Major retailers from Target to Whole Foods are leaning on their suppliers to cut prices and capitalize on cooling inflation - and prevent shoppers from buying less and turning to discount stores.
Retailers usually negotiate prices with vendors at least annually. But this time, the stakes are higher. Many retailers are telling their vendor partners they need to make their case for keeping prices high. Otherwise, they risk discontinued orders or unfavorable placement on shelves.
“In the last few months, we’ve seen the shift away from trying to fight cost increases to pushing for [vendor] cost decreases,” said Bobby Gibbs, a partner in the retail and consumer goods division of the marketing consulting firm Oliver Wyman.
For now, shoppers who have paid for pricier goods - from kitchen appliances to laundry detergent to grocery staples - are unlikely to get much relief, experts say. Rather, the best-case scenario is that inflation will not get any worse.
The pressure is rising on big box retailers and grocery chains, which often operate on narrow margins, amid signs customers are pulling back. In December, consumer spending slid 0.2 percent over the month - a disappointing finish to the all-important holiday shopping season - while retail sales fell 1.1 percent, federal data show.
Economists and policymakers are closely tracking consumer spending, which makes up more than 70 percent of GDP, for any sign of diminishing demand. Even though the U.S. economy grew by 2.1 percent last year, fears of a recession still linger, especially in tech, which has seen companies announce thousands of layoffs.
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Although inflation is moderating - it fell to 6.5 percent in December from its peak of 9.1 percent in June - weary American shoppers are changing their habits to adjust to high prices. Many are savvier and more thoughtful - hunting for discounts, clipping coupons, prioritizing kitchen staples and opting for in-house brands, which are cheaper and have improved in quality. Target executives noted this trend in their Q3 earnings call last November.
“We see our guests holding out for and expecting promotions more than ever, spending less on regularly priced items,” said Christina Hennington, executive vice president and chief growth officer at Target. “Some guests are trading into smaller-pack sizes [while] others are opting for larger-pack sizes for stocking up when items are on promotion, knowing they will receive greater per-unit value.”
Discount retailers are also gaining market share, outperforming competitors as shoppers seek relief, according to data from Coresight Research. Discount grocers Lidl, Aldi and Grocery Outlet have all expanded their footprint in the United States over the past few years.
Over the past year, retailers have passed on rising vendor prices to their customers. But stores are now seeing consumers purchasing fewer items, including apparel, electronics and homewares.
For their part, retailers also absorbed additional costs during the pandemic, as supply chain headaches combined with higher wage demands and new safety and cleaning requirements took a bite out of their margins.
Now that some of those supply networks have stabilized, grocery and retail chains are putting pressure on suppliers.
“All the big payers are working with their vendors to reduce cost,” Gibbs said, citing Target, Walmart and Albertsons. Those companies either declined to comment or did not respond to requests for comment.
Meanwhile, Whole Foods asked suppliers to lower costs during a virtual meeting in December, according to a Wall Street Journal report.
Mike Graziano, a consumer products analyst at the consulting firm RSM, said now is the right time for retailers to push back. The cost of certain materials like polypropylene resin - a common plastic used in packaging - is down 48 percent year-over-year, Gibbs noted. Ocean freight fees, which saw a 15-fold increase in September 2021 from January 2020, have dropped dramatically.
The promise of stable or lower prices could “entice customers to continue to shop, albeit likely not at the same levels we’ve seen over the last two years,” Graziano said. “As we saw throughout the holiday season, discounts were a key driver of consumer spending habits; by sharing in the lower input costs, retailers can discount products while still maintaining some margin protection.”
But vendors continue to wrestle with their own challenges. Bouts of severe weather, the ongoing Ukraine war, truck-driver shortages and increasing labor costs are among the many factors still driving suppliers to hike wholesale prices.
In December, for example, the producer price index for food manufacturing surged by 10.8 percent year over year. The costs of other wholesale goods are still elevated - like edible oils, which are up 13 percent, and eggs, which increased 192 percent year-over-year, according to the Consumer Brands Association.
The increase in egg prices - thanks in part to a highly pathogenic avian influenza - have hit lower-income shoppers especially hard. For the about 40 million people on food assistance programs, eggs are a primary source of protein, noted Phil Lempert, food industry analyst and editor of supermarketguru.com.
“For a lot of the population, they’re saying ‘I just can’t afford it,’” he added.
Inflation is still front and center for the Federal Reserve, which on Wednesday raised interest rates by 25 basis points - its eighth increase in a row. Chair Jerome H. Powell made clear that the central bank has more work to do despite easing inflation in areas like consumers goods.
“That disinflationary process that you now see underway is really at an early stage,” Powell said. “What you see is really in the goods sector. You see inflation now coming down because supply chains have been fixed, demand is shifting back to services, and shortages have been abated.”
For now, most grocery and retail chains are working with suppliers to manage costs by offering to place orders earlier and help reduce packaging fees, Lempert said. But in return, many companies want proof that vendors’ expenses to source, manufacture and transport their products have increased. He pointed to the U.K.’s Tesco and U.S. retailers like Giant Eagle as examples.
Retailers are also negotiating with suppliers to let them offer more product promotions - something that vendors pulled back on during the pandemic, according to Gibbs.
Retailers hold most of the power in these negotiations. If suppliers push back on their demands, stores can pull the product from shelves and push their cheaper in-house brands. Vendors’ preferred products may also get worse placement on an aisle, less promotion and higher prices on shelves - what some in the industry call “the penalty box.”
In 2018, for example, Walmart ordered fewer products from Campbell’s after the soup maker refused Walmart’s request to freeze its prices. The dispute led to a 2 percent drop in net sales for Campbell’s.
But across-the-board pressure on vendors has unequal impact. Bigger brands like Nestlé, Kraft and Johnson & Johnson will survive the hit, according to Lempert. Most small businesses can’t, and they risk losing their spots on shelves entirely.
Whole Foods, which is owned by Amazon, has particular leverage over its suppliers, most of whom are smaller brands that rely on shelf space to sell their product. If they refuse to lower their prices, they could get bumped by rivals that will. (Amazon founder Jeff Bezos owns The Washington Post.)
Mary Pellettieri, co-founder and president of Top Note Tonics and Soft Drinks, said her packaging fees, which cover things like labels and glass bottles, have gone up about 40 to 60 percent. The Milwaukee-based small business works with a supplier to distribute its product to Whole Foods, as well as a few liquor stores and markets.
“Our profit margin is very slim, and not because of the liquid in the bottle,” Pellettieri said. “Couple that with higher costs to inventory all these items, [and] small businesses don’t have much liquid cash to maintain business, let alone grow.”
Lempert noted that companies can also save face if they pressure vendors to lower fees. When customers see their grocery bill surge, they tend to blame the retailer, he points out.
“You don’t say, ‘Oh, all those brands that are in the bag are the bad guy,’” Lempert said. “You say, ‘The store that I’m shopping at - they’re ripping me off!’”
The Washington Post’s Rachel Siegel contributed to this report.