Target’s weak quarterly earnings underscore why it has aggressively cut prices on thousands of household staples: It’s struggling to attract bargain hunters. This issue is part of a broader trend as inflation continues to squeeze consumer budgets, now nearing the three-year mark.

Target's Earnings Highlight Challenges

Target’s first-quarter results on Wednesday revealed that American consumers are becoming increasingly selective with their spending due to sustained inflation. The company's declining sales illustrate the heightened competition among retailers and even some restaurants, all racing to outmatch each other on low prices.

Walmart reported last week that its grocery “rollbacks,” short-term deals on specific items, increased by 45% year over year in April. Additionally, Walmart introduced a new premium grocery brand with most items priced under $5. Meanwhile, Aldi reduced prices earlier this month on more than 250 items, including chicken, steak, granola bars, and frozen blueberries. Even McDonald’s is launching a limited-time $5 value meal in late June as some diners balk at rising fast food prices.

Target's Price Cuts

On Monday, Target announced that it has already reduced prices on about 1,500 items and plans to cut prices on thousands more this summer. Many of these items are essential staples like milk, peanut butter, and diapers.

Multiple major grocers and restaurants slashing prices or offering deals could provide relief at the checkout, especially as consumer prices continue to climb by more than 3% from last year. This trend could also give the Federal Reserve more confidence to cut interest rates. However, the revenue lost from these lower prices could force businesses to cut back elsewhere, potentially affecting labor costs.

Analysts' Concerns and Business Strategies

During Target’s earnings call on Wednesday, analysts questioned the timing and rationale behind the price cuts and whether Target or its vendors would absorb the cost. Although Target declined to share specific details, Chief Growth Officer Christina Hennington emphasized that vendors are aware of Target’s commitment to passing savings on to customers to drive traffic.

Some businesses have managed to retain customers even with stable or higher prices. Chipotle and Sweetgreen, for example, have bucked the trend of consumer spending slowdowns.

Target vs. Walmart

Target’s earnings report partially explains its strategy to join the race to cut prices. Sales of discretionary items, such as clothing, dropped year over year. However, even sales of high-frequency items like groceries and paper towels declined.

Some customers may be opting to shop at Walmart instead. Transactions at Walmart’s stores and website rose 3.8% in the most recent quarter, with e-commerce purchases in the U.S. surging by 22%. In an interview with CNBC, Walmart's finance chief, John David Rainey, stated that the retail giant is gaining market share from higher-income households, with some consumers choosing Walmart for meals due to sticker shock at fast-food chains.

“We’ve got customers that are coming to us more frequently than they have before and newer customers that we haven’t traditionally had,” Rainey said.

Target's Strategy to Reclaim Growth

During Target’s earnings call, analysts posed tough questions about whether the retailer is losing ground with shoppers or being perceived as too expensive outside of sales events. CEO Brian Cornell stressed that Target is emphasizing value to return to growth.

“We want to make sure America knows that Target’s a great place to shop and we have great value every time you engage whether it’s in-store or through our digital channels,” Cornell said, adding that the company aims to reverse sales declines in the second quarter.

Hennington noted that customers have noticed and responded to Target’s price cuts. For instance, Target realized it lacked low-priced tech accessories that customers wanted, such as charging cables and phone cases. These items became part of Dealworthy, a new private brand launched in February offering Target’s lowest prices on basic items like laundry detergent and paper plates.

“When we introduced the right price points in Dealworthy, the guests noticed immediately and that drove unit and traffic acceleration in those categories, and that’s what we’re doing business by business,” Hennington said.

Seasonal Items and Future Plans

Hennington also mentioned that Target will soon implement a similar strategy with seasonal items. After a thorough review of the most popular products from last summer, customers can expect to see cheaper pool noodles, floats, and coolers this year.