Image: Wal-Mart shopper
Joe Raedle  /  Getty Images
Wal-Mart is dropping numerous toys to $10 in a holiday promotion. Retailers could end up hurting themselves with rampant discounting.
Alison
By Allison Linn Senior writer
msnbc.com
updated 11/3/2009 3:21:33 PM ET 2009-11-03T20:21:33

The recession has dramatically changed many Americans’ shopaholic habits, at least temporarily and perhaps forever.

Now the question is whether the nation’s retailers have kept up.

“The answer is no,” said Marshal Cohen, chief industry analyst with NPD Group.

He’s not alone in that assessment.

Although it’s still early days of the holiday shopping season, some analysts are already worried that too many merchants are taking a business-as-usual approach to an era that is anything but usual. Any miscalculation could be disastrous for retailers, who typically expect up to 20 percent of annual sales and a bigger share of annual profits during the critical holiday season.

“Retailers still don’t have a full grasp of reality,” said Burt P. Flickinger III, managing director of  Strategic Resource Group, a consulting firm.

Flickinger thinks many of the nation’s retail executives don't completely understand how severely the Great Recession has affected the millions of Americans who have lost jobs, had their wages cut or are living in fear of a job loss.

That, he noted, is on top of other financial concerns many Americans are facing, including a steep drop in home and investment values.

Retailers have good reason to fear such financial jitters, having only last year endured a disastrous season in which holiday retail sales fell 3.4 percent as Americans, rattled by the financial crisis, held onto their pocketbooks.

This year, Flickinger said, consumers are facing the reality of a sky-high unemployment rate and growing concerns about credit card debt.

“Shoppers are more scared going into this holiday season than any time in the last 50 years,” he said.

In the new era of tight budgets, consumers are looking for good value on the items they want and need. But instead, many analysts say retailers seem to be taking a different approach: offering ever-more extreme discounts on items they want to get rid of.

The super-low price method of offloading excess inventory has become so commonplace, even among higher-end retailers, that shoppers are coming to the conclusion that many products are just worth less, said brand analyst Robert Passikoff.

“It isn’t just that you learned that there will be sales — there will always be sales — but what it’s done is it ultimately affects the value perception of the product,” said Passikoff, president of the customer loyalty research firm Brand Keys.

Black Friday comes early
Even while Americans are still munching on candy and taking down the Halloween decorations,  retailers already are girding for what is expected to be an intense battle for fewer customer dollars.

Big-box leaders Wal-Mart and Target have announced plans to drop prices on a wide range of items, from toys to food. Along with online retailer Amazon.com, they have launched an intense price war over the season’s most anticipated books.

Sears is hoping to get ahead of the game by pushing “Black Friday” specials long before Black Friday, the day after Thanksgiving that typically marks the start of the holiday shopping season, when retailers traditionally go into the black for the year.

Many retailers are aiming to lure shoppers with marketing messages appealing to sentiment but focused on value. Home products retailer Crate & Barrel, for example, is touting “holiday moments at prices to celebrate.”

Analysts say customers in this post-bubble era are looking for value, but that means more than just a great sale price or alluring marketing message. Today many consumers are thinking carefully about whether they need the product on offer, even if the price seems too good to pass up.

“A bargain on something you don’t need isn’t a bargain,” Flickinger notes.

‘Bored customers to death’
At a time when even people who do have money are hesitant to spend it, many retailers and product manufacturers also have been unable or unwilling to risk developing a new and exciting product that could become a big breakthrough — or a huge flop.

Instead many stores seem to be focusing on safe bets and traditional gifts like scarves or board games, Cohen said. That raises the concern that there will be another season with few if any “must-have” items that leave consumers clamoring at store windows and pushing frantically through the aisles.

“They’ve basically bored customers to death,” Cohen said. “Going into this holiday season, what does the consumer have to have? Nothing.”

If struggling retailers — and the companies that make their merchandise — can’t find a way to appeal to consumers, that could have a ripple effect on the U.S. economy, which is heavily reliant on consumer spending and also is struggling to regain its footing.

Already, the outlook for the holiday shopping season is relatively dour. The National Retail Federation, the industry’s trade group, is predicting that holiday sales at discounters, department stores, specialty stores and grocers will fall by 1 percent this season, from a year earlier, to $437.6 billion.

That would be an improvement over 2008, but it would still be far below the 10-year average sales growth of 3.4 percent, as tallied by the federation.

The recession is clearly weighing heavily on shoppers’ minds. In NPD Group’s annual survey of consumer intentions for the holiday season, nearly half said the state of the economy would have a significant impact on their spending habits.

NPD’s Cohen does think retailers will be less likely to offer the type of extreme discounts this holiday season that they were forced into last year, but he also expects that it will take a while for consumers to stop expecting to find such outrageous deals.

“It’s a phase I call discount detox,” he said. “We have to have the industry begin to detox the consumer and wean them off the expected discounts.”

Bright spots
Analysts say some retailers seem to get what customers want and need this year.

Cohen lauds computer maker Apple Inc. for continuing to push innovation through the recession, coming out with new iPhones, iPods and other items even amid the worst economy in decades.

That strategy has been in contrast to many other companies, who have hunkered down and largely relied on their current stable of products instead of spending on research and development of new items.

Also, amid deep discounting for items customers don’t seem to want, Flickinger said he is seeing some retailers have success by offering a tangible reward customers can use.

He thinks pharmacy chain CVS has done a good job with its reward cards, which give customers a cash discount coupon based on how much they spend. He thinks retailers will succeed if they offer incentives or rewards that really help people out, such as a free turkey.

One potential bright spot for retailers is that consumers might actually need to get out and buy things like new clothes after holding back for the past two years, Passikoff said. In Brand Keys’ survey, 60 percent of respondents said they planned to buy clothing and accessories this year, up 10 percent from last year.

Some shoppers even may give in to the siren call of shopping and use the holidays as an excuse to temporarily suspend their frugal ways, Passikoff said. Still, he predicts consumers overall will spend about 1 percent less this holiday season than last, similar to the NRF survey.

Because even those people who feel like spending again, and have the money to do so, are likely to keep an eye toward value and necessity.

“There’s been a shift into ‘wise shopper’ mode,” Passikoff said.

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