Retailers Turn to Cheaper Items This Holiday Season

By Jessica DiNapoli

NEW YORK (Reuters) – Retailers including Target (NYSE:TGT) and Walmart (NYSE:WMT) are stocking shelves with more toys and gifts such as Barbies priced under $10 this holiday season, a strategy aimed at attracting cash-strapped shoppers.

For retailers and toymakers, selling a bounty of cheaper gifts aimed at consumers earning $50,000 or less helps boost volumes and sales in the crucial holiday period that is five days shorter than last year and is forecasted to be lackluster.

The merchandising plan also helps cushion profits because discretionary goods, like toys or clothes, usually have richer margins than consumable items such as food, which shoppers, especially low-income ones, are spending more on due to inflation.

U.S. inflation has been persistently high, with grocery prices, particularly eggs, soaring.

Privately-held Bratz doll maker MGA Entertainment reports that 60-70% of its sales come from toys priced $10 and under, said CEO Isaac Larian. Its Miniverse figurines, listed as top toys by retailers like Target and Walmart, mostly retail for less than $10.

"The consumer is very, very stretched, and they’re going to be frugal," Larian noted. "A kid who used to get four to five toys (in the past) might only get two to three this year."

MGA has 625 toys out of 2,500 that retail at $10 or below, Larian added.

Discounter Five Below (NASDAQ:FIVE), known for its primarily $5 and under merchandise, is "leaning into value even more this holiday season with $1, $2, and $3 items," chief operating officer Kenneth Bull reported to investors this month.

The retailer is selling squishy Hello Kitty collectible figurines for $3.25 and $1 candles and gift wrap. These ultra-cheap items are helping attract customers, Bull said, even though the retailer anticipates a sales decline in its fourth quarter, covering November and December.

Walmart and Target are also promoting $10 buys. Walmart has positioned Procter & Gamble (NYSE:PG)'s Old Spice HoliDude soap and deodorant gift sets in eye-catching locations, according to a research note from brokerage D.A. Davidson.

Merchandise costing $10 and under might lead customers to purchase cheaper items than they initially planned, potentially lowering sales and squeezing margins, stated Barry Thomas, a senior global thought leader at marketing data provider Kantar.

These low-cost items may also encourage shoplifting, as thieves can easily grab and walk away with them, he added.

Stores are also emphasizing $5 and $10 deals on Mattel’s Barbie dolls, according to D.A. Davidson. A Barbie priced at $10 or less usually has fewer accessories or simpler clothing compared to higher-priced dolls.

"$10 is a price point that has psychological power," Thomas said, adding that $10 is low enough for consumers to try something new. "It's low risk. From the retailer's perspective, it’s seen as driving basket size. It’s an impulse price point."

Retailers have long promoted low-cost and heavily-discounted gifts during the holidays to boost sales during the biggest selling season of the year.

However, the deals this year aim to encourage more spending from frugal low-income consumers, whose buying has lagged behind that of wealthier shoppers so far.

Consumers earning less than $50,000 plan to spend an extra $87 this holiday season, or 12% more than last year. Those earning between $100,000 and $199,000 plan to spend $379 more, or 17%, according to Deloitte.

In the two weeks surrounding Thanksgiving, low-income consumers lagged behind middle- and higher-income shoppers in purchases, according to Bank of America credit card data.

A sign of how retailers are adjusting their merchandise for cash-strapped shoppers is that the average price of Walmart's 70 top toys was 10% lower than last year, at $40.16, according to D.A. Davidson. The average price of Amazon's top 389 toys fell by 3%, according to the brokerage.

A Target spokesperson mentioned that the retailer intentionally increased its allotment of toys priced under $20.

Latrina Begley of Nashville, living on a tight budget, stated she plans to do her holiday shopping in-store, where prominently displayed $10 deals might catch her eye.

Only 40% of consumers earning less than $50,000 plan to shop online during the five days after Thanksgiving, compared to 60% of those making over $100,000, according to the National Retail Federation.

"I prefer shopping in-store; I have a better view of what I'm buying," said Begley, who plans to visit stores like Target, Walmart, TJX's Marshalls, and Ross. "(Buying online) comes with shipping concerns."

Consumers at Dollar General (NYSE:DG), where most earn less than $35,000 annually, are shifting their spending to essential items like food, impacting the retailer's profits.

However, Dollar General is discounting toys, gadgets, and holiday decor to entice customers, executives said.