Price wars aren't unusual, but in the early stages of economic recovery, they're about as common as World Series play at Wrigley Field.
Solid evidence of a sustained economic upturn came on Apr. 28, with the Commerce Dept.'s report on real gross domestic product: It expanded at a 2% annual rate in the first quarter--the fourth consecutive advance in GDP. But it seems as if Corporate America hasn't heard of the recovery's arrival: Companies from candymakers to hotel chains are still slashing prices.
GILDING THE LILY. Winn-Dixie Stores Inc. is the latest to enter the fray. The largest grocery chain in the Southeast said on Apr. 28 that it will cut prices on thousands of items in its 1,200 stores. The move is aimed at building market share. Says a Winn-Dixie spokesman: "Our customers respond to pricing."
The current price wars are gilding an inflation outlook that has already been brightened by low money-supply growth and weak wage increases. According to DRI/McGraw-Hill, the core rate of inflation--consumer prices excluding the volatile swings of food and energy--should increase by only 3.6% by the end of this year, and just 3.5% in 1993 (chart).
What's moderating price hikes? Jeff K. Thredgold, chief economist at KeyCorp., a bank holding company, credits the lack of new jobs and low income growth, which had depressed consumer spending. Until last quarter, he argues, consumers didn't believe a recovery had started. "Statistically, the recovery may be a year old," Thredgold says, "but emotionally, it is only two or three months old."
So, to stoke demand, companies are slashing prices. "Competitive pressures are so intense that companies are more interested in maintaining market share than in achieving price increases," says Edward E. Yardeni, chief economist at C.J. Lawrence Inc. And the surest way to draw customers is to offer bargains. "The only growth in real spending is coming from where consumers are getting the most bang for their bucks," says Robert T. McGee, an economist at Tokai Bank.
Take the travel business. The recession slammed spending on tourism. Indeed, domestic air travel fell 2.3% last year and ran flat in this year's first quarter. To try to turn the tide, American Airlines Inc. launched a new price structure in early April, reducing fares by as much as 38%. American's rivals quickly responded in kind.
Next came a skirmish at car rental agencies. Alamo Rent-A-Car Inc., based in Fort Lauderdale, Fla., introduced its Great American Rates, which cut prices on economy, midsize, and luxury cars as much as 55%. Donald C. Moonjian, Alamo's vice-president for marketing, describes the cuts as a way to "jump-start" demand. Not to be left out, rental leader Hertz Corp. responded by chopping its daily rate on subcompacts.
In the hotel industry, ITT Sheraton Corp. checked in with SureSavers rates at all U.S. and Canadian Sheraton hotels. The move is an attempt to placate irritated guests who searched for bargains hidden within the hotel chain's complex price list. The motivation for the new, four-tiered list was simple, says Robert F. Cotter, senior vice-president: "Customers want it."
CANDY LAND. Even sweet-toothed consumers can enjoy a bargain. In a nip-and-tuck battle for market share, Hershey Foods Corp. and M&M/Mars Inc. are taking aim at consumers with price cuts and refunds. In early April, Mars cut wholesale prices on bags of M&M candies by 6.5% to 11%, leading some retailers to slash as much as 40 off the price of 1-lb. bags and sell them for $2.49. Mars landed a second blow by running newspaper ads offering candy eaters $1 in exchange for 20 candy-bar wrappers. Caught short, Hershey has so far refused to lower its list prices. But in late April, it did match the refund offer, boosting its nickel-a-bar give-back with coupons for free candy.
The few companies that tried to raise prices as the recession waned now find themselves slashing again. Steelmakers, for example, had to abandon the 3% price increases they announced in January. And while tire companies hoped to inflate their prices by 4% to 8% last fall, the average increase ended up closer to just 2%.
Of course, there are a few sectors, including the auto business and health care, where price hikes are still the norm. And the red-hot price war between telephone companies looks as if it is cooling at last (page 46 34 ).
Yet many economists figure the general price-cutting won't stop until the second half, when the recovery is supposed to gain speed. Now, if the Chicago Cubs could just make it to the Series.