Retailers Rewrite Playbooks as Consumers Tighten Budgets

Retailers across the U.S. are confronting a new era of cautious spending as consumers tighten their belts in response to ongoing economic pressure. Inflation, rising living costs and a backdrop of political and economic uncertainty have prompted shoppers to rethink their purchasing habits, sharpening their focus toward essential items and cutting back on discretionary purchases.

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As consumers, especially those with lower incomes, prioritize value and necessity over luxury due to inflation and economic pressures, businesses are adjusting their strategies to stay competitive. Dollar stores and department stores alike are recalibrating their offerings and operations to meet the demands of a more selective market, where shoppers are focused on essentials rather than indulgent purchases.

Retailer Reactions to Changing Consumer Behavior

“The ripple effects of economic uncertainty hit retail hard this quarter, particularly in discretionary categories,” Bellamy Grindl, founder of Retailytics, said in an interview with PYMNTS. “Consumer confidence often wavers during election years and inflation, coupled with rising costs, is impacting holiday spending this season.”

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As retailers adjust to this new reality, many are reporting shifts in consumer behavior that reflect growing caution. The following highlights from recent earnings calls show how companies are responding to the evolving landscape of tighter consumer budgets and changing priorities.

• Dollar General CEO Todd Vasos said earlier this month: “Customers continue to face significant pressure and are less able to stretch their budgets at the end of the month and that’s having an impact on their shopping behavior. We see this pressure in the timing of their shopping during the month and the mix of products they buy. They’re buying very close to need and being very selective at the shelf. The consumer is seeking value, trying to make ends meet. The last weeks of the month are some of our weakest.”
• Dollar Tree interim CEO Michael Creedon said in an earnings call: “The customer is clearly buying for need and what we call closer to need. When you look at the customer cohort, our low-income customers are definitely pressured. We see that and there’s a rise in eat at home. There is belt-tightening among lower-income customers, and that dynamic remains a discretionary headwind.”
• Ken Bull, interim CEO, president and COO of Five Below, told investors in August: “Our response to the macro pressures of the last few years and the evolving consumer environment has required even greater execution, compelling and differentiated assortments and focus on the customer.”
• Target CEO Brian Cornell said in November: “Consumers tell us their budgets are being stretched. They’re becoming resourceful, focusing on deals, then stocking up when they find them. We have a singular focus on value. As we encounter short-term headwinds, we immediately focus on leveraging our assets and strategy to move beyond those headwinds.”
• Coca-Cola CEO James Quincey said: “There’s clearly part of the consumer landscape where there’s pressure on disposable income.”

Economic Pressures Shape Retail Strategy

This sentiment is reflected in the PYMNTS Intelligence report, “New Reality Check: The Paycheck-To-Paycheck Report: The Inflation Edition,” in collaboration with LendingClub, which shows 55% of respondents have limited spending capacity, 49% have shifted their shopping preferences, and 66% of those living paycheck to paycheck have cut spending.

In an interview with PYMNTS, Martin Qiu, associate professor at the Lazaridis School of Business and Economics at Wilfrid Laurier University, said this cautious approach to discretionary spending is driven by a mix of economic and political uncertainty in the U.S. and Canada, compounded by inflationary pressures in both North America and Europe.

“Education and healthcare have become increasingly unaffordable for regular households, while job prospects for many working-class individuals are dimmed by the rapid adoption of AI,” Qiu said. “As a result, consumers are prioritizing essentials and seeking value, which affects retailers across a broad spectrum — from leisure to apparel to home appliances/improvement.”

Customers are still spending, Qiu said, “but retailers now face the challenge of capturing a larger share from a shrinking pool compared to their competitors. Success (or survival) depends on leveraging core competencies — pricing, service, merchandising and more — to stand out. If a retailer has none of these, store closure is expected.

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“Customer loyalty is a complex story,” he added. “To make it short, retailers need to recognize that not all customers are the same and treat them differently. They need to identify who are loyal customers and keep those customers.”

Value Over Indulgence

The combination of rising inflation and higher costs of essentials has led consumers to reassess their spending priorities, with discretionary purchases often the first to be cut when budgets tighten, Grindl said.

“Shoppers are gravitating toward sales, promotions and private-label products to stretch their budgets,” Grindl said. “That said, if the perceived value is strong, consumers will still spend on luxury. Heavy early-season promotions pulled forward demand, with many consumers spending their budgets early. Now, they’re pulling back to recover. Brands need to carefully consider how they are positioning themselves to consumers. Focusing on quality, value and differentiation will resonate more in this environment. Shoppers are willing to spend — but they need to see a clear reason to do so.”

This cautious shift in consumer behavior is underscored by Neil Saunders, managing director, retail, at research firm GlobalData, who told PYMNTS years of inflation have eroded consumers’ spending power.

“They have been pretty resilient in the face of this, but there is now some fraying around the edges, with some brands and retailers finding it more challenging to generate growth,” he added.