Retailers try to break deep discount habit

CHICAGO Fri Oct 9, 2009 2:10pm EDT

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CHICAGO (Reuters) - U.S. retailers that pushed deep, margin-sapping discounts in 2008 to try to lure holiday shoppers during the recession are going to try to break consumers of the 70 percent-off habit in 2009.

But whether retailers will succeed in getting back to more normal, less steep discounts in an environment where consumers are still counting their dollars remains to be seen.

"The idea that retailers, in this kind of an economic environment, are going to be able to stare down consumers and win (is) probably not a logical point on their part," said Patricia Edwards, chief investment officer of investment advisory firm Storehouse Partners.

The holiday season always involves a game of chicken between retailers and consumers over how long shoppers will wait for bigger discounts close to Christmas before purchasing.

Consumers who hold out for bigger discounts usually face the risk of not being able to find the items they want if they wait too long, while retailers face the prospect of not selling items before Christmas and having to take deep discounts in January to clear the shelves for spring merchandise.

But in 2008, the credit crises and stock market plunge hit in September, causing consumers to sharply cut back spending at a time when it was too late for retailers to reduce holiday inventory enough to avoid sharp, early discounts.

Even high-end department store chain Saks SKS.N had to resort to drastic measures such as 70 percent-off sales in order to clear out inventory.

"You had an enormous amount of excess product in system and it had to be discounted to move it out because it was not going to increase in value," Saks Chief Executive Steve Sadove said in an interview.

Since then, Saks has worked to cut inventory levels by 20 percent and other retailers have done the same, risking lost revenue in order to protect profit margins.

"Now you are in a totally different situation," Sadove said. "You are going to have much more of a scarcity of product going into the holiday season than a glut of product. It is going to mean that you are going to see more in the way of running out of sizes, running out of hot items and you'll see far less, I believe, in the way of discounting."

SACRIFICING SALES FOR FUTURE PROFIT

While retailers still want to have good sales and profits in 2009, the focus is more forward-looking when it comes to discounts.

"Their eye is on 'how do I recalibrate the consumer so if the economy improves in 2010, we get them back to more normal buying behaviors?'" said Craig Rowley, retail practice leader at Hay Group, a human resources consulting firm.

"I'm predicting you are going to see a lot less of the 60 percent to 70 percent off this year," Rowley said, adding that consumers may have to shop earlier this season.

"If there is something you absolutely have to have, don't wait for it to go to 70 percent, because it won't get there," he said. He noted that on average, inventories are down 5 to 10 percent from last year and that last year's inventories were already down from a year earlier.

Retailers might not mind if customers cannot find what they're looking for, if it trains them to shop earlier, and closer to full price, next year.

"Retailers would rather be in the position of not having enough merchandise than being in the position they were in last year, which is having too much," National Retail Federation spokeswoman Ellen Davis said.

Still, retailers typically build discounts and special offers into their holiday sales strategies. With consumers still worried about losing their jobs, credit being tighter and finances still recovering from the market plunge, retailers are likely to have planned attractive deals to lure consumers into stores.

"Most retailers are worried about just getting the traffic flow into their stores and generating sales," said Steve Ferrara, a partner in BDO Seidman's Retail and Consumer Product Practice.

(Additional reporting by Aarthi Sivaraman, Nicole Maestri and Jessica Wohl, editing by Matthew Lewis)

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