Fallout from tariffs inflicted on “liberation day” eight months ago may soon “peak,” but any relief will be uneven as the gap widens between high- and low-income shoppers – prompting brands and retailers to remain surgical in their pricing and marketing strategies, according to leaders at Walmart and The Coca-Cola Co.
Consumer spending over the unofficial kickoff for holiday spending in the US on Black Friday and Cyber Monday was “very consistent with what we’ve seen the last couple of quarters” with more money going towards necessities versus discretionary items, Walmart CFO John David Rainey said yesterday at Morgan Stanley’s Global Consumer & Retail Conference.
“You certainly see that dollars are being stretched and there is less money to spend on discretionary items like general merchandise, and that has been pretty consistent” over the last few quarters and “even through last week,” he said.
“We’ve seen certain areas that have been pressured or that have been more impacted by tariffs and had higher prices” have less unit flow through, he added.
Likewise, consumers in the “bottom half of the income pyramid” also are being hit harder by tariff-related price hikes than those with in the top half who are “actually in good, robust shape,” Coca-Cola CEO James Quincey added during a different session of the conference.
Consumer segmentation is essential in current economy
In light of this bifurcation, Quincey argues consumer segmentation is an important lever to effectively target marketing.
He explained that brands and retailers need to identify which consumer groups are under financial pressure and how that is influencing their shopping behavior and which messages resonate with them.
For example, he said, “instead of spending money over here trying to activate in this type of store, I actually need to be over here activating a different sort of occasion, because they are now moving to smaller baskets in different channels.”
He added: “The ability to move the investment money around, to follow those consumers, both from a kind of mindset point of view, but also a spending pattern, where and how they’re spending, is something we’re able to bring to life on a relatively short-term basis.”
Walmart plays offense for long term gains
As the negative impact from tariffs drags on, Walmart continues to “play offense” by strategically absorbing or passing along higher costs depending on the category and target consumer base.
One place where it has held down prices as much as possible is food, Rainey said.
“We want to play offense. We have seen over the last several years that as we’ve gained share, the retention of those share gains has been greater than at any time in history. And so that told us that we want to play offense in this environment. We want to be known for everyday low prices, and we want to be there to help the customer,” he said.
“And so we have been more aggressive this year around price levels to make sure that we can use to minimize the impact of tariffs, or just higher cost overall to consumers to let their dollars go further. So, our merchant team has been very targeted in areas of, where do we absorb the cost of tariffs, versus where we pass those along? And you can see in our numbers, like for like, inflation, for the past several quarters, has been 1-2% and so we’ll continue to play offense here,” he added.
The play has been to the retailer’s benefit – allowing it to gain share and deliver the financial results it outlined to the investor community and helping consumers, he said.
When will relief come?
The negative impact of Trump’s on-again, off-again tariffs have destabilized supply chains, confounded companies’ ability to predict sales and purchases and cost average Americans, but relief may be in sight, according to Rainey.
“Our expectation at Walmart is that probably peak impact from the tariff costs will land around the beginning of the first quarter,” he said, noting that once companies “lap” liberation day “it gets a little bit easier” at least from year-over-year perspective.
But, when viewed across a longer horizon, the numbers are still difficult for many consumers.
“If you go back five years, food prices are still 25% higher. General merchandise is a similar percentage, even through a deflationary period,” he said. “So, I think everybody is keeping an eye on the consumer and concerned about when does something happen that creates an event that really is the straw that breaks the camel’s back.”
That said, he argued, Walmart is “better insulated for that environment than just about any company,” and its model appeals to people during expansion periods as well as during difficult economic periods.
“If people are making their dollars stretch further, they’re going to look for value, and Walmart is a place that you would come to do that,” he concluded.
