The chain retailer said Tuesday it would reestablish its “everyday low price commitment” in order to compete with competition, calling out several categories including household products, personal care and food as areas that would be affected. The news comes as Wal-Mart has made moves of its own to lower prices, particularly as it looks to compete with discount grocery chain Aldi, and shortly after Procter & Gamble said it would cut prices at Gillette.
“Wal-Mart met with personal-care companies telling them to lower prices as it competes with Aldi, so I imagine Target will do the same with its vendors,” said beauty industry expert Allan Mottus. “Margins for [manufacturers] will be affected unless they refuse to comply, which is doubtful. L’Oréal has greater share I presume at Target, so they may be able to mitigate some of the pressures, but Coty and Revlon have less clout. It is really tough out there now.”
Target said on Tuesday that it would invest in lower gross margins to make sure the company is competitively priced.
“Everybody’s affected,” Mottus continued, adding that he thinks it’s likely some beauty brands will have to lower costs when dealing with Target. “The bottom line is Amazon — without stores — can sell products cheaper than those who have stores, so they have to bring their costs down to compete.”
Not everyone is convinced that the decisions will have a large impact on personal-care companies. “I think it’s more about [Target] reducing their margins then about going back to the CPG companies to get concessions,” said BMO Capital Markets analyst Shannon Coyne, who covers household products and personal care. Another Wall Street source suggested that because beauty is viewed as a growth driver by retailers, pricing effects may be less pronounced. One source noted that while their niche beauty offerings sold through Target haven’t gotten tons of pricing pressure so far, Target has been increasingly focused on exclusivity.
Prices for personal-care products were down 0.2 percent for 2016, according to a detailed report of the Consumer Price Index, with the biggest declines (0.8 percent) from hair, dental, shaving and miscellaneous personal-care products. Prices for cosmetics, perfume, bath, nail preparations and implements products were up 0.4 percent for 2016, according to the figures.
“We find it interesting that P&G announced an average 12 percent decrease in Gillette razors last week, which seems more than coincidental especially given Wal-Mart’s demands for a 15 percent price reduction at the same time,” wrote Deutsche Bank analyst Bill Schmitz in a note.
“While Wal-Mart has had success, we believe Target’s announcement risks exacerbating price competition in retail, with likely expansion into consumer packaged goods categories given a need to fund price investments,” wrote Stifel analyst Mark Astrachan in a note, perhaps suggesting a widening spread of price cutting.
Brian Cornell, Target’s chief executive officer, said on Tuesday that the retailer would “accelerate our investments in a smart network of physical and digital assets as well as our exclusive and differentiated assortment, including the launch of more than 12 new brands, representing more than $10 billion of our sales, over the next two years. In addition, we will invest in lower gross margins to ensure we are clearly and competitively priced every day. While the transition to this new model will present headwinds to our sales and profit performance in the short term, we are confident that these changes will best position Target for continued success over the long term.”