Markdowns May Dampen Retailers’ Christmas Cheer : Shopping: Store owners fear a potential price-cutting war. Some are fighting back with service.
This should be a white Christmas for America’s leading retailers--in fact, some already seem to be turning a little pale.
Although no one is predicting an industrywide disaster, many department store and specialty shop executives fear that an unusually fierce price-cutting war will erupt during the holiday shopping season. While that is good news for customers shopping on a budget, it brings out the Scrooge in people on the other side of the cash register, who normally count on Christmas for a big chunk of their profits.
For retailers, beset by worrisome long-term trends and financial turmoil at some big chains this year, “the primary objective is to escape with as few bruises as possible,” said C. Scott Killips, a vice president with the consulting firm Booz, Allen & Hamilton in San Francisco.
“You’ll see markdowns of 50% to 60%, no doubt about it,” predicted analyst Sarah Stack of the Los Angeles brokerage Bateman Eichler, Hill Richards Inc.
In Southern California, markdowns generally are not expected to be quite as sharp as elsewhere because of the relative strength of the region’s economy and the financial health of most of its major stores. Even so, price reductions here began right after Halloween.
Preliminary results of a survey sent to 1,200 Southern California retailers by the accounting firm Touche Ross & Co. show that roughly 80% of those responding expect their gross profit margins to be flat or down during the fall and winter months. The reasons: among other things, higher labor costs and profit-squeezing price competition.
Aside from fretting over markdowns, retailers this Christmas season are emphasizing customer service--in part, to shield themselves somewhat from the price wars. With the enormously successful Nordstrom department store chain setting the standard, everyone locally from C & R Clothiers to Vons supermarkets is promoting the quality of its service to attract shoppers.
Retailers are also looking for early signs of what will be the hottest-selling products. Although people with money will always buy gifts, there is concern that consumers are unenthusiastic about this year’s offerings. “People are kind of spent out,” said Rosalind Wells, chief economist of the National Retail Merchants Assn. “We’ve had a seven-year expansion, and a lot of things already have been bought.”
On the other hand, Sandra Shaber, an economic analyst with The Futures Group consulting firm, added that the “jaded, bored, bargain-hunting consumer can still be captured by someone with a new gimmick.”
Generally speaking, apparel is expected to do well compared to last year, when many women were cool to the available fashions. Television sets, videocassette recorders and other home electronics equipment are projected to sell fairly briskly as well, but analysts predict that big-ticket items such as furniture and appliances will move slowly.
As usual, a handful of novelty gifts are expected to emerge as hits, but store managers say it is too soon to pick the big winner. A leading candidate is “Rock’n Flowers,” battery-powered daisies selling for $30 that “dance” to the sound of music or a loud voice.
Still, retailers are mainly preoccupied with the bottom line, amid a host of factors that are consorting to drive down prices and profits.
Nationally, much of the concern stems from the bleak financial condition of both Campeau Corp., parent of the Federated Department Stores and Allied Stores chains, and of L. J. Hooker Corp., which owns B. Altman and Bonwit Teller. The companies have been brought to their knees by hefty debts from acquisitions. In another move that recently shook the retailing industry, the Saks Fifth Avenue and Marshall Field’s chains were put up for sale, but analysts say those firms are in good shape.
Experts speculate that the Campeau and Hooker stores could grow desperate for cash and resort to sharp markdowns to bring in customers, triggering a cutthroat battle throughout the marketplace.
Neither Campeau nor Hooker has department stores or specialty shops in Southern California. Consequently, “people in New York may be getting better buys this Christmas than in California,” said George Rosenbaum, president of the Chicago market research firm Leo J. Shapiro & Associates.
Even so, the fallout from the retailing industry’s acquisition spree during the past few years may be felt in the Southland. Bullock’s, now owned by debt-heavy R. H. Macy & Co., recently surprised competitors with newspaper ads trumpeting that it will not be undersold on women’s coats.
Some retail experts suggested that the move could be part of a broad price-cutting effort to win back business from Nordstrom. That was denied, however, by a Bullock’s spokeswoman. Bullock’s will have “some sales, which is always the case this time of year, but we will not be involved in price slashing,” said spokeswoman Kathleen Waugh.
The Campeau and Hooker problems also may indirectly influence prices locally and nationally. Industry analysts have suggested that a number of apparel makers--worried about the ability of Campeau and Hooker stores to pay their bills after the Christmas rush ends--will try to ship more of their merchandise to off-price retailers.
Retailers, meanwhile, are struggling to change widespread consumer shopping patterns that have narrowed profit margins. Their main problem is that more and more shoppers are putting off their buying until merchandise is discounted sharply.
“There were days when 15% to 20% reductions would bring shoppers in the store. That is no longer the case,” said Gordon Cooke, executive vice president of New York-based Bloomingdale’s. He said it now takes reductions of 30% to 50% to draw a rush of shoppers.
Several major companies, most notably Sears, Roebuck & Co., have responded by switching to “everyday low prices”--that is, offering stable and relatively low, if not rock-bottom, prices. So far, though, there is little evidence that the strategy is working. The middle-of-the-road stores are being hurt by competition on one side from the high-end chains and on the other side by discounters and off-price shops.
As part of the waiting-for-sales trend, for the past several years Christmas shoppers have increasingly put off much of their buying until the last days of the shopping season.
Retailers commonly fear that last-minute shoppers will buy less expensive goods and fewer accessories or, worst of all, will take their business to other stores. The typical solution for reversing the pattern: offering more service and--what else?--earlier sales.
With Christmas falling on a Monday this year, giving consumers a full weekend for last-minute buying, retailers are particularly nervous. Working in retailers’ favor, though, is the apparently increasing awareness among consumers that if they wait too long, the merchandise that they want won’t be around because of tighter inventories.
For example, Violet Leisher, a department head at Midway Medical Center in West Los Angeles, says she started her holiday shopping a month ago. “Every year (before this one) I have shopped later and later, and you get less and less of a selection,” she explained. “I’ve already shopped and taken advantage of sales.”
She also started shopping early to avoid the year-end crowds at the malls and the traffic tie-ups that result when winter rains begin.
Other consumers who are pressed for time have taken more of their business to mail-order houses. Analysts expect mail-order firms to make further inroads this Christmas, but at a slower pace, partly because of the lower prices offered by some conventional retailers. Mail-order firms themselves, including Wisconsin-based Lands’ End, have been hurt recently as dozens of newcomers have entered the field.
The backdrop for the intensified price competition is a national economy that is giving mixed signals after a long recovery. The federal government reported last week, for instance, that lower auto sales brought overall retail sales down 1% in October, the biggest one-month drop since January, 1987. On top of that, job creation in the private sector and personal income growth have been slower in recent months.
Analysts say that consumer confidence remains high but it could falter if more discouraging news breaks. “If on Nov. 20 we have a 300-point drop in the stock market, people could change plans very abruptly,” Rosenbaum said.
All told, analysts expect consumers’ Christmas spending to rise a modest 5% to 7% this year, down from roughly 9% in 1988. After discounting the impact of inflation, the projected growth is in the 2% to 3 1/2% range. Economists are not giving earnings forecasts, but many say they expect profits to rise even less than sales because of the likelihood of price cutting.
In some quarters, though, is a measure of optimism. Philip M. Hawley, chairman and chief executive of Los Angeles-based Carter Hawley Hale Stores Inc., said the Southland’s retail market will benefit from having settled down after being roiled in recent years by corporate mergers.
“It’s probably as stable a market as we’ve seen in Southern California in a number of years,” Hawley said.
And even if retailing experts are more worried than usual this year, some note that concerns always run high around now. “This time last year everybody was saying it’ll be a terrible year, but people now look back and say it wasn’t that bad,” said David W. Stewart, an associate professor of marketing at USC.
Still, in a market as tough as this year’s, paying some extra attention to the business couldn’t hurt retailers. “We’re in a situation where a weekend can make or break your business,” said Bateman Eichler’s Stack. “Retailers have to be able to turn on a dime.”
ANNUAL RETAIL SALES Figures are all in 1982 dollars to compensate for the effects of inflation. Retail goods that cost $100 in 1982 would cost $117.90 today.
Year-to-year % increase after inflation
1985: 4.4%
1986: 5.3%
1987: 1.3%
1988: 3.6%
1989 *: 2.0%
* Projection
Source: The Futures Group
