That $3.20 latte at Starbucks or the $300 handbag at Coach may no longer be affordable luxuries. Feeling squeezed by gas prices and weak credit, the nation's shoppers are increasingly trading down to lower-price stores or cheaper items.
Such changes — which emerged this past summer and surfaced in the latest financial results for retailers — could alter dynamics of the holiday shopping season as it officially kicks off on Friday. For some shoppers, it could be as drastic as buying all their clothes at discounters instead of department stores. For others, it could be as subtle as buying a wallet instead of a handbag or one latte per week at a fancy coffee shop and deli coffee on the other days.
The trend could benefit discounters, warehouse clubs and drug stores while hurting department stores and mall-based apparel chains. Even Starbucks Inc. reported its first decline in traffic on record at its U.S. stores.
"People are so cash- and credit-concerned," said retail consultant Burt Flickinger III, noting that he hasn't seen "the trading down" phenomenon since the 1987 stock market crash resulted in massive job losses and the housing slump in the early 1990s.
The idea of trading down is different from cross-shopping, when shoppers buy kitchenware at Target and status handbags at Neiman Marcus. Shoppers cross shop to have a more eclectic style, but trade down to cheaper stores as a sign of financial stress, say experts.
Amanda Curry, a waitress and bar manager from Riverview, Mich., said she normally shops at Somerset, an upscale mall with Nordstrom and Macy's department stores. Now, she is looking at places that offer lower prices.
This year's destination? "Meijer, Wal-Mart — J.C. Penney, probably," she said. "My income's not as high as it used to be," she said, noting that she now has a 17-month-old daughter. Her financial situation has meant fewer trips to Starbucks and more bringing home coffee from home.
Monica Tang, a retail strategist at Kurt Salmon Associates, agrees that certain shoppers are trading down to less expensive stores, but she doesn't see it as a slam on the brakes.
They are finding easier ways to cut back if they are looking to reduce their spending, she said.
The trend is starting to play in the hands of Wal-Mart Stores Inc., which has stepped up discounting after suffering its worst holiday season on record last year. Last week, the discounter recorded an 8 percent profit increase, and analysts say it could benefit from shoppers trading down this holiday season even as its core customers pull back. Drug store chains like CVS Caremark Corp. and Walgreen Co. — both of which have been adding trendy items like funky jewelry — are also expected to be winners.
Meanwhile, department stores — which enjoyed a resurgence last holiday season — have seen their fortunes reverse. Home and apparel, categories sensitive to the economy, are struggling with sluggish sales and department stores are finding stiffer competition from the likes of offprice stores like TJ Maxx, Flickinger said.
Last week, Macy's lowered its sales outlook, while Kohl's Corp. and J.C. Penney Co. reduced their earnings projections as they recorded declining profits in the third-quarter. But TJX Cos. boosted its earnings outlook as it recorded an 8 percent profit gain in third-quarter profits.
Luxury stores like Saks Fifth Avenue should continue to fare well this holiday season. But the aspirational luxury buyer seems to be feeling pinched, hurting results at Coach Inc., considered a bellwether for the low-end luxury market. Coach cut its sales outlook after struggling with declining traffic.
In a bid to get shoppers to buy early, Wal-Mart and other stores have offered door buster specials starting the first weekend of November. The deals are only expected to get better the day after Thanksgiving with stores expanding shopping hours and offering more door buster items than last year.
With all the noise, shoppers still may be resigned to keep to their holiday budgets, which surveys show are not much different from a year ago. Those same surveys, however, show that shoppers plan to spend less per gift. According to a survey conducted by Deloitte & Touche USA LLP, consumers plan to spend $569 on 23 gifts compared to last year's $584 on 22 gifts. According to a survey conducted by the International Council of Shopping Centers, 60 percent of customers planning to spend less overall plan to buy less expensive gifts.
Then again, what they plan and what they actually do is another story.
"I don't have a whole lot of money to spend — with gas and everything, you can't — but I probably will overspend," said Kerry Weston of Hollywood, Fla., who was shopping in Burlington, Vermont.
Nevertheless, analysts will be watching how the holiday season shakes out. In particular, whether drug stores like CVS and Walgreens will be able to steal market share from department stores and other higher-end shops.
CVS is selling gifts such as a Sky Scrambler Wireless Indoor Helicopter for $19.99 and iCraig's iPod Alarm Clock Radio for $29.99.
"Rising gas and oil prices mean that consumers are looking to make fewer trips and cut costs anyway they can," said Eileen Howard Dunn, senior vice president, CVS/pharmacy. She added, "we seem to be in a very good place."