Retailers look to bridge the K-shaped economy with dual playbooks of price cuts and premiumization

As the K-shaped economy continues to divide Americans, retailers are courting lower-income customers with lower prices while catering to more affluent customers with premium offerings.

This past week, major US retailers, including Walmart (WMT), Target (TGT), Home Depot (HD), and Lowe’s (LOW), reported their latest quarterly results, providing an inside look into the state of the US consumer. Many called out the growing divide between high- and low-income consumers, as wealthier households continue to drive spending while lower- and middle-income households struggle to keep up.

“We certainly see with our higher-income consumers, they’re benefiting probably from the wealth effect of a buoyant stock market,” Walmart’s CFO John David Rainey told Yahoo Finance. “But with low-income consumers, they don’t necessarily get that benefit, and then it’s a little bit more of paycheck to paycheck.”

Read more: What is a ‘K-shaped’ economy, and what’s causing the divide?

US retail sales rose 0.5% in April, with spending on general merchandise remaining steady, even as consumer sentiment hit record lows amid inflation concerns and as gas prices have remained over $4 per gallon.

BofA Global Research found that total credit and debit card spending per household increased 4.8% year over year during the week ending May 16. The researchers said that overall spending “remains resilient,” though higher-income shoppers are spending more than lower-income shoppers, excluding gas purchases.

Julia Wilson, KPMG Principal of Consumer and Retail Strategy, said a survey of consumers showed that Americans are still willing to splurge, but only at certain price points and assortments.

“They’re willing to spend on things that they value, so if they see the value in that particular product, they will continue to spend,” Wilson said.

Retailers like Walmart and Target have begun adjusting accordingly. Walmart plans to cut prices on over 7,200 items, a 20% increase from last year. At the same time, it’s investing in its membership program, Walmart+, to drive growth.

Grocery chains like Kroger (KR) are also considering rolling back prices to try to gain market share in this bifurcated consumer environment.

Target, meanwhile, is rethinking the products it offers consumers as it seeks to reclaim its “Tarjay” moniker for high-end style and affordable prices. Target increased its number of toys under $10 by 9% and added more $1 price points, while also adding 1,500 new health and wellness items, premium baby brands, and pricey Pokémon cards.

“We made investments in assortment, really thinking through expanding both low, low price points, starting at $1, all the way up to some of the new premium brands,” said Cara Sylvester, who became Target’s Chief Merchandising Officer in mid-February.

Sylvester said that Target’s toy sales grew by double digits after it added new store experiences and “clear price points at $3, $5, $1.”

Home improvement retailers Lowe’s and Home Depot noted that higher mortgage rates and a tough housing market are affecting what their customers are purchasing.

“There’s no question that the average consumer is feeling pressure from rising fuel costs,” Home Depot CFO Richard McPhail told Yahoo Finance “Our customer tends to have higher incomes and higher housing wealth, but they do tell us that they’re feeling the impact of fuel costs.”

McPhail said that smaller projects like painting and patio construction continue to be “a real source of strength,” while “customers continue to defer those larger projects as a result of the concerns they feel over economic uncertainty and general affordability.”

Lowe’s CEO expressed that although its core consumers, who are homeowners, remain healthy, they are “uncertain because of the current mortgage rate environment.” Lowe’s also saw a pullback on big purchases.

The concern now is whether all consumers, including aspirational middle-income consumers who support spending, eventually pull back as fuel costs remain high, according to Keith Gangl, a senior portfolio manager at Gradient Investments.

“If oil prices stay above that $90 in the next, say, three, four months … that is an area of concern,” Gangl said. “It doesn’t matter if you’re low-end or high-end. Those fuel prices touch you. … [The cost of] transportation oil is actually in everything that you touch and feel.”

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Brooke DiPalma is a reporter for Yahoo Finance. Follow her on X at @BrookeDiPalma or email her at bdipalma@yahoofinance.com.

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