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Discounts abound — if you’re willing to spend

Image: Blu Ray
Popular high-priced electronics such as Blu-ray DVD players sell at the same price that an Apple iPhone went for a year ago.Justin Sullivan / Getty Images file
/ Source: Business Week

The bargains sweeping America are increasing. From apparel to autos, 10 percent or 20 percent price reductions no longer cut it — deals of half-off and more are flourishing in a growing number of industries as manufacturers and retailers plot an uncertain future in the midst of a near certain sales calamity.

In other words, anyone willing to spend can pick up some incredible bargains. "We are looking at a pretty deep recession. In this environment, retailers have zero pricing power," says Nariman Behravesh, chief economist for research firm IHS Global Insight. "They are going to be discounting like crazy. We are going to be looking at a pretty nasty Christmas season."

Shoppers will find some of the most aggressive discounts at apparel and department stores. Most chains took heavy blows in October, with department stores seeing an almost 13 percent sales decline at locations open for at least a year, a closely followed barometer known as same-store sales. J.C. Penney's "Biggest Sale of Them All" has some items marked down 60 percent, and Gap's three brands — Gap, Old Navy, and Banana Republic — each currently boast deep discounts, with some items slashed by as much as 70 percent at Gap stores.

Jewelry bargains galoreAt a midtown Manhattan Banana Republic outlet Friday afternoon, sales staff outnumbered customers. Agnes Curmi, a 54-year-old mother of four, says the sales don't entice her as much as they once did. "You don't know what's going to come tomorrow," Curmi said. "You don't know if your husband is going to have a job or not."

Apparel is not the only area in which consumers can expect generous discounts. Luxury and discretionary goods such as jewelry, electronics, and sports cars have suffered significant sales declines in recent months, leaving retailers with no choice but to lower prices to help move merchandise. Chicago-based Whitehall Jewelers, which filed for bankruptcy in June, is closing its 375 stores and liquidating $500 million worth of gold, diamonds, and other items, with prices up to 75 percent off.

While jewelers typically have more control over pricing than other retailers because their inventory turns over less frequently, liquidation sales such as the one at Whitehall have a ripple effect that can make it harder for competitors to maintain profit margins of 50 percent or more. "It sets up a value expectation and the economy just reinforces that," says Nick White, president of White & Co., a Kentucky-based custom jeweler, who also serves as an industry consultant at Gerson Lehrman Group. With jewelry sales predicted to fall as much as 10 percent this holiday, from 2007 levels, price drops are inevitable well into next year. Yearend shopping is the most important selling period for jewelers.

Breaking the $400 threshold
Vying for the same consumers are electronics retailers, which have significantly lowered prices on big-ticket items this season. Popular high-priced electronics such as Blu-ray DVD players and PCs can be had for roughly the same price that an Apple iPhone or camcorder would have cost a year ago. Typically purchased for their features, rather than their brand name, such items as HDTVs, laptops, and portable GPS navigators are being offered by lower-end manufacturers marketing more affordable models.

A 26-inch Dynex flat screen at Best Buy and a Compaq Presario at Wal-Mart are both under $400. "Once you drop below that $400 price point in those categories, that is pretty significant psychologically for the consumer," says Tim Herbert, senior director of market research for the Consumer Electronics Assn. "In some of the higher-ticket item products we will continue to see price points in a range that we have never seen before."

Retailers were conservative when ordering winter inventories six to nine months ago, anticipating slower sales this holiday season. But modest as their growth predictions were (the National Retail Federation forecast a 2.2 percent growth in sales this Christmas over last), they underestimated just how bad their luck would be. Same-store sales are expected to decline by as much as 5 percent or more. That means many retailers — even those that already cut inventory — still find too much in storage. "They can't find the bottom yet," says Jim Ellis, dean of the Marshall School of Business at the University of Southern California. "They can't figure out how bad business is going to be to then determine how low their inventory ought to be."

Discounts at the Opera
With Detroit's automakers on the brink of bankruptcy, dealers have been offering incentives. Rebates run as high as $10,000 on large pickups such as the Ford F-150 and Dodge Ram and on truck-based sport utility vehicles like the Ford Expedition and Chevrolet Tahoe. "The buyer has a lot of leverage with GM," says Tom Libby, senior director of industry analysis at J.D. Power & Associates, which like BusinessWeek, is a unit of The McGraw-Hill Companies. "When supply is greater than demand, the customer has some power in the negotiating process." Foreign and luxury cars are not immune to the slowdown in consumer spending, either. In October, small sports cars saw a 50 percent drop in sales over the same period last year. As a result, dealers of small luxury cars like the BMW 3 Series and Audi A4 will be competing to offer the lowest monthly rates for leases.

Luxury and entertainment sectors are feeling the effects of cutbacks on discretionary spending and are responding with their own deals. Theaters and sports teams, in particular, are pricing conservatively this season. The Metropolitan Opera in New York is offering half-off a second ticket for holiday performances while major sports franchises — notably the Boston Red Sox — have suspended ticket price increases for the first time in 14 years.

Hotels from New York City's Algonquin to the Ritz in London are feeling pressure to offer special room rates and vacation packages in aggressive bidding to lure consumers. says the number of hotel deals it offers to destinations in the Americas has jumped 216 percent in the past year, including discounted rates in pricier markets such as New York City and the Caribbean. Hotels have been hurt by airline price hikes over the past few months, with airfares surging as much as 40 percent since January.

Foreign fares fallingAs the price of crude oil has plunged more than 60 percent since mid-summer, U.S. airlines have held their prices steady by reducing seat inventory. But even the airline industry — which has remained resilient to discounting thus far — will begin lowering prices more aggressively next year, predicts Rick Seaney, CEO of travel site

While the price of domestic flights to such popular destinations as California, Florida, and Las Vegas will likely not budge much because of sustained demand, fares to Latin America, Europe, and Asia will decrease, Seaney predicts. Already consumers can purchase business-class seats typically priced from $3,000 to $5,000 for around $1,400 as companies cut travel expenses. "I expect to see ridiculous discounts on business-class cabin seats next year," says Seaney. "A lot of the people filling up those seats were in the financial sector and either they don't have jobs or they are flying coach now."

While some analysts and retailers hope that the spring of 2009 will bring better prospects for retailers, others are skeptical, believing that it may take well into 2010 before retail pricing power firms. "There is concern that until there is a greater consumer confidence, promotions will continue," says Billy Busko, managing director at Financo, a boutique investment bank in New York. "It's really trying to fight for a share of someone's wallet."