Why Target and McDonald’s are cutting prices and offering deals

Target’s first-quarter results on Wednesday not only show American consumers are more selective about spending in the face of sustained inflation that has squeezed their budgets for nearly three years. The company’s declining sales also illustrate how the battle for shoppers’ wallets has heated up as retailers — and even some restaurants — race to outmatch each other on low prices.

Walmart said last week that its grocery “rollbacks,” short-term deals on specific items, were up 45% year over year in April. The discounter also introduced a new premium grocery brand with most items under $5.

Elsewhere, Aldi dropped prices earlier this month on more than 250 items, including chicken, steak, granola bars and frozen blueberries. And even McDonald’s is debuting a limited-time $5 value meal in late June as some diners scoff at the price of fast food.

Target made its move on Monday, saying it has already reduced prices on about 1,500 items and plans to cut prices on thousands more this summer. Many of those items are staples such as milk, peanut butter and diapers.

Multiple major grocers and restaurants cutting prices or offering deals could offer relief at the checkout, at a time when consumer prices are still climbing more than 3% from last year. It could also give the Federal Reserve more confidence to cut interest rates. Even so, the revenue lost from lower prices could force businesses to cut back elsewhere — potentially on labor costs.

Analysts on Target’s earnings call on Wednesday asked about the timing and reasoning behind the price cuts and whether the retailer or its vendors are picking up the tab. The company declined to share details of that split, but Chief Growth Officer Christina Hennington said Target’s vendors know the company is committed to passing on savings to its customers to drive traffic.

Some businesses have held on to customers even with the same or higher prices: Chipotle and Sweetgreen, for example, have bucked the consumer slowdown.

Target’s earnings report revealed at least part of the reason why it is joining the race to cut prices. Sales of discretionary merchandise, such as clothing, dropped year over year. But so did sales of higher frequency items like groceries and paper towels.

Some customers may be making those purchases at Walmart instead. Transactions on Walmart’s website and stores rose 3.8% in the most recent quarter, and its e-commerce purchases shot up by 22% in the U.S., the company reported last week.

In an interview with CNBC, Walmart finance chief John David Rainey said the retail giant is gaining share from higher-income households. He added some consumers are coming to its stores for meals because of sticker shock at fast-food chains.

“We’ve got customers that are coming to us more frequently than they have before and newer customers that we haven’t traditionally had,” he said.

On Target’s earnings call, analysts asked tough questions about whether the retailer is losing ground with shoppers or is seen as too pricey, outside of sales events.

CEO Brian Cornell said Target is putting value front and center as it fights to get back to growth.

“We want to make sure America knows that Target’s a great place to shop and we have great value every time you engage whether it’s in-store or through our digital channels,” he said, adding the company is on track to reverse sales declines in the second quarter.

When Target cuts prices, customers have noticed and responded, Hennington said on the earnings call. For example, it noticed it didn’t have low-priced tech accessories that customers wanted, such as charging cables and phone cases, she said.

Those items became part of Dealworthy, a new private brand launched in February that offers Target’s lowest prices on basic items like laundry detergent and paper plates.

“When we introduced the right price points in Dealworthy, the guests noticed immediately and that drove unit and traffic acceleration in those categories and that’s what we’re doing business by business,” she said.

It’ll soon run a similar play with seasonal items, she said. After Target “took a hard look at some of the most popular products from last year’s summer assortment,” customers can expect to see cheaper pool noodles, floats and coolers.

— CNBC’s Amelia Lucas contributed to this report.