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Retailers jacked up prices and squeezed consumers. They might have just blinked

Ikea is cutting prices across hundreds of its furniture and home goods products.
Spencer Platt/Getty Images/File via CNN Newsource
Ikea is cutting prices across hundreds of its furniture and home goods products.

By Parija Kavilanz, CNN

New York (CNN) — Retailers are feeling jittery. Consumers aren’t shopping like they used to. In a game of chicken between stores and shoppers, it’s the stores that appear to be yielding first, by dropping prices on thousands of products.

The markdowns come as inflation has pushed prices higher for the past two years, squeezing Americans and forcing them to choose between wants and needs.

That’s a problem not just for individual shoppers or even big retail chains but for the whole American economy, of which about two-thirds comes from consumer spending.

A slew of retailers in recent weeks have announced price cuts as they strive to pull consumers into stores and entice them to spend money on things like new clothes, decorative items for the home and arts and crafts or hobby kits.

Ikea has slashed prices on hundred of products. In April, an 18-piece dinnerware set at Ikea was marked down to $29.99 down from $49.99, a glass door bookcase now costs $189 down from $229 and a bedframe with storage and headboard costs $499 down from $549.

It’s telling that these are categories considered to be discretionary purchases, meaning things that are nice to have but maybe aren’t everyday necessities in the same vein as groceries and medicine.

Shoppers have pulled back for a year now as costs have risen 20% to 30% higher than they were a year ago and as incomes failed to keep up, said Sarah Wyeth, managing director, retail and consumer with S&P Global Ratings.

This is making consumers across income levels look for deals.

“The ‘budget conscious consumer’ is no longer just low- or middle-income earners. By far the starkest decrease in intent to spend is coming from the higher-income groups, and those that were previously the most immune to an economic downturn are now tightening their belts,” said Chad Lusk, managing director in global consultancy firm Alvarez & Marshal’s consumer and retail group. “Retailers should be thinking about targeted deals on higher-priced discretionary merchandise, too, to increase buying frequency.”

The end result has been a palpable sense of anxiety from the industry.

“Retailers have been nervous for quite a while,” Wyeth said. “There’s just less dollars for consumers to spend.”

The challenge for retailers now is to shake consumers out of that frugal mindset.

Juicing sales

Retail sales overall haven’t been terrible, but they’re not also absolutely great,” said Zak Stambor, senior analyst, retail and ecommerce, with market research firm eMarketer in an interview with CNN.

Retail sales rose 0.7% in March from the prior month, a slower pace than February’s upwardly revised 0.9% gain, according to the latest government report. That beat the 0.4% increase that economists projected, according to a FactSet poll. The figures are adjusted for seasonal swings but not inflation.

Retail spending has increased in seven of the past 10 months through March. In that period, spending has been a mixed bag, boosted by purchases of high-ticket items such as cars, robust online buying and spending on services such as restaurants, travel and entertainment. But elsewhere, spending on furniture, clothing, sporting goods and electronics remains weak.

Businesses want to change that, Stambor said.

“A lot of retailers have said that discretionary spending is slowing. People are buying essentials, they’re also trading down in prices and then calling it a day,” Stambor said. “If you want to convince consumers to spend you have to give them a reason to do so. Lower prices are a clear opportunity to drive people into the store or online.”

It’s a lever that Walmart, he said, has pulled forever. Walmart said in December that lower grocery prices will be coming this year. “It’s a very effective lever. It’s a great marketing strategy to get consumers’ awareness, get them into the store and convince them to open their wallets and spend,” said Stambor. “There is the perception of value, and value is very much front of mind for consumers even when as they continue to spend to some extent.”

Jesper Brodin, CEO of Ingka Group (Ikea Retail’s Dutch holding company) told CNN in March that Ikea is “lowering prices more than it has ever done.”

“This is not rocket science really, we lower our prices, in particular when we are in times when people have less money in their pockets,” Brodin said. “The last six to eight months definitely have been slower than we have ever seen.”

Michaels, the arts and crafts destination with more than 1,300 stores nationwide, in early April said it was dropping prices on 5,000 products. “It’s more important than ever to deliver exceptional value for every customer looking to stretch their dollar,” Ashley Buchanan, CEO at Michaels, said in a statement announcing the new discounts on April 18.

Specifically, the retailer said shoppers would see prices of frequently bought products like paint, markers and pens slashed by up to 15%; the cost of adhesive, papers and stickers cut by up to 20%; and painting canvases up to to 35% cheaper.

Clothing chain H&M told analysts during its most recent earnings call that it, too, would lower prices. “At the end of this year, we believe we’ll have lower prices than where we were at the beginning of this year,” H&M CEO Lars Daniel Ervér told analysts during the call in March.

Other businesses competing for consumers’ dollars are jumping on board with price-cutting moves of their own.

Frida, a maker of babycare products, in February announced it had dropped the price of the NoseFrida, its flagship product, to its original 2014 launch price of $14.99 from $17.99 and reduced prices on other products.

Last week, restaurant and kids’ entertainment chain Chuck E. Cheese announced what it called “budget-friendly” efforts to make it a more affordable destination for families. The company said it was lowering prices of games and offering 50% off on foods and drinks as part of a new discounted summer promotion.

Stambor expects retailers will also look beyond price cuts to a wider array of levers to use “such as highly-tailored offers within loyalty programs or limited-time specific offers” in their continued quest to boost sales.

–CNN’s Bryan Mena contributed to this report.

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Article Topic Follows: Economy

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