No Sale: Is Retail Really Giving Up Its Discount Events?
The patient-care technician picked up two DKNY tops: a tan hoodie for $7.25, marked down from $49, and a cotton cowl neck sweater for $9.99, slashed from $39.98. She also snatched up an American Rag print top for $9.75, which was originally priced $39, a Michael Kors grey top for $17.37, down from $ 69.50, and a Karen Scott sweater originally priced at $49 for a mere $6.12.
The tops already seemed like a bargain when Pietschnig, a native New Yorker who now lives in Lodi, N.J., plucked them from the clearance racks. Then, when she scanned the tags at Macy's (M) price-check machine, "I wanted to go 'Eeee!'" she says, making a squealing sound. "The feeling was, 'What a bargain!'"
A Bad Bargain for Retailers
Pietschnig is just the sort of bargain-hunting shopper that worries J. Crew CEO Millard "Mickey" Drexler. Across the retail landscape, the constant sales and discounting are out of control -- and it's killing stores' profit margins, he said.
Drexler knows that retailers have desensitized shoppers to the flurry of sales that precede their final clearance bonanzas, training them to wait to buy at the lowest possible price.
Now, faced with shopper ennui and thin profit margins, some retailers are putting the kibosh on the discounting frenzy.
Starting Feb. 1, J.C. Penney (JCP) simplified pricing with an everyday-low-price hook: its "fair and square" pricing strategy. The only sales now are "monthly value" discounts on select items and "best price" sales held twice a month.
Taking a cue from Penney's, other retailers, particularly department stores and fashion chains, will begin offering more products at lower prices early in the selling cycle and eliminate many of their sales events, experts say. They'll break from the coy practice of selling new merchandise at often-inflated "full" prices, then slashing prices bit by bit in a series of subsequent markdowns and promotional ploys.
Penney's 'No More Sales' Move Sparks an Industry Shift
J.C. Penney CEO Ron Johnson "dropped a bomb" on the retail industry when he permanently cut store prices by 40% and ditched most of its 590 annual promotional, sales and coupon events, says Alex Helander, vice president of sales for SunriseBrands, which supplies apparel to retailers such as Macy's, Express and Chico's.
Alison Jatlow Levy, retail strategist at consultancy Kurt Salmon, agrees. The customer is thinking, "I don't understand why anything is full price," she tells DailyFinance. "The permanent promotions create a distrust."
Still, shoppers have come to expect them. According to an AP report citing A.T. Kearney research, the average retailer sells between 40% an 45% of its inventory at a promotional price, up from 15% to 20% a decade ago.
"It used to be that the majority of customers would buy at full price or at the first markdown, and a minor percent would wait for the deep discount at 30% to 50% off," Jatlow Levy says. "But now the new value-minded customer that has been greatly impacted by the recession no longer thinks of purchasing the same way. The majority of customers have shifted to wait for deep discounts -- across income levels."
Inflated Original Prices
Johnson spoke frankly about retail's dirty little open secret during an analyst meeting in New York last month: A number of those big sales are not really sales at all, as many stores have been selling at increasingly inflated prices in recent years, he said.
The irony is that the strategy has failed Penney's, he said. Consumers ignored most of its 590 sales, opting instead to shop the chain on average a mere four times a year.
Because sales events are costly and time-intensive to run, "Most [retailers] can't make money on all these promotions," Helander says.
J.C. Penney is betting that it has a better shot of wooing consumers through its doors more frequently if they know to expect affordable prices every day.
Convincing them of that won't be easy: Retailers determined to replace sales ploys with everyday lower prices are faced with the challenge of convincing shoppers that they're still getting a good deal.
Of course, this strategy isn't new. Walmart (WMT), for one, became the world's largest retailer in part thanks to founder Sam Walton's "always low prices" model. But as endless promotions have run rampant, the move away from them is a radical step.
Signs of the pricing shift have already started to emerge this spring. Stein Mart, a department store chain concentrated in Texas and the Southeast, announced this month that it would slash 50% of its coupon offers and return to its everyday low price roots because the chain's discounting habit had gotten out of control, its chief financial officer said.
Ann Taylor's spring and summer product lineup also reflects a subtle pricing shift, says Catherine Fisher, vice president of corporate communications for Ann Inc., parent company of the Ann Taylor and Loft chains. The retailer considered: "How do you get her not to wait and to want [the merchandise] now?" By offering "accessible" price points upfront, such as $68 for the Chelsea line of brightly-colored spring cropped pants, she says.
Retailers Grapple with 'Showrooming'
Efforts to wean shoppers off their sales addictions will take place against the backdrop of another painful trend for retailers:
the rise of "showrooming."
More and more shoppers are using brick-and-mortar stores as showrooms to check out potential purchases, then buying later from online merchants at lower prices. That practice is forcing stores to be sharper on price than ever.
Last year, 15% to 20% of shoppers "showroomed" for home goods like vacuum cleaners, kitchen mixers and sewing machines, according to The NPD Group, a market research firm.
Shoppers have become so skilled at mining the Web for deals that when it comes to buying consumer electronics, Best Buy (BBY) has become "Amazon's showroom," Drexler said.
Although showrooming is more common for products like consumer electronics and home goods, fashion is not immune, Jatlow Levy says.
More Unique Products
But stores that are the single point of distribution for their merchandise -- ones that exclusively sell their own brands, such as Ann Taylor and J. Crew -- are less vulnerable, as shoppers can't price check for a cheaper product at another store, experts say.
So if retailers are going to convince shoppers to buy merchandise at the starting price, even if it's lower, it will become crucial to give them a compelling reason. Hence, "unique product will be that much more important," Jatlow Levy says.
Expect stores to try to beef up the perceived value of their products with added bells and whistles and more aggressive marketing, which doesn't necessarily cost a supplier or retailer a lot more, Helander says.
"People will [also] pay more for a product that tells a story," Jatlow Levy says -- like shoes made by an Italian cobbler, a dress that benefits a charity, or a blouse that features "special beads found at the bottom of the sea."
The Thrill of the Bargain
Will recession-minded shoppers living in an age that has given us TV shows like Extreme Couponing be willing to part with all those sales and warm up to everyday lower prices? "That's the big question," Helander says.
Pietschnig, for one, who gets a thrill out of the ritual of the retail sale, doesn't like the idea.
What she does like is "getting the feeling that there's this special bargain that I found -- the joy that you get from peeling off the price stickers when you get home, and looking with delight when you get to the original price, and seeing that it's been marked down, marked down, marked down," Pietschnig says.
She also likes the "mystery" of the savings the price scanner reveals. "Sometimes the clearance rack will say 50% off, but you don't know the actual final price." Then when the scanner tallies up all the sales, "you see there's even more that's being taken off," Pietschnig says. "That's all part of the joy: In addition to a sale, you're getting something extra."