US retailers brace for margin hit from holiday discounts

ReutersNovember 24, 2013 

According to a new Reuters-Ipsos poll, most Americans plan to spend less than they did during the 2012 holiday shopping season. And by all indications, most are demanding rock-bottom prices.

Retailers from Macy’s to Walmart to Best Buy are responding with massive discounts even at the risk of profit-margin declines. When the smoke clears on the unprecedented price-cutting blitz, consumers should emerge as the clear winners.

“It’s going to be a promotional frenzy this year,” said David Bassuk, a managing director at advisory firm AlixPartners and co-leader of its retail practice, which expects overall holiday sales to rise 4.1 percent to 4.9 percent — higher than the National Retail Federation’s forecast for a 3.9 percent rise and last year’s 3.5 percent increase.

Underlining Bassuk’s point, Walmart has said it would jump the gun on special prices offered by its competitors on Black Friday, the day after Thanksgiving and the traditional start of holiday shopping period. Walmart will match Black Friday offers on toys and electronics from Target, Toys R Us and Best Buy starting as early as a week before the big shopping day.

Rising to the challenge, Best Buy vows to do whatever it takes to compete, even if it hurts fourth-quarter margins. CEO Hubert Joly said the retailer was “playing to win,” He declined to estimate the potential effect on margins.

To be sure, the emphasis on discounting is nothing new. Since the recession, Americans have searched for ways to save money. They’re disconnecting home phones, opting for free entertainment and driving cars longer before replacing them. Beyond that, the Internet has made it easier to find deals.

Ted Vaughn is a partner at consulting firm BDO, whose survey of 100 retail chief marketing officers predicted that sales in established stores during the holiday season would rise 2.5 percent for 2013.

“At certain points in history you have a resetting of expectations,” said Vaughn. “This one is proving to be very significant.”

According to the Ipsos poll, 61 percent of shoppers plan to spend less than $500 in 2013 compared with 57 percent in 2012, and 18 percent plan to spend between $500 and $1,000 compared with 22 percent in 2012. Slightly fewer shoppers plan to spend more than $1,000 than last year.

About a third of those surveyed plan to buy fewer toys, clothes and electronics. Only 14 percent plan to spend more on electronics and 13 percent see spending more on toys and clothes. Jewelry sales may slip the most. Almost 40 percent of shoppers expect to spend less this year on and only 3 percent more than 2012.

More affluent Americans, buoyed by stock market gains of more than 20 percent this year and higher home prices, appear to be more willing to spend this holiday season. People who earn $70,000 and up account for 33 percent of U.S. households, but 45 percent of spending. People who bring home less than $30,000 per year also account for a third of households, but they are only responsible for about 19 percent of spending, according to U.S. Census data crunched by AlixPartners.

Ronald Goodstein, an associate professor of marketing at Georgetown University’s McDonough School of Business, says retailers have little choice after getting consumers accustomed to never paying full price.

“We’re creating a retail market where everything is going to be on sale all the time,” he said.

“You’re killing yourself as an industry, you’ve trained people to only buy on sale.”

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