But consumers are also stubbornly clinging to one recession-era shopping behavior that has retailers scrambling: discount prices.
“The retail industry has created this monster that they wish they hadn’t,” said Jennifer Black, president of retail research firm Jennifer Black & Associates.
Retailers say they are girding for a fierce competition over who can offer the best prices this holiday season, and many have already kicked off their deals. Wal-Mart lowered prices on 20,000 items Nov. 1 and expects the majority of those cuts to remain in place through the holiday season. Amazon.com, Staples and several other retailers have already made their Thanksgiving weekend deals available to shoppers.
Hunting for rock-bottom prices has long been a Black Friday tradition, but experts say the emphasis on promotional pricing rose to new heights during the recession. Retailers aggressively slashed prices throughout the holiday season when they found merchandise wasn’t moving. That practice continued even after the holidays as the recession dragged on, and customers became trained to look for deep discounts such as “40 percent off your entire purchase.”
Experts say the lingering promotion-mania may be related to one of the key weaknesses of this economic recovery: Wages have largely remained stagnant, meaning plenty of households likely aren’t feeling more flush than they were several years ago.
Non-economic factors, too, are fueling the promotion addiction. The Web has created unprecedented transparency around price, and smartphones have made it easier for shoppers to make sure they’re not missing out on a better deal. In a survey released by Deloitte in October, 68 percent of shoppers said they were likely or very likely to research a purchase online before ultimately making it at a store. Twenty-three percent of shoppers said they would use their phones to do in-store price comparisons.
Retailers say they are struggling to cater to customers’ desire for deep discounts without destroying their already-thin profit margins.
“It becomes a limbo contest: How low can you go? At some point you’ve got to fold the hand,” said Charlie O’Shea, a retail analyst at Moody’s Investor Service.
Gap Chief Executive Glenn Murphy told investors in August that there’s “a bit of a promotional merry-go-round in the marketplace,” an environment the company said was a key reason its merchandise margins slipped in the second quarter. While Gap’s Old Navy brand has been a relative bright spot for the company, its flagship Gap stores have been struggling to recover from several months of weak sales.
Experts say retailers are gradually adjusting to this new normal. Williams-Sonoma, for example, told investors in August that in recent quarters it has reduced its spending on advertising to free up money for more discounts. Best Buy, meanwhile, says it has implemented new pricing and tracking capabilities that have enabled it to see which of its promotional offers are getting the most traction with customers.
In this competitive climate, analysts note that there is an important distinction between planned and unplanned promotions.
When retailers plan to offer a discount, they likely bake that into their original pricing. In other words, if they plan to offer a “40 percent off your purchase” deal for much of the holiday season, they’ll likely set the price of a sweater at $100 knowing they’d typically be selling for $60.
The trouble comes when retailers are forced to unexpectedly offer a promotion because sales are slow, which can put a strain on their profit margins.
As the recession gets further in the rear-view mirror, Jesse Tron, spokesman for the International Council of Shopping Centers, said his organization has noticed a new twist on deal-hunting. In some cases, shoppers are once again shelling out for pricier items, such as upscale denim or luxury handbags, suggesting that they have a comfortable shopping budget. But even as they do so, they’re still only opening their wallets when the items are priced promotionally.
“No one wants to feel like a chump,” said Alison Paul, leader of Deloitte’s U.S. retail practice.