There used to be a clear divide between the people who shopped at Walmart and those who shopped at Saks. Not anymore.
Consider the shopper on Walmart’s website loading up on the basics: a 12-pack of paper towels, a few boxes of mac ’n’ cheese, a gallon of milk—all from Walmart’s private label, all cheaper than national brands. Then, into the same cart, she drops a $627 pre-owned Louis Vuitton handbag that Walmart has certified as the real thing. The next morning she swings by Ulta for $12 Maybelline foundation and the $36 Drunk Elephant face wash she refuses to live without.
A decade ago, when the economy was humming, this woman—a six-figure earner—would have spent much of her money at stores built on aspiration and exclusivity, like Saks Fifth Avenue, Whole Foods, and Sephora. But in this turbulent economy, she’s willing to trade down on many products to save.
America is in a cost-of-living crisis. Inflation hit 4.2% in May, its highest in three years, driven by an energy shock from the war with Iran. Gas prices jumped more than 40% from a year earlier, and grocery items like tomatoes spiked more than 30%. Up and down the income ladder, people are scrambling to stretch their dollar—and even affluent shoppers are gravitating toward retailers that compete on price and value.
“The upper end of consumers are trading down,” says Marshal Cohen, Circana’s chief analyst for retail. “Everyone is pulling back on spending.”
This didn’t happen overnight. Inflation has been creeping up since the pandemic, which is when higher-income shoppers first started defecting to lower-end stores.
The middle class—defined by Pew as households earning between $56,600 and $169,000 annually—are struggling to keep up with their upper-middle-class peers when it comes to housing, schools, and vacations.
Meanwhile, households a rung or two above the middle classes are getting significantly richer, thanks in large part to the stock market. The result is a tiered system of perceived (and real) scarcity, which has driven a larger portion of the middle classes toward retailers that help them save money on their everyday shopping expenses.
The retailers winning right now are the ones that saw this coming. Walmart, Ulta, Costco, TJ Maxx, and Ross are all booming—with sales up by between 7% and 21% in the most recent quarters. They’ve turned the trade-down economy into an art form, courting the budget and deep-pocketed shopper in the same aisle by offering rock-bottom prices for the customer counting every cent, with just enough elevated merchandise (premium soda, prestige skincare) sprinkled in to keep the wealthy interested.
At the same time, the department stores built on aspiration are sliding. Nordstrom, with its stock down 61% over five years and its full-line stores losing ground to its own off-price chain, was taken private last year; Macy’s is closing roughly 150 stores in a multiyear retreat; and Saks, the onetime temple of luxury, filed for bankruptcy in January.
“Walmart and Costco have become the new brands of the middle class,” says brand strategist Eugene Healey.
These brands didn’t win simply by slashing prices; markdowns are a race to the bottom. What sets the winners apart is how they’ve made value feel smart, even pleasurable. Their playbook breaks down into four lessons that any retailer can pull from.
In this story, we’ll lay out:
- The four iron principles that drive high-low retail success today
- 14 ways that brands can implement those principles
- What successful merchants have learned about the psychology of the current American consumer and how it’s changing the way you shop
- How markdowns can be transformed from a loss into an emotional win
- Walmart’s counterintuitive move to expand its “low prices” strategy
The Playbook in 4 Takeaways
1. The Lipstick Effect Is in Full Force
The lipstick index is a concept coined by Leonard Lauder, the former chairman of Estée Lauder, during the 2001 recession: When money gets tight and the big splurges—vacation, new sofa, designer coat—fall out of reach, people indulge in smaller luxuries instead. A premium lipstick won’t blow the budget, but it delivers a hit of luxury and reminds the customer there is still room for a little treat.
Retailers that are thriving right now are experts at capitalizing on the lipstick effect. Walmart and Costco stock their shelves with higher-end items, like San Pellegrino water and La Roche-Posay skincare. And at Ulta, this manifests in actual lipstick: A $53 Chanel lipstick sits a few feet away from a $9 E.l.f product.
Importantly, expensive items sit on the same shelves as far cheaper items. Retailers aren’t separating products by high end and low end since the same customer might buy both. For the wealthy shopper, it’s a routine repurchase, the lipstick she restocks every few weeks without a second thought. For the stretched shopper, it’s a treat—the consolation prize she buys for herself instead of the handbag she’d been saving up for.
“We’re very focused on being inclusive, and we want to be a destination for everyone,” says Ulta CEO Kecia Steelman. “We can take care of your beauty shopping needs no matter what your budget is.”
The lesson for brands and retailers: Don’t sort your customers into tiers. Anchor the bottom with real value, leave room at the top for the occasional indulgence, and let the customer decide how they fill their basket. “If you open my own makeup bag, you’d see everything from NYX to YSL,” Steelman says. “This is how the consumer is shopping today.”
2. Engineer the Treasure Hunt
Many purchases these days feel like small defeats. Gas prices are skyrocketing, ground beef costs $9 a pound, the grocery bill creeps higher than it did last month. So when a shopper finds something she needs at a price that’s far lower than she expected, the payoff isn’t just financial, it’s emotional. It feels like a rare win in an economy that otherwise feels rigged.
Many of the retailers thriving in this environment are the ones engineering that feeling on purpose. At TJ Maxx, it’s the designer coat with the department-store tag still on it, marked down 60%. When the economy is doing badly, the chain gets access to even more premium merchandise that other retailers couldn’t sell. It’s a feeling TJX builds its business model around. And it’s working: TJX, TJ Maxx’s parent, grew sales 9% to $14.3 billion last quarter, with comparable sales up 6%, and every division—including the one housing TJ Maxx—posting gains.
CEO Ernie Herrman has said the company’s teams work to deliver “an exciting treasure hunt of merchandise at great value to our customers, every day.”
At Costco, it’s the Kirkland batteries and coffee that are reportedly made by Duracell and Starbucks, respectively, at a lower price tag. Or the rotating “treasure aisle” where a $900 espresso machine or a designer handbag appears for one week only.
Costco treats that unpredictability as a core asset. In a proxy statement, the company told investors that its merchandising creativity helps promote the “treasure hunt that our customers value.” In both cases, the unpredictable layout is an appeal to customers who relish the hunt. The strategy is paying off. Costco’s net sales rose 11.6% to $69.15 billion last quarter, with comparable sales up nearly 7%, excluding the swings in gas prices and currency.
The lesson for brands and retailers: Any brand can engineer a jolt of satisfaction that signals to shoppers that they’ve gotten more than what they expected. It might mean a surprise upgrade, an unadvertised markdown that rewards a loyal customer at checkout, a limited “found it before it sold out” drop, or simply pricing a high-quality product below what you can get elsewhere on the market. Pull it off, and you become the rare bright spot in a shopper’s week, and a place they’ll likely come back to.
3. Value Is the New Aspiration
For decades, aspirational brands promised that spending a little more was how consumers could show the world—and themselves—that they’d arrived. This economy flipped that instinct. Now the opposite is true: The savvy move is paying less for something just as good. The retailers winning have made thrift their entire brand. Just read their mottoes: Ross’s “Dress for Less,” Walmart’s “Save Money. Live Better.”
Take Ross. Where TJ Maxx dangles the designer label at a discount, Ross plays a different game: offering rock-bottom prices. Its core shopper isn’t hunting for merely good value; the win is in how little she paid. That instinct is showing up on the balance sheet: Ross’s sales jumped 21% to $6.01 billion last quarter, powered by 11% more foot traffic and 6% bigger baskets.
In an earnings call, CEO Jim Conroy frames the strategy in exactly those terms, describing the work as bringing in “branded bargains across good, better, and best.” And he ties the mission directly to the squeezed shopper, saying Ross wants to “deliver the absolute best bargains and best values for our customers, particularly those under pressure from the prices of oil or gas prices.”
The lesson for brands and retailers: Stop treating a low price as something to apologize for, because the customer no longer feels ashamed about getting a deal. Quality, however, is nonnegotiable. The affluent shoppers who are trading down are discerning, and they’ll recognize that a cheap product that falls apart is no bargain at all.
“Consumers today are willing to pay more for better product because they recognize it’s going to last, it’s going to be different, it’s going to allow them to stand out rather than look like everybody else,” Circana’s Cohen says.
So strip out the costs they no longer care about—the inflated branding, the fancy packaging—and pour the savings into what they do care about: the product. Then do what Ross and Walmart do: Tell the customer, plainly and often.
4. Court Everyone at Once
When inflation hit, Walmart’s obvious move was to go even cheaper. But instead, it did the opposite. It started to add more premium and name-brand products to its assortment.
“Walmart said, ‘We’re going to trade up. We’re not going to trade down,’” Cohen says. “We’re going to bring in better product so that we can get that middle-income consumer and the lower end of the upper consumer.” (This lower-end upper-middle-class consumer has an annual household income of $170,000 and higher.)
Walmart’s grocery aisles stock the kind of assortment you might find at Whole Foods, including Rao’s pasta sauce, Graza olive oil, Goodles mac and cheese. On Walmart’s website, you can now find MacBooks, Air Jordans, pre-owned luxury handbags, and expensive collectibles.
Julie Barber, Walmart’s chief merchant, calls this strategy “access.” The goal, she says, is “giving people access to brands they didn’t know that we could offer them at an incredible value.” She describes the approach as moving customers “from essentials to the unexpected”—they come for the basics, then discover a La Roche-Posay serum or a Scoop blazer they didn’t know Walmart carried.
The strategy makes sense. Walmart had spent decades cultivating the low-income shopper. To grow, it had to tap into a new market. And it’s working. Over the last few quarters, the majority of Walmart’s market share gains have come from households making more than $100,000 a year.
At a fireside chat with journalists during Walmart’s Associates Week, CEO John Furner described this shift. The company continues “to see the higher-income customers coming to Walmart . . . buying more; they’re coming in more frequently,” he said. “And I think that’s largely due to the flexibility of what we offer.”
The credibility, Barber says, is compounding. Brands once reluctant to sell to Walmart now see “a lot of growth in customers making $100,000 a year” and “a lot of growth in our Gen Z”—the cohorts those brands most want.
How did Walmart pull this off without alienating budget shoppers, who are still its core market? Carefully. It kept rock-bottom prices on essentials that bring people in, then layered the premium products on top—$35 Madison Reed hair dye next to a $6.94 Revlon box. Even as it leans into these premium brands, Barber says, Walmart “will never take out that value and the mission—everyday low prices—that is the heart of the company.”
Walmart poured money into parts of the shopping experience the affluent noticed, like cleaner store layouts, better lighting, an improved app, and fast delivery, while using its massive scale to negotiate for the lowest prices on the market. It has also avoided the cues that would alienate some customers: locked cases, snooty service, or sections devoted to higher-priced goods.
“Walmart’s set up really well in any kind of economy,” Furner said. “If things are stronger, our assortment grows. If times are a bit tougher, we offer value.”
The lesson for brands and retailers: You can design a retail experience to be inclusive so that no shopper feels out of place. In an economy where everyone is stretching, the brands that win are the ones that make everyone—rich, struggling, and those in the increasingly blurred middle—feel like they belong.
