Retailers: New Strategies for this Holiday Season

Stocked with "cautious optimism," early markdowns, and lower inventories, stores hope to avoid repeating the 2008 holiday sales debacle

By Esmé E. Deprez

As the holiday shopping season kicks into gear, retailers and industry experts are expressing "cautious optimism," a phrase that has become a ubiquitous stand-in for predicting good news in the current economic climate. Attracting consumers to stores through early promotions and discounts—as well as going into the season with lower inventory levels—are among the tactics retailers are adopting to deal with shoppers, who remain skittish about the future.

It's too soon to say if it's working. The U.S. Commerce Dept. is scheduled to report October figures for consumer spending on Nov. 25 amid expectations of a slight bump up from September's 0.5% fall. "We're looking at modest sales increases for the holidays and don't expect the degree of markdowns" that retailers needed to introduce late in the season to move product, says Brian Sozzi, a retail analyst at Wall Street Strategies.

Hoping to avoid a repeat of last year's holiday shopping results—often described as one of the worst on record—retailers will likely regard slender or stagnant sales as a success. Recent third-quarter earnings reports from major retailers have showed mixed results. Wal-Mart (WMT)—the world's largest retailer and regarded as a bellwether for the overall vigor of consumer spending—reported on Nov. 12 a revenue increase of 1.1%, while same-store sales dropped 0.4%. Revenue fell 3.2% at J.C. Penney (JCP), the company reported on Nov. 13, while same-store sales dropped 4.6%, although Penney improved its full-year profit and sales outlook with fewer discounted items on offer.

October statistics reported on Nov. 13 in the Deloitte Consumer Spending Index, which tracks consumer cash flow as an indicator of future consumer spending, rose in October for the fifth consecutive month, to 4.1%, from September's upwardly-revised 3.6%. The calculation takes into account the tax burden (the percentage of income that one pays in taxes), which has recently been stabilizing; initial unemployment claims, which continue to drop from their March peak; real wages, up almost 5% from a year ago; and real home prices, declining at a slower pace.

Signs that spending has stabilized

"The continued rise in the index points to a significant improvement in the fundamentals of household financials," Carl Steidtmann—chief economist at Deloitte Research and author of the monthly index—said in a press release. "If these economic indicators maintain their direction, real consumer spending may turn positive before the end of the year."

SpendingPulse by MasterCard Advisors, which tracks national retail and service sales, showed some mixed signs of stabilization in its October report, released on Nov. 12. Seasonally adjusted retail sales, excluding autos, were down 1.3%, compared to the same time last year—still in the red, but an improvement from the prior three month's average of 5.8%. Excluding autos, month-to-month growth rates flattened to 0%, after gains of 2.4% and 0.6% in August and September, respectively.

Retailers have been adapting their strategies to survive since consumer spending plunged last fall, and many will look to this holiday season as a significant test for how they and the greater economy are faring.

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