Big Discounts May Put Some Stores in Red : Retailing: All in all, the trend is good news for shoppers. But some of the markdowns may be phony.

Looking for a cheap thrill? Try taking a stroll through your nearby shopping center.

Department stores and other fashion retailers--along with book shops, fast-food restaurants and even weight-loss clinics--all are trumpeting reduced prices this Christmas season. In some cases, prices are so low that retailers are nearly certain to lose money.

“It’s clearly a consumer’s heaven, but I’m worried about what will happen when the dust settles,” said Dan Paul, a Riverside-based retailing consultant. “Where will we be able to shop?”

Not that all of the advertised discounts are true bargains. When you investigate the current markdown mania, you find that it probably is driven as much by marketing chicanery as by the grinding everyday realities of retailing and the industry’s ugly long-term competitive situation.

First, some background on the chicanery. Consumer protection authorities in California and other states have charged--as lots of consumers have long suspected--that retailers frequently offer phony markdowns. In other words, they say, some merchants are basing their advertised 30%, 40% and even 60% discounts on artificially inflated original prices.

In a major case, May Co. California paid $295,000 two years ago to settle false-advertising complaints brought by the district attorneys of Los Angeles and Orange counties. The district attorneys alleged that May, among other things, publicized discounts of up to 60%, when in fact the real discount was just 10%.

Last year, to settle a similar false-advertising case brought by the Los Angeles district attorney, Nordstrom paid a civil penalty of $200,000. Under the settlements, neither May nor Nordstrom admitted any wrongdoing.

“The fact there is a sale being advertised doesn’t in fact mean that consumers are saving any money,” said Herschel T. Elkins, the head of the California Attorney General’s consumer law section.

Elkins said a common tactic by retailers is to quietly offer an item carrying an inflated markup for 10 days or so to establish an “original” or “regular” price. Then, the price is slashed to a more realistic level and the advertising blitz touting the supposed markdown begins.

In other cases, retailers advertise substantial--but possibly misleading--markdowns on private-label merchandise. Such goods are made specifically for a particular store, and they usually cost the retailer far less than competing brand-name goods.

Although the full retail price for apparel traditionally has been about double what the merchant pays for it, the full retail price for private-label goods may be triple the merchant’s cost.

So, a department store can mark down a private-label sweater by, say, 40% and still net a profit.

Many markdowns, however, are truly bargains for consumers and profit-pinchers for retailers. Accountants say that when stores offer genuine discounts averaging 20% to 30% or more off normal selling prices, they lose money.

Under good circumstances, a successful retailer might average markdowns of about 10% or so. That would mean that, on average, the company is selling merchandise for roughly 80% more than it pays for the goods.

But by the time all other expenses are deducted--including such things as payroll expenses, rent, taxes and utilities--retailers probably would turn a net profit equal to only 3% to 5% of the company’s total sales. Consequently, if retailers offer big, genuine markdowns on most of their merchandise, profits disappear.

Still, from the retailer’s point of view, markdowns may be the best way to get rid of excess merchandise. Being stuck with slow-selling merchandise is a serious financial drain.

In the apparel business, it’s usually impossible to persuade a manufacturer to take back merchandise. The only alternative to unloading unwanted shirts, pants and sweaters through a clearance sale is to sell the goods to liquidators, who usually offer only about 20% of what the retailer spent.

Part of the reason so much merchandise needs to be cleared out through special sales is that many retailers do a poor job of forecasting consumer demand, said Paul, president of Retail Merchandising Service Automation.

During the past year or two, the situation has worsened for retailers--and markdowns have become more plentiful for consumers. Last year, Campeau Corp.’s department store empire was starved for cash to cover its junk bond interest payments and other expenses, so it slashed prices to attract business. The result: Campeau helped trigger a price war, and retailers marked down merchandise like never before.

This year, by some accounts, retailers are advertising deep markdowns even earlier in the holiday shopping season to try to spur business in the face of the weakening U.S. economy.

In the economically depressed New York area, “the magic number now is 50% off,” said Alan Millstein, publisher of the newsletter Fashion Network Report. Last year around this time, Millstein said, “it was 20% or 40% off.”

Even upscale shops that once never discounted their designer merchandise until after the holiday season have gotten into the act.

Long-term shifts in American retailing also have intensified competition and put more pressure on merchants to discount prices. Various economic indicators--including the rising savings rate and slowing consumer credit increases--show that the American consumer has been growing more reluctant to spend every year since 1987, said Carl Steidtmann, chief economist with the retail consulting firm Management Horizons.

Meanwhile, during the 1980s, developers went on a store construction binge, leaving the nation with what analysts say are too many stores to maintain a healthy retailing industry.

Today, there is about 18 square feet of retailing space for every American, up from 13 square feet 10 years ago. During that period, annual sales per square foot of retailing space fell 11% to $160, Steidtmann said.

He said an additional problem for retailers is that they have grown too similar, offering the same kinds of merchandise, service and displays. That, he said, makes low prices a more important competitive weapon.

At the same time, consumers have gotten more sophisticated about sales and have learned to wait until prices come down.

“We’ve created a generation of buyers who won’t buy anything at full price,” said Richard H. Valade, a retailing partner in the Detroit office of the accounting firm Arthur Andersen & Co.

All told, markdown mania may be a bonanza in some cases for consumers, but it is taking a toll on U.S. retailers. A survey by the accounting firm Deloitte & Touche last month found that 78% of the slightly more than 100 Southern California firms that responded expect to make less money this holiday season than they did last year, due to big markdowns and tough competitive conditions.

“There’s no question,” Steidtmann said, “that a lot of retailers will lose money in the fourth quarter, and there will be a rash of bankruptcies early next year.”

BUYER BEWARE Do your own comparison shopping. Don’t assume that because an item is “on sale” it is a good bargain.

Be particularly careful when buying jewelry, apparel and furniture. With these items, phony markdowns are common.

Be wary of advertisements that cite big markdowns from “original” prices. Original prices often are set unrealistically high to provide a basis for offering “big discounts” later .

If you believe you have been victimized by false advertising, complain to the store manager. If that doesn’t work, contact your county district attorney’s office or the state attorney general.

Source: Herschel T. Elkins, senior assistant attorney general.