A man shops at a J. Crew in New York City on Nov. 23, 2010
Grace Healy is a retailer's worst nightmare — and she isn't alone.
The 51-year-old mother of one in Lodi, Calif., considers herself a "huge shopper," but freely admits that the recession has changed her spending habits so much that now she not only seeks out bargains — she expects them. Healy lined up at 3 a.m. for Black Friday sales last year. She recalls 2008's hefty 50% to 80% discounts and is prepared to wait until the final days before Christmas this year to get similar markdowns. "I definitely won't go to a store for just 20% off — I'm looking for at least 50% off or more," she says.
In other words, as American consumers head into one of the country's biggest shopping days of the year — Black Friday, a day that for better or for worse will serve as a litmus test for the entire 2010 holiday-sales season — cheap is still very, very chic. Although consumer confidence and employment trends ticked up in October, the national unemployment rate stubbornly remains above 9% and the economic recovery has stalled, making shoppers that much more cautious. So while industry experts predict holiday sales will surpass last year's dismal levels, it will likely take heavy promotions and big discounting to achieve this. "In general, everyone wants value now, whether they need it or not," says Greg Daugherty, executive editor at Consumer Reports. "People just want a good deal and feel there's something wrong if they don't get one — it's a new mind-set."
The National Retail Federation (NRF) is predicting holiday sales will increase 2.3%, which is considerably higher than the 0.4% improvement in 2009 and 3.9% decline in 2008. Kathy Grannis, director of media relations at NRF, notes that back-to-school sales were strong, and retailers have seen four consecutive months of sales increases, which bodes well heading into the holiday season. The International Council of Shopping Centers is even more bullish, predicting a 3% to 3.5% rise.
Experts expect discounting will be needed to move merchandise this year, but not the 70%-plus levels seen two years ago. Also, some retailers are artificially hiking the original ticket price so they can later slap a 50%-off sticker on it and still maintain their profit margins.
"They just raise the price so they can discount it," says Richard Jaffe, a retail analyst at Stifel Nicolaus. "If this is what you — the consumer — want to see, they've figured out a way to make you see it."
Inventory is the wild card. In 2008, the collapse of Lehman Brothers, meltdown in the credit markets and other factors caused a sharp pullback in consumer spending, forcing merchants to slash prices as much as 85% to clear inventory from their shelves. Last year, retailers ordered up to 20% less inventory, which prevented panic discounting, but caused some retailers to run out of stock before Christmas. So, this year, many retailers have ordered more inventory in anticipation of better sales. However, the orders were made in March, at a time when retail sales were brisker than they are today.
The anomaly in all of this is luxury goods, whose sales have bounced back in 2010 faster than any other segment, and experts expect sales of upscale merchandise to continue to surge through the holidays. Year-over-year sales of luxury apparel and accessories jumped 67% in the first quarter, 29% in the second quarter and 22% in the third quarter, according to Ed Jay, senior vice president of American Express Business Insights, an analytics and consulting firm that assesses customer behavior, market activity and industry trends based on data collected from credit cards. "It's higher than pre-recessionary levels," he says.
The sharp bounce back is largely related to the rebound in the stock market, where many luxury buyers have their assets, and where the industry is poised to receive "the biggest bonuses in the history of Wall Street" of $144 billion, says Howard Davidowitz, chairman of Davidowitz & Associates, a national retail-consulting and investment-banking firm. Saks Inc. is one of those beneficiaries. Steve Sadove, chairman of Saks, says sales at stores that his company has owned for at least a year have increased for 11 consecutive months, and he expects fourth-quarter same-store sales to rise in the mid-single-digit range.
Most other retailers can't depend on such a strong holiday season, and it shows. The tee-off for this year's Black Friday began earlier than ever, with some retailers, such as Sears, Kmart, Target and Toys "R" Us, hosting "Christmas in July" sales. The main Black Friday marketing machine revved up in October, while Halloween costumes and jack-o'-lanterns were still sitting on store shelves. Many retailers have even been leaking their own Black Friday ads well ahead of the sale date to entice shoppers into their stores this weekend; it's a sharp reversal from previous years when angry retailers would chastise online sites like gottadeal.com that would post their ads in advance. Many opened their doors earlier than ever — some, such as Sears, Kmart and Walmart, even opened on Thanksgiving Day.
Many large retailers, like Macy's, Kohl's, Walmart, Radio Shack, Best Buy and Toys "R" Us, put many of their Black Friday so-called door-buster sales online on Thursday. "It's become Cyber Week rather than Cyber Monday," says Fiona Dias, executive vice president of marketing at GSI Commerce, an e-commerce marketing provider. Still, some retailers are saving some extra discounts and perks, like free shipping, for Cyber Monday. Forrester Research is predicting online holiday sales will increase 16% this year over last year.
The biggest pricing wars in the stores will likely be on electronics and toys, where Best Buy and Toys "R" Us are competing head-to-head with big discounters, such as Walmart, Target and Amazon. "Our advertising ran days earlier this year than last year. We also spent more money on TV this year when compared to last year," says Scott Morris, a senior manager at Best Buy. Heavy discounting in excess of 60% will likely be limited to select merchandise (including e-readers and flat-screen TVs) as a way to entice shoppers into the store, says Jaffe. However, all bets are off if Black Friday weekend sales are a bust and retailers are forced to rethink and step up their promotions. In that case, shoppers like Grace Healy will get the sizable discounts they are willing to wait for — and that retailers are doing anything they can to avoid.