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Commentary: What's Roiling The Selling Season


If retailers learned anything during the 2004 holiday shopping season, it was that the rules of engagement have changed drastically. And those changes are largely of their own making. In an all-out effort to goose sales with discounts, gift cards, and other blandishments, retailers have helped alter consumer behavior so much that many are now scrambling to catch up. By now, everyone knows Americans expect big discounts -- despite retailers' annual vows to limit them. This year was no different; shoppers rushed to the stores in the week before Christmas when stores finally piled on with their biggest sales. But the gift card phenomenon is adding a new wrinkle this season. Analyst Kristine Koerber of JMP Securities estimates that cards accounted for 10% of sales, up from 7% to 8% in 2003. That means plenty of "Christmas" purchases won't take place until January, when many cards are redeemed.

All that makes it harder to judge how well retailers are doing. On Dec. 26, MasterCard International estimated that holiday retail sales would rise by 8.1% over '03; other estimates ranged from 3.2% to 4.5%, about level or slightly below 2003. The difference partly reflects the fact that MasterCard includes gift card sales in its tally; others don't count the cards until they're used.

What does all this mean for retailers? With the holiday season now stretching well into January, and discounts here to stay, they'll have to get a lot smarter about who their customers are, what they put on the shelves, and how to get folks to buy full-price. Here's how some stores are adapting:

MAKE GIFT CARDS PAY. Gift-card redeemers tend to be free spenders. Shoppers with cards often buy full-priced goods when presented with them, generating more profit for a store than the sale of, say, two sweaters at 50% off. So smart retailers are moving to make sure they have plenty of full-price merchandise on hand when these folks show up -- stocking fresh products in late December and early January, rather than waiting until February. Over the past couple of years, Charming Shoppes Inc.'s (CHRS) Lane Bryant chain has begun displaying full-priced spring clothes in December. Now, thanks to the popularity of gift cards, sales of those clothes are taking off. The day after Christmas, retailers as disparate as Coach (COH), Ann Taylor (ANN), and American Eagle Outfitters (AEOJ) all had new apparel ready to sell, notes NPD Group analyst Marshall Cohen. "This is a way to not only clear leftovers but to sell higher-margin stuff," he says.

GO LOCAL. It's no longer enough for a retailer to profile customers nationwide, or even by region. To avoid discounting, many also will need to tailor stores to local conditions. That's one of the secrets behind the success of Best Buy Co. (BBY), which is expected to post far stronger sales than chief rival Circuit City for the '04 season. The electronics chain determines if local customers tend to fall into key categories, including "busy suburban mom" and "affluent professional." Stores serving the wealthy bulk up on home-theater gear, while those with a lot of mothers in the 'hood talk up the convenience of digital cameras for photographing kids. It seems to work: Best Buy says stores that have gone local boast higher gross margins and same-store sales growth that's twice as fast as the rest of the chain.

INCLUDE THE EXCLUSIVE. Increasingly, rival retailers are taking a page from Target Corp. and Kmart Corp., which for years have managed to stand out from the crowd -- and boost gross margins -- by selling exclusive lines created by the likes of Michael Graves and Martha Stewart. J.C. Penney Co. now sells housewares designed by celebrity wedding planner Colin Cowie. Bed Bath & Beyond Inc. carries an exclusive line of textiles created by dress designer Nicole Miller. So far, however, no retailer has managed to duplicate Target's or Kmart's success. That's because carrying an exclusive brand requires more than slapping a name on a few pieces of merchandise. Retailers need large, comprehensive lines to create a strong visual impact in stores and generate substantial sales. "If you're going to create your own brand," says New York marketing consultant Wendy Liebmann, "you have to build it and market it." Clearly, minding the store has never been more complicated.

By Louise Lee with David Kiley in New York


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