Faced with Walmart and History, Retailers Can't Avoid Deep Holiday Discounts

Retailers would love to avoid the disastrous discounts that they were forced to launch in the last holiday season, but research from Ball State University suggests they won’t be able to avoid them.

With 70 percent off signs still haunting the nightmares of many retail executives, consumers are dreaming of how far they can make their dollars stretch in the holidays. While many began shopping early, a major motivation was having plenty of time to find bargains. Recent evidence that online shoppers are holding back from purchasing suggests that consumers are becoming even more eager to play chicken with retailers, taking the risk that they may not get some of the goods they want by waiting for retailers to lose their nerve and slash prices as the holiday season moves towards its conclusion. The growth of last minute shopping in recent years demonstrates the strengthening of that trend.

Retailers have been wetting consumer appetites even as they adopt strategies to avoid across-the-board price cuts. From its $298 computer to its recent price war with Amazon and Target on anticipated books,  Walmart has led up to the holidays by providing deep discounts on a limited scope of products or for a limited duration, so controlling the cost of promotions and encouraging secondary, full-price purchasing. On Oct. 30, Target, for its part, announced it was expanding free shipping on products purchased from its website, an initiative that it launched two weeks earlier this year than last. Expanding free and low-cost shipping is a strategy many retailers are employing.

On another tack, Sears declared its own Black Friday last weekend but only deeply cut prices on a defined set of apparel items, offering modest discounts on its more popular products such as tools and major appliances. For its part, Kohl’s is just concluding a limited-time 50 percent off sale on selected apparel products that came with three days of 99-cent shipping.

One problem retailers with less scope and marketing muscle face is, they can’t widely tout limited super discounts and, to compete with all the row and ruckus major chains put up, they may have to start waving 70% Off Everything in the Store signs to get attention.

Michael Hicks, director of Ball State’s Center for Business and Economic Research, a division of the school’s Miller College of Business, said recent research suggests that the deep price cuts will naturally push spending wary consumers towards the big discount stores anyway. Combine that with a consumer who might not feel bad about purchasing fewer presents, and you have a formula for a rough holiday season. Despite signs of economic recovery, holiday sales will fall just about one percent compared with last year’s depressed numbers, he said, adding:

We believe that some of the increase in manufacturing activity in recent months has reflected inventory declines and a belief that this holiday season will be less severely affected by the economic downturn than the past. However, we anticipate many retailers, including high-end department stores and specialty stores, to offer significant discounts this year to move inventory through the season.

It is not all gloom and doom out there because we are seeing signs the economy is recovering. However, the unemployment rate continues to be high, and will be for some time, and this is putting a damper on shopping. Some people are afraid to spend as freely as in the past.

Consumers may be out and about this holiday season but they “will be out looking for really great bargains,” he noted. “Already, Wal-Mart and Target have announced deep cuts on toys and other merchandise. Consumers want and expect that. For many retailers, it may be difficult to reduce prices further, but they may not have any choice.”

Hicks said that department stores will see a sales decrease of 16 percent this holiday season. Consumer electronics will be down by 14 percent in 2009, a year after shoppers satiated themselves with hot products – LED televisions and smart phones among them — at discounts. Furniture sales will be down about 12 percent.

Some categories will improve, one surprisingly so. Food sales should see an increase of three percent. After last year’s late collapse, auto sales will struggle up the ditch by almost two percent. And jewelry sales will be up almost one percent.

“Interestingly, we expect jewelry sales to accelerate in December, perhaps, as jewelry represents a last-minute purchase,” Hicks said. “However, this will not necessarily translate into higher profits for retailers.”

After all, it will probably be discounted.