, all three have gotten a lot harder than they already were, especially pricing.

After months of being nagged daily by creeping inflation — from the cost of bread to the price of gas — the consumer state of mind seems to have passed a tipping point.

The widely-followed University of Michigan Consumer Sentiment Index recently sank to its lowest level in more than a decade, at a time when conditions were arguably much worse.

The bottom line today: off price is now on target. That will mean different things for different brands.

For example, last December Bloomberg reported that Nordstrom was trying to figure out what to do with its floundering off-price business, Rack. Bring in experts to fix it? Spin it off into a separate business — essentially, make it an orphan?

Six months later, in a recent meeting with a group of retail industry consultants, CEO Erik Nordstrom was quoted as saying Rack is now the future of Nordstrom’s, and the company will be adding to its fleet of 250 Rack stores. Nordstrom said that in addition to advantages, such as click-and-collect locations, Rack stores introduce future Nordstrom’s customers to “coveted brands at great prices.”

At Urban Outfitters, the company is hunkering down on the cost side, among other tactics weeding out SKUs that generated low-quantity orders and were thus less profitable. Several big box chains have decided to bite the bullet, marking down and taking the losses on bloated inventories of an estimated $45 billion in excess and out-of-season goods.

But once companies have trimmed all the fat and fine-tuned their logistics, the challenge will be figuring out how to establish a pricing scheme during an economic downturn that’s competitive and still makes a profit.

The Internet and the pandemic have made consumers even more savvy about prices and reviews than they already were. Now that economic uncertainty is in the air, they are just about unanimous: 94% tell First Insight that they plan to reduce their spending. More than 40% of workers report they shop for deals more than they used to and stay within a budget, according to First Insight’s recent inflation report.

Consumers are bypassing more expensive organic grocery brands in favor of non-branded products. They are shifting down to lower-priced “house label” consumer goods, giving that category a boost. Along the way, sustainability is fading as a primary concern when making a purchase.

Price is center stage and is going to be there for a while. Leaders had better focus on finding a way to understand how customers are changing daily well into 2023.