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Retailers are playing a 'game of chicken' with their customers

Nicole Sinclair
Markets Correspondent

America’s brick-and-mortar retailers have reported dismal first-quarter sales, with many emphasizing consumers’ growing expectation to never pay full price.

Even Walmart (WMT) — whose 1% comparable store sales growth actually came in better than expectations — emphasized the need for continued discounts.

“We’re focused on making strategic investments to improve our position in the market and invest in price,” Walmart CEO Doug McMillon said in the company’s earnings call.

It seems that consumers have become addicted to discounts and promotions — and won’t pay “full price” for anything they buy anymore.

“When you start tightening up in promotion, you are playing a game of chicken with your customers. And they try to wait you out. And so we’ve been playing that now for really the last quarter,” Gap (GPS) CEO Arthur Peck said in a recent earnings call. In his round-up of earnings call highlights, Avondale's Scott Krisiloff points to Peck's comments as reflective of what has been especially plaguing retailers.

In other words, promotions have become an addiction and consumers won’t settle for anything less. And those promotions may be part of what’s killing retail, at least according to those in that sector.

“The problem, as I see it, is more of a supply issue, especially in the apparel category. Simply put, America is overstored and overstocked. We have approximately 10 times more retail space per capita than our European counterparts and more direct-to-consumer choices, too,” Urban Outfitters Chairman and CEO Richard Hayne said in his earnings call.

“Rather than trying to differentiate their products and experiences,” Hayne added, “many retailers try to drive demand by offering constant and ever-larger price promotions that erode not just the bottom-line, but brand equity as well.”

To avoid this outcome, Urban Outfitters’ brands are trying to draw customers in through the shopping experience rather than just through sales.

“The Urban brands have invested heavily in creative talent to make our products and shopping experiences unique and compelling, so demand isn’t dependent solely on price-driven promotions,” he said. “The success of the Anthropologie large-format stores is one example of how to win through creativity.”

Retailers may be driven to keep discounting items just to keep up with their competitors, though.

“The competitive environment has become a lot more promotional. I think part of this is the result of the internet where every promotion happens across the country immediately,” Macy’s (M) CFO Karen Hoguet said on the company’s conference call. “And also there’s a lot of price-matching going on.”

Nordstrom (JWN) even sees price-matching as a necessity and not simply a strategic priority, the company’s co-president and director Erik Nordstrom said on that company’s earnings call.

“We do not look to price matching or price promotion in any way as being a big strategic lever and a way of driving our top line. We look at price matching as a customer respect and a customer trust issue: that when a customer comes to us, they know that they’re being treated fairly,” he said. “And we think the clearest way of doing that and what customers expect is not to pay more for a specific item when they’re shopping with us.”

Despite those intentions, sometimes discounting has actually hurt brands.

“There’s some big brands that we have that have had some precipitous declines. A lot of that’s related to promotion and how that’s adversely impacted that brand within our customers,” Nordstrom added.

And it doesn’t look like this trend is going away anytime soon.

“Many of our competitors are sitting on meaningful excess inventory, which we expect will extend the very intense promotional environment into the months ahead,” said Target (TGT) CEO Brian Cornell.