Holiday Retailers Take a Different Tack

With sales figures expected to show little or no increase over last year’s dismal tally, retailers will focus efforts on wringing greater profits from each ring of the cash register.

“Profits will be much more the story than sales,” says Mike Niemira, chief economist for the International Council of Shopping Centers. “That’s a function of a lot of factors: cost reductions, store closings, a different product mix and even lower inventories than last year.”

Lower wholesale prices for apparel, footwear and household goods will help. Product costs for general merchandise for the second half of 2009 will decline 5% to 7% from the same period last year, according to Citigroup. Import costs for general merchandise, tracked by the Bureau of Labor Statistics—numbers that roughly parallel the product costs calculated by Citi—started to decrease earlier this year after increasing since late 2007. The lower costs will allow retailers, especially those with large in-store brand lines, to offer plenty of bargains to consumers and still turn a profit.

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And gift card purchases could be one saving grace, even though sales will likely slip as much as 5% this year after falling 5% in 2008. Because recipients tend to see gift cards as “found money,” they bargain hunt less diligently than when shopping with cash or credit cards. Consumers often buy full priced items, blessing retailers with heftier profit margins.

This year, buyers and recipients alike will favor gift cards that can be used to buy necessities and make practical purchases, according to Dave Sievers, principal and consumer products and retail practice leader at Archstone Consulting. Retailers will focus on giving buyers the most bang for their buck. “Retailers are more adept at targeting their offerings at specific shoppers and consumer segments, making more creative gift cards for particular segments,” Sievers says, citing gift cards that double as toys at Target and others tailored for businesses to give to their employees to help pay for their health related expenses.

Look for sellers to discount heavily, especially early in the season, luring shoppers with bargains on flat-panel TVs, digital cameras and the like. Price competition will be necessary in some categories to get consumers to buy: “For specific products that are rising to the top of the list, it’s easy for consumers to trade over (shop a competitor) and for retailers to get consumers to trade over,” says Marshal Cohen, chief industry analyst for The NPD Group, a market research firm. That deal hunting mentality will make discounters and mass merchandisers the big winners throughout the season.

We expect heavy mall traffic in the first weekends of the season, particularly on Black Friday—the day after Thanksgiving—as shoppers look to take advantage of the low prices. “People will go out and see for themselves, ‘What does it really look like?’” when it comes to prices and inventories, according to Stacy Janiak, U.S. retail leader for Deloitte. Great deals will likely peter out after the traditional opening weekend of the holiday shopping season. With inventories low, retailers hope they’ll clear out stock without slashing prices. “It’s been a year of operating in a different environment,” Janiak says, “and retailers have adapted to that.”

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