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Retailers vs. Buyers: Who Will Blink First?


When Ignacio Castellano hit the stores the day after Thanksgiving, he found just about every Christmas gift on his list. Except one: a Sony (SNE) PlayStation 2 for his 12-year-old son, Eloy. The Chicago-area factory supervisor wasn't prepared to pay Sears' (S) $179 price tag. Castellano, 49, wants to spend no more than $140, and figures retailers will be forced to cut prices eventually to move the merchandise. Then again, his son wants that PlayStation pretty bad. So if Castellano can't find it on sale, he'll "pay regular price just before Christmas."

If retailers' lean-and-mean Yuletide strategy works, Castellano may well end up paying top dollar for the toy -- assuming he can find any left in stores at the 11th hour. After putting too much merchandise on the shelves for the past three years and being forced to discount heavily, purveyors of everything from women's leather coats to high-end televisions are being conservative this year. Many have cut inventories sharply, hoping to keep prices firm and profits decent -- even if that means losing revenues when popular items sell out. Says Michael Keefe, CEO of Hilco Merchant Resources, an inventory-management company: "Retailers want to create a sense of urgency so shoppers will buy early and not try and wait them out."

The industry could sure use a lift after the abysmal Christmas of '02, when retailers were forced to clear out much of their unsold merchandise. Most analysts expect sales and profits to be more robust this year than last. The Bank of Tokyo-Mitsubishi Ltd. (MBK) predicts sales at stores open at least one year will rise 4.5% this year, up from 0.5% last year. And Thomson First Call (TOC) predicts fourth-quarter profits for major retailers will rise 15.2%, up from 13.5% in 2002.

But even a strong season overall won't be enough to save everyone in an overcrowded retail environment, where one chain's gain often comes at another's expense. This is particularly true among mid-priced retailers, which are getting squeezed from below by lower-priced discounters and from above by higher-end stores with more interesting merchandise. Under pressure from Wal-Mart Stores Inc., toy retailer FAO Schwarz was the latest casualty, when it disclosed on Dec. 2 that it would seek Chapter 11 bankruptcy protection for the second time this year.

DANGLING CARROTS

Whatever the segment, the key to success will be holding the line on prices. So far, that seems to be happening. "There are fewer promotions all around," says Todd D. Slater, an analyst at Lazard Fr?res & Co. For good reason: Consumers are opening their wallets anyway. The Bank of Tokyo-Mitsubishi estimates that sales at stores open at least a year rose 5.2% during the traditional Thanksgiving shopping week. For the month of November, the bank estimates that sales grew a respectable 4% over the previous year -- in line with its holiday forecast.

It's not that retailers aren't discounting; they are. But in place of last season's store-wide clearance sales, this year's markdowns are more strategically planned, and limited to a small number of goods. At the Gap (GPS) chain, for example, stores aren't awash in red sales signs as they were this time last year. Instead, they're running a more discreet promotion featuring $29 sweaters. Retailers are also trying to use sales to stoke further spending. Bloomingdale's (FD) strategy is to give escalating discounts to customers who shop in several departments and buy more merchandise. Pacific Sunwear, a booming purveyor of surfing-inspired apparel, is seeking to lure customers back by offering them discounts at checkout that are good for their next visit to the store.

Others are using so-called doorbusters -- deep discounts on a few popular items for just a few hours. Best Buy Co. (BBY) for example, lured customers the day after Thanksgiving with $19.99 DVD players and $8 CDs. The hope, of course, is that once inside, shoppers will buy lots of other stuff at full price. The strategy is a good bet for the likes of Best Buy, Circuit City, and Wal-Mart, say analysts. They note that higher-priced consumer electronics -- flat-panel TVs, video games, and digital cameras -- are must-haves on many Christmas wish lists this season.

Will retailers manage to maintain price discipline? The last few years have taught shoppers to wait for items to go on sale. "Consumers have become quite adept at playing the price game," says Anne Brouwer, senior partner at consultancy McMillan/Doolittle LLP. Last December, many held off until the last Saturday before Christmas before plunking down their plastic. The lull in sales prompted many retailers to pull the clearance trigger to get shoppers in the door. Says Marshal Cohen, a principal at NPD Group: "All it takes is one retailer to blink before the others do, too."

Then again, last year, retailers had a lot more inventory they had to get rid of -- especially those in fashion. According to Lazard Fr?res, apparel inventories actually jumped 8.5% during the fourth quarter of 2002 over the previous year, while sales grew a meager 1.5%. By contrast, Lazard expects clothing inventories to rise just 2.9% in the fourth quarter of '03, while sales should jump 6.2%. If the relatively strong demand seen so far endures, consumers may start to see something they haven't in a long time: empty shelves. By Robert Berner in Chicago, with Gerry Khermouch in New York, Christopher Palmeri in Los Angeles, and Ann Therese Palmer in Chicago


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