Shrinking Wallets, Ballooning Costs: Is There any Retail Relief in Store for Shoppers?

Many Canadians continue to feel squeezed as their rents, mortgages and grocery bills climb. Supply chain issues, inflation and war have made their mark on prices — and budgets.    

This Spring, there were several developments around pricing and consumer demand that have prompted questions about the potential power of shoppers (and their shrinking wallets) when it comes to how companies set their prices and whether they will offer shoppers any retail relief.   

For instance, an online campaign urging a boycott of retailer Loblaw and its grocery chains over the cost of grocery items made national headlines, while IKEA Canada lowered prices on more than 1,500 products.   

Some other retailers, including Walmart, Target and Walgreens in the U.S. are following suit in dropping prices.   

So, what does this mean for costs to consumers, their buying habits and future retail prices? We asked Brent McKnight, associate professor at the DeGroote School of Business, about the social factors and structural issues that are at play when it comes to pricing. 

We’re seeing places like Ikea and Walmart cutting prices on some retail goods. What does this tell us about how people in general are doing economically?  

It does seem that enough people are changing their buying habits and practices to be noticed by companies. And likely many of them are feeling the pinch of higher mortgage rates and rents that require them to squeeze budgets, like food and furnishings budgets, elsewhere. 

How much power do consumers have here?   

Consumers generally don’t have a lot of power because they have to work in a very concerted way in order to be effective. But I think what has happened is inflation and the high cost of living, including rent, groceries and other things are forcing people to find other solutions. And if they’re finding enough other solutions, then that sends a message. I do think you’ve seen a lot of the retailers that pride themselves on being low cost and they’ve been responding. 

What is the reasoning behind the price cuts?  

A business’s strategy focuses on creating value. Businesses create this value by either providing more benefit to a customer for their product or service – through quality, service, convenience, etc., or by decreasing the cost of providing that product or service. Prices often reflect that underlying strategy.  

The companies that are making cuts right now are mostly those following lower cost (and thus often lower price) strategies like Walmart and Ikea.  Both are known for offering lower cost strategies and pricing accordingly. For example, IKEA’s founder talked about being focused on customers “with a thin wallet” and Walmart is famous for its aggressive cost cutting and integrated systems.  

Major grocery stores in Canada don’t need to worry so much about this because most of the chains have low-cost stores in their portfolio. Loblaw has recently been investing more in their No Frills grocery store franchise for example and no doubt Metro and Empire are doing the same for Food Basics and FreshCo, respectively. These stores can afford to keep prices relatively high in their flagship grocery stores because they have other formats to serve those customers elsewhere. Kind of the same way that you have movies in theatres and then released to streaming services or books in hard cover and softcover – different people are prepared to pay different amounts for similar products and services.  

How are retailers able to cut these prices – doesn’t it impact their bottom line?   

Absolutely, any price change affects bottom line but there are a few factors at play. One is price elasticity. Economists and marketers like to use this term to refer to how much change in demand or buyer preference occurs with a change in prices. The price elasticity for food is low – or inelastic. There is no alternative to food as it is a necessity. People tend to be willing to pay more for it, even if they are upset about it. But at a certain point people start to make changes to their shopping habits and I think that is what we started to see and that has had greater impact on some companies.   

A report that looks at Canada’s food prices found that despite inflation people spent less money on food in 2023, suggesting they are buying less and lower quantity food.  

Also, price changes are laggy. Just like it can take time for businesses to increase prices because they strive to retain their customers, it can take time for those same businesses to drop prices as they make sure that their cost bases have stabilized as well.  

Remember, a significant reason for higher prices has been the higher costs of fuels and grain due to the war between Russia and Ukraine. Prices also remain high because of elevated shipping costs as well as higher interest rates that the central bank has set to constrain inflation. These factors persist.   

Do you have any predictions when it comes to retail costs over the next few months? 

I think modest pullbacks on prices are possible. This will reflect more certainty in how companies’ view the current market. Look for companies emphasizing value and lower costs to lead the way before others feel sufficient competitive pressures