Have Retailers Hurt Their Businesses by Becoming Too Greedy?

(Shutterstock)

All of us have been painfully aware of increasing prices these past two years, otherwise known as inflation. But even if it’s taken as a given that customers are expecting prices to go up, and the right set of circumstances presents itself for companies to increase their prices—perhaps higher than their own increases in costs—will that justify their being opportunistic?

Shrinkflation vs. Greedflation

In “shrinkflation,” corporations shrink the size of their products even as they continue to charge the same prices. Companies, especially those in the food and beverage industries, employ this tactic to try to subtly and surreptiously boost profits.

“Greedflation” occurs when the product remains the same, but the company hikes the price to generate more profit. The idea is that even though production costs haven’t risen enough to justify price increases, companies carry out price increases anyway to improve their bottom line.

Rising prices on food and household items are getting a lot of attention lately. While companies contend that they have been forced to raise prices because their own costs have increased significantly, the net income of half of the 28 food and consumer goods manufacturers listed in the Fortune 500 have risen compared to pre-pandemic levels, according to a Fortune analysis.

A review by Datasembly found national average prices for 18 key products from Fortune 500 consumer goods and food manufacturers—measured from January 2021 to 2022—noted 11 inflation-exceeding price hikes.

While this is great for investors in these companies’ stocks, consumers are suffering, most especially lower-income families that must spend most of their earnings on the basics, including food and household goods.

(Source S&P Global, Fortune Magazine via Yahoo Finance)

Consumers Push Back on Retailers

The impact of retailers’ pricing strategies on their businesses is complex. Some argue that certain companies have taken advantage of inflation to increase prices and boost their profits, which can be seen as greedy. This approach can lead to short-term gains, but might hurt customer loyalty and trust in the long run. Starbucks customers, for example, have had enough of high prices and painfully slow service—with the coffee chain admitting it has lost tens of millions of visitors this year. Research has shown that recapturing lost customers is extremely difficult. Short-term incremental profit at the expense of long-term customer loyalty? Not good strategy.

Retailers are finally getting nervous. Consumers aren’t shopping like they once did. Stores appear to be responding, only recently, by dropping prices on thousands of products. The markdowns come after two years of inflation-related price increases that have squeezed Americans and forced them to choose between wants and needs. That’s a problem for individual shoppers and big retail chains, but also for the entire American economy, because almost 70 percent of GDP comes from consumer spending.

For example, Ikea slashed prices on hundreds of products. Recently an 18-piece dinnerware set at Ikea was price-reduced to $29.99 down from $49.99, a glass door bookcase repriced to $189 from $229, and a bed frame with both storage and headboard that cost $499 today was previously $549.

Walgreens is now lowering prices on over 1,000 items, even as it closes stores and teeters on bankruptcy. Target has announced price cuts on 5,000 food products and household goods. Craft and furniture stores like Michael’s have also said they will drop prices on several popular items.

Consumers Running Out of Money to Spend

It just may be that consumers are not only pushing back on higher and higher prices but also increasingly are unable to keep spending at the level they had been. There has been a sizeable trend in consumer spending relying more on credit cards and savings accounts. Since the second quarter of 2021, credit card spending had been surging. By mid-2023, credit card balances exceeded $1 trillion for the first time. Average balances are today $6,200. Interest rates at 22.5 percent means paying almost $120 per month in just the interest-expense portion alone.

This increasing credit card usage has been accompanied by rising delinquencies, especially among lower-income consumers. Consumers have seen their credit card spending, revolving balances, and delinquencies going up fast. In addition, the depletion of excess savings accumulated during the pandemic has also contributed to this slow drop-off in consumer spending. If the long-awaited recession does finally arrive, delinquent credit card accounts will spike, and we may even see a sharp increase in personal bankruptcies.

Now it’s time to address the household debt that keeps growing, in part because of inflation. Here’s what you can do:

• Keep money set aside for the future in an interest-bearing account.
• Track spending to identify expenses that can be reduced.
• Focus on paying down any variable rate loans.
• Choose a credit card with rewards for more value from your purchases.
• Modify existing interest rates, work with a credit counselor, choose a debt payoff strategy and plan, boost your income with a side hustle or gig, and minimize your spending.

Without proportionate increases in compensation, workers will simply suffer a reduced standard of living than they enjoyed before these years of inflation. Prices rose 20 percent on average, and only an equal and opposite effect—deflation—can bring prices back to where they once were. With inflation at about 3 percent today, that seems a long way off.

The Epoch Times copyright © 2024. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.