Bidness Bytes

Steep Discounts and Aggressive Promotions Fail to Lure Customers

Retailers are doing everything within their capacity to boost holiday sales; however, consumer spending continues to fall short of expectations


The holiday season is the busiest time of the year for retailers; according to estimates presented by the National Retail Federation (NRF). The two-month period accounts for 20% to 40% of annual sales. This year, however, retailers are under immense pressure to boost revenues. It seems there is a sleigh full of discounts and promotional offers waiting for consumers, post-holiday season, as retailers try to clear inventory. While customers may benefit from the steep discounts, there is still a high risk that retailers will get hurt on margins.

Retailers, in the final days before Christmas, are witnessing lackluster sales during what is traditionally the busiest shopping quarter of the year. The holiday season is in its home stretch, and retailers are offering last minute discounts and throwing in various promotions to lure bargain hunters. However, this time around, nothing seems tempting enough for US consumers who have either tightened their spending or are waiting for even better deals to come their way.

Despite steeper discounts being offered, US retail sales dropped by mid-single digits at brick-and-mortar stores on Friday and Saturday, before Christmas, two of the busiest shopping days of the year. RetailNext, a leading in-store analytics company, estimated that the number of visits to brick-and-mortar stores dropped 7% when compared to last year. In contrast, online sales were reported to be strong during the two day-period.

ComScore estimated online sales, which constitute 11% of holiday sales, to have grown 9% to $37.8 billion from November 1 through December 15.

Following the news of disappointing sales during the weekend before Christmas, stores are increasingly focusing on damage control. Retailers have been forced to give discounts up to 75% on their products, and because of the anticipation that this holiday season may very well be a slow one, stores had also extended hours for ‘Super Saturday’, which was expected to be the busiest shopping day of the year, as estimated by ShopperTrak. According to BMO Capital Markets, which tracks 20 clothing stores, discounts were 13% higher than last year, making these the biggest holiday discounts offered since the peak of the recession in 2008.

Market Track, which tracked eight major retailers including Wal-Mart (WMT), J.C. Penny (JCP) and Best Buy (BBY) among others, revealed that these retailers increased the number of promotional circulars by nearly 16% from December 3 through December 18, to lure customers into last-minute shopping. The research firm also said that retailers aggressively pushed online deals by sending more promo emails this year, up 54.5% from the same period last year.

Despite the aggressive promotional strategy, many stores have been unable to boost sales to desired levels. This is because consumers have shifted towards more practical purchases this year. Patty Edwards, Managing Director of investments at U.S. Bank, spoke about the shift in consumer spending to staples. "There's more of a focus on necessities. We're seeing more need-driven shopping than want-driven shopping,” says Edwards. Ryan McConnell, who heads the Futures Company's US Yankelovich Monitor survey of consumer attitudes and values, also said: "The era of 'living large' is now officially in the rear-view mirror."

Industry analysts said that consumer spending was inclined towards big-ticket items like home, appliances and automobiles rather than towards discretionary items thereby creating more pressure for retailers.

Analysts expect retailers to see a big dent in profitability this year, and it seems that some retailers had already anticipated this. According to Retail Metrics LLC, 51 retailers projected profits to be lower than analysts’ estimates for the quarter covering the holiday season.

Last week, Stifel Corporation, a financial services company, also sent out a bearish report, saying that the profitability of apparel retailers, including Aeropostale Inc. (ARO), Francesca’s Holdings Corp. (FRAN), L Brands Inc. (LB), and Urban Outfitters Inc. (URBN) may be compromised as a result of aggressive promotions during the holiday season. Retailers are taking a hit on their margins because of the steep discounts and free shipment offers.

John Goodwin, Chief Financial Officer of Lego, has termed this year the ‘greatest stress test’ based on the fact that the company faced difficultly planning inventories since consumers have held back spending to an ‘unexplainable’ extent. One possible reason for the drop in spending is that many consumers expect retailers to offer even bigger discounts going forward. Charles O’Shea, senior analyst at Moody’s Investor Services, says: "Retailers recognize that consumers will wait as long as they need to," as he noted bigger discounts being offered during the Christmas weekend, compared to preceding years. In a similar vein, Michael Sarfo, a bargain-hunter said: “It makes me stressed, if I just spent a lot of money there and the next day they have a big sale. It makes me want to be wiser about when I buy so I get the best deals,” as he explained his theory of shopping until the very last minute, to Bloomberg.

ShopperTrak has estimated a 2% rise in holiday season sales for the period from November 1 to December 15, projecting 2.4% revenue growth for this holiday season, to $265 billion. The 2.4% gain is the weakest since 2009.

On the other hand, NRF has reiterated its estimates for the holiday season, saying sales will grow 3.9% to $602.1 billion, compared to 3.5% growth in 2012.

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