Retailers Won't See Much Cheer This Holiday Season

Discounting, bundling of goods, value marketing and service cutbacks will be in the forefront of this retailing strategy.

By Laura Kennedy, Researcher-Reporter, the Kiplinger letters

September 19, 2008

A sense that this holiday season would be far weaker than last year's was prevalent long before the latest meltdown on Wall Street. Even now, we see Santa's sleigh bringing at best a 2% bump in sales this year compared with a 3.5% increase in 2007. Consumers will continue to struggle under the weight of rising joblessness, ongoing relatively high gasoline prices and still shrinking home values.

The key to boosting Christmas sales: Value-oriented marketing. If they want consumers to spend more, retailers will have to prove that a few extra dollars are worth it. "Everybody's got the products...price is going to dictate" who comes out ahead in this year's holiday shopping season, says Marshal Cohen, chief industry analyst with the NPD Group, a marketing research firm. "Who's going to out-market it?"

Some retailers will coax consumers into buying more by bundling products. The purchase of a sweater might be sweetened by retailers offering 50% off on a pair of matching slacks. Or a home theater might be packaged with a library of dirt-cheap DVDs to play on it. Supermarkets will get in the game, too, bridging the gap between their general merchandise and food offerings.

Bundles of products will be especially popular at Web-based stores. "You'll see online retailers get very creative about how they package things to give consumers perception of value," says Leon Nicholas, director of retail insights at Management Ventures Inc., a retail research and consulting firm. "The convenience is there and it's priced right...and the ability to do that online is instant."

Web retailers will continue to snare a growing number of shoppers who don't want to use up pricey gas to drive to the mall. But sales will increase by the low double digits, 10%-12%, which won't match the dazzling growth of prior holiday seasons -- last year, sales jumped 16%. The stores will lure shoppers with online-only sales and Web-exclusive products. Multichannel retailers -- those with bricks and mortar as well as Web presences -- will "use the online vehicle as the promotional method of communicating with...and rewarding the consumer," says Cohen.

Not least of these incentives will be pledges of cheap, and often free, shipping, despite high fuel costs. For example, in some cases free shipping kicks in "after [the shopper] spends a certain amount of money...it becomes more affordable [to a retailer] because it's a higher purchase order," says Jeffrey Grau, a senior analyst with eMarketer. "It takes the sting out for retailers offering those promotions."

Discounters will come out on top, too, although specialty stores will likely struggle, as has been the case for most of this year. "The consumer is going to come out and shop when deals are there," says Britt Beemer, president of America's Research Group, a retail consulting firm. "The retailer controls its own destiny based on how deep it decides to go on discounts." Along those lines, inexpensive accessories and add-on gadgets will sell well as penny-pinching consumers look to spruce up their wardrobes, homes and electronics rather than start fresh.

The discounts, though, won't come without a cost for retailers. In preparation for the slowdown, retailers have kept their inventories low -- retail container traffic at major ports is expected to drop 6% this year, according to the National Retail Federation's Port Tracker. And selling products at low prices will slice into stores' profits, forcing them to cut costs. They'll focus on reining in holiday hiring plans, which means service is likely to suffer as retailers scale way back. Consumers may notice staffing shortages particularly in the beginning, as retailers wait to see how the season progresses. Longer lines and slower delivery will be the norm.

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