By  on December 9, 2008

After months of deep discounting, retailers will be in need of some serious ingenuity to get shoppers back to buying full-priced items in the months ahead.

That was the consensus from a spate of industry observers and retail analysts following the arc and tenor of the stock market. Since stores broke price before Thanksgiving with 30 to 40 percent markdowns, the deals have only gotten better.

Pam Danziger, author of “Let Them Eat Cake: Marketing Luxury to the Masses as Well as the Classes,” said: “This is a situation they have created by becoming overreliant on sales as an incentive to get people into stores. It’s dumbed-down retailing. It’s the easiest thing to do, but guess what? They are really shooting themselves in the foot.”

In the midst of holiday price wars, an economic meltdown and the most jobs lost in a single month in 34 years, stores have the added burden of marketing to savvy shoppers whose credit lines are being squeezed and whose status-consciousness has fallen by the wayside.

Peter Schiff, president of Euro Pacific Capital, sees a seismic shift underfoot for retailers, with full-priced selling returning only on a much smaller scale. “A lot of retailers were caught flatfooted. They didn’t expect the economy to weaken as much it did. It has become an oversaturated business that has no clue,” Schiff said.

Many Americans are now trying to wean themselves from credit cards out of necessity or restricted credit, and in doing so are relying on cash for payment. Needless to say, they will be spending less, said Schiff.

Some national chains, in turn, will have to close stores, reduce the size of their larger units and scale back their offerings, he said. These consequences will have “severe repercussions” for suppliers who won’t have the big orders they are accustomed to, Schiff said. And if that weren’t enough, he expects the dollar to weaken substantially in the months ahead, which will drive up the cost of imported products.

That could spell trouble for chains that rely on inexpensive, foreign-made goods. In addition, retailers like Gap, which has loads of retail space nationwide, may have to downsize, but smaller specialty stores will be OK, though they might not be as profitable as they once were, Schiff said.

His long-term solution is for Americans to save more and manufacture more. To offset the anticipated weakening of the dollar, the garment industry’s domestic production is going to have to be revived, as well as other types of manufacturing. “Instead of buying a new wardrobe every season, more people are going to sew their clothes when they get a hole, or hand them down to their kids. Most women out there already have plenty of clothes in their closets to get by,” he said.

Well aware that many shoppers will hit the brakes on shopping to save money, retail analysts expect stores to respond by tightening inventories; offering more limited edition and customized styles; providing better assortments, especially for different regions of the country, and becoming more innovative in how they connect with shoppers. While none of these ideas are exactly groundbreaking, combined they stand to impact the bottom line. In addition, interest in consignment shops, hand-me-downs, mass market shopping, mending clothes and knitting should increase, observers said.

And this year, stores can’t count on last-minute gift buying to put them back in the black. In late October, 64 percent of respondents in an AlixPartners-backed survey said they planned to spend less on gifts this year. If that research were conducted today, that figure would be closer to 85 or 90 percent, said Matthew Katz, head of AlixPartners’ Retail Performance Improvement Practice. In addition, 60 percent polled said they planned to wait for sales and specials; 52 percent said they would buy less expensive merchandise, and 33 percent said they would shop at lower-priced stores.

“Things are not as festive as we would like them to be. There aren’t as many Christmas decorations up this year. Maybe people don’t feel like paying for the electricity to keep the lights on. Instead of throwing holiday parties with top-tier catering, some companies are going to Costco to buy jumbo shrimp and lamb chops, or having potluck dinners,” Katz said. “I understand fiscally why people are not spending like they did last year, but I’m not sure that cutting off things entirely is such a good idea. People need to be encouraged.”

And “the lessons of fall ’08 will last a long, long time” with consumers, even once they are able to spend more freely, he said, adding that “conspicuous consumption will certainly drop off, and we will live within our means.” Paraphrasing Terry Lundgren, chairman and chief executive officer of Macy’sInc., Katz said “stores need consumers not to spend more, but to spend more with them.” However they choose to accomplish that — better customer service, more interesting products, greater accessibility, improved price value — the retailers need to be on message all the time, he said.

Wal-Mart is faring well, and Urban Outfitters “has a great value message, products for multiple occasions and a completely coordinated brand message and store experience,” Katz said.

Robert Burke of Robert Burke Associates said, “This predicament has made everyone think and rethink where they are going. It’s not that different from what’s going on in the real estate market.”

The shakeout calls for more unexpected tactics, which is what Vera Wang has done by merchandising her signature collection with her Lavender label in her new Mercer Street store, Burke said. “It’s no longer valid or interesting to just have high-end everything. We were feeling that before. This economic climate drives that home more than ever.”

Bryan Roberts, a retail analyst with Planet Retail, which has offices in London and Tokyo, said the severe discounting is causing long-term instability in the market. “To try to correct pricing, or return to more traditional price points, will be quite difficult. This downturn, recession or whatever you want to call it, is expected to be in place for 18 months to two years. They are managing to exploit prices in the wrong direction for consumers,” he said.

“You only had to look at Sears’ most recent numbers to see how bad some retailers are having it,” added Roberts. “This Christmas and New Year’s, there will be an awful lot of bloodshed on Wall Street. We’ve already seen a lot of high-profile chains, such as Circuit City and Linens-N-Things, falter. It is certainly not inconceivable that apparel and footwear companies will follow suit in January and February. The market is just horrific — certainly in terms of apparel. It wouldn’t come as any great surprise to see these companies going out of business or filing Chapter 11.”

Aside from running the risk of cheapening their respective brands, this season’s drastic markdowns “really do smack of desperation and loss of consumer confidence,” Roberts said. “We’re seeing quite a steep change with discounting happening earlier in the year, and to a greater degree. As consumers, we’re getting used to the dramatic discounts that are available to us as we head into November and December.…A lot of big department stores are disastrously broken,” he said.

Stores that don’t break price, such as the London-based chain Next, which has a Boxing Day sale set for Dec. 26, have a real advantage. “If they make a lot of consumers get used to full pricing, they can generate significant excitement when they do discount and will have people queued up around the block,” Roberts said.

Jeffrey Klinefelter, senior research analyst at Piper Jaffray Co., said, “Retailers that have sought-after product, particularly those that have more unique or excellent styles than the rest of the retail marketplace, will be able to drive people back to buying full-priced merchandise. But it’s going to be a long, slow process.”

However, stores are better positioned to come out of this recession than they were when the 2001 downturn took hold after 9/11, he said. “The good news is there is less excess inventory than we had going into the 2001 recession, and that will help mitigate, to some degree, the promotional discounts,” he said.

Next year, more shoppers will frequent secondhand stores to sell old clothes and find affordable additions to their wardrobes to create a more individualized look. There are 20,000 secondhand stores in the U.S., and that figure is expected to increase by 7 or 8 percent in the next year, according to Adele Meyer, executive director of the National Association of Retail and Thrift Stores.

Danziger, who is also president of Unity Marketing, visited a resale shop last week. She said shoppers no longer have to go to luxury stores to find “really good luxury” products.

While next year calls for more buckling down, companies have the chance “to break through and reach out to consumers if they don’t stick their heads in the sand,” said Danziger, citing advertising, marketing, Web sites, new channels of distribution and TV shopping as opportunities. “H&M has a done a very good job of creating demand by making sure that consumers know [certain products such as the Rei Kawakubo collaboration] are not going to be there for long and to get them right away,” she said. “There are lots of ways to create excitement, but they are not necessarily the old way by sending something that can only be worn by a 6-foot glamazon down the runway. They have to design things that reflect real women.”

Richard Jaffe, an analyst at Stifel Nicolaus, said, “Obviously, we have reluctant consumers with diminished credit who have a strong resistance to spending. They have to be motivated to spend money, and cutting prices is one of the most straightforward ways.”

In addition, retailers underestimated the downturn in demand and have wound up overstocked. “What can they do? They have to reduce prices to drive sales,” he said. “Lastly, we have a malaise in the fashion community. There is not a lot of excitement or newness. There is a lack of inspiration in products,” and that has left one thing to compete with — price.

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