The battle to grow volumes continues as deflation sets in

Holiday deals are hitting nice and early this year, and some experts see the heavy promotional environment as a sign that retailers are trying to drive volume in response to falling prices.

“Promotions is obviously one of the fastest ways to drive unit volume, and it’s a way that you can do it in a controlled setting where you’re not adjusting your everyday price,” Matt Pavich, pricing expert at Revionics and a former manager of merchandising and systems development at Target, told Retail Brew.

In the first two weeks of October alone, Amazon held its two-day Prime Day event, which saw heavy discounting across categories, and both Target and Walmart held week-long sales events offering lower prices on thousands of products, including toys and other gift items.

These sales events appear to be just the latest in an industry-wide effort to boost volume after multiple years of drawing profits from inflated prices in the wake of the pandemic, Pavich explained. As inflation has slowed or even reversed into deflation in certain categories, the question of how to drive volume has become a priority for major retailers.

Walmart signaled this shift in strategy last year, and has since reiterated that it’s not in the business of raising prices to take profits. “We’re growing the business with higher transaction counts and higher unit growth, which of course is encouraging,” Walmart CFO John David Rainey told shareholders over the summer.

“We’re demonstrating that we’re able to grow our business on a sustained basis in the absence of price inflation,” he added.

Unit deterioration: Not every retailer has been so fortunate, Pavich said. Coming out of 2023, there were widespread cases of what he calls “unit deterioration.”

“I think the real issue involving unit deterioration is that some retailers have been selling fewer units but still growing revenue in the past couple of years due to inflation,” Pavich wrote in an email. “Digging in deeper, their fundamental business was actually shrinking.”

• Earlier this month, Nike reported that it’s dealing with this exact situation, selling less product at a higher price. In an earnings call in October, CFO Matthew Friend said the company “delivered lower unit sales than we expected, partially offset by a higher ASP [average sell price].”

Diverging paths: Overall, though, retailers find themselves in increasingly diverging positions vis à vis volume, Sam Rines, macro strategist at WisdomTree, told Retail Brew. “It’s not quite as uniform as it was called a year ago,” he said. “A year ago, it was all price…Nobody was really paying attention to the volume side of things. That’s really changed, but it hasn’t changed uniformly. So there are winners and there are significant losers.”

He would put Nike in the latter category, and Walmart and Costco in the former. As for how they may have ended up in their respective positions, Rines said it could come down to when they raised their prices and when they started lowering them. Retailers that hiked prices early in the inflationary cycle, when everyone else was as well, but then pulled back sooner tended to see their volumes bounce back quicker, while those that raised prices later in the cycle are still struggling.

Holiday arms race: Looking ahead, it’s unclear if earlier holiday promotions will drive more volume overall this year. Pavich said it’s been a challenge for retailers to determine if earlier deals are actually driving value, especially now that the situation has become a kind of “arms race” between retailers to draw customers.

“There’s not necessarily a lot of evidence that bringing Christmas earlier and earlier into the year, starting the Black Friday holiday earlier, opening stores earlier on Thanksgiving evening, really drives more total volume,” he said. “But you have to be on the cutting edge to actually get your share of the pie.”