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Stores Cut Holiday Prices, But Will Consumers Bite?

The turkey’s not even in the oven, but the annual game of chicken has begun.

Retailers already planned to offer steep discounts this holiday shopping season. But with sluggish sales so far, there could be even bigger bargains for those who wait. Still, inventories are tight this year, so some of the hotter items will go fast.

That's because retailers knew as early as this summer that they faced a tough holiday season. Consumers were already grappling with rising energy prices, the beginnings of a credit crunch, and an uncertain economic outlook.

Stephan Savoia

So without blockbuster, must-have items, many retailers knew they were going to have to rely on promotions and merchandising to get customers excited.

Wal-Mart Storesbegan its holiday markdowns in October in a bid to re-establish itself as the place to go for low prices. Rivals countered in early November with door-buster deals the likes of which are typically reserved for Black Friday, the day after Thanksgiving, which traditionally marks the start of the holiday shopping season.

Even the days immediately preceding Black Friday are being promoted with "beat the rush" deals of their own. Black Friday shoppers may be greeted this week with many of the same sales that have been going on all month.

Store Traffic Seen Lower

However, even with these early steps, consumers have been slow to shop. Retailers have blamed milder-than-usual weather, which has made it hard to focus on winter apparel and Christmas gifts. But it's also true that the economic picture has grown even cloudier.

There are growing doubts about the job market, energy prices have surged to record levels, and the housing market shows no signs of bottoming. Against this backdrop, research firm ShopperTrak is predicting a 2.5 percent drop in foot traffic at the shopping mall this holiday season.

The big question on everyone’s mind is when, and by how much, retailers will veer from their0 plans and begin to offer deeper discounts. The hope of many consumers is that there will be plenty of bargains for those feeling confident enough to shop.

“In this economy, you are fighting for trips to the store,” said Bill Marquard, a former consultant for Wal-Mart, who recently wrote a book called “Wal-Smart: What it Really Takes to Profit in a Wal-Mart World.” “You need to create a sense of urgency, that consumers must go or the deal will be gone,” he said.

Some 73 percent of chief marketing officers at leading U.S. retailers believe discounting and promotions will be plentiful this holiday season compared with 2006 due to the current credit crunch, according to a survey from accounting and consulting firm BDO Seidman.

Where the Discounts Are

Although many of the current discounts appear to have been planned long ago by retailers, there are some categories where the price-cutting is beginning to go deeper than planned. This includes mid-tier department stores such as Kohls, J.C. Penney, and Macy’s, which are expected to get squeezed in the middle as penny-pinching consumers trade down to discount stores.

“Coming into September, we had every anticipation that we would get off to a strong start for the fall season, said Myron E. Ullman, chairman and chief executive at Penney’s on a recent conference call. “Obviously, that was not the case.”

Ullman is now expecting the holiday season to be marked by lots of price-cutting. This outlook has forced Penney’s to cut its fourth-quarter earnings forecast to a range of $1.65 to $1.80 a share, from a prior estimate of $2.41 a share.

Times also could be rough for home furnishing and home improvement retailers such as Williams-Sonomaand Lowe's, which should begin to feel the soft sales that typically follow a downturn in the housing market.

Apparel is another area where consumers may find steep discounts. According to Frank Badillo, senior economist at TNS Retail Forward, the apparel sector is on pace to see a 2% decline in prices from last year.

This group, which includes stores such as Ann Taylor, Chico's FAS, were particularly hard hit by the mild weather during September and October. These retailers are eager to unload fall merchandise, which is hogging up sales floor space heading into the holidays.

The high level of overstocks could benefit companies such as TJX, which may be able to offer its customers better merchandise.

For toy retailers, performance is spotty.Target and etoys.com are seeing some weakness in their toy business, but Amazon.com is having a good year so far. To bolster its business etoys has added a free shipping offer.

Will the High-End Hold?

Although there are many analysts who expect the high-end retailers to hold up this holiday season, there are those who expect to see some weakening among this group.

According to Badillo, a recent profit-warning from Coach and weak same-store sales growth at Nordstrom in October as signs of slowing among upper-income households.

The affluent have appeared immune to the impact of high enegy prices, but they may be pinched by the credit crunch, according to Badillo.

“They also are going to have trouble getting credit,” he said. “Refinancing is going to cost them more and take away from their spending. There are already reports about the difficulty in getting a jumo loan. Credit’s just not available for all income segments.”

What's At Stake?

“I think there is fierce competition for consumer dollars,” said Scott Krugman, a vice president at industry trade group, the National Retail Federation.

Retailers receive between 25 percent to 40 precent of their annual sales during the holiday season, according to the NRF. For some categories such as jewelry, the stakes are even higher. Last year, jewelry stores ran up 31.2% of their annual sales during the holidays.

“It really has to be innovative merchandising, compelling promotional strategies to drive traffic and conversion,” said Jeff Klinefelter, an analyst at Piper Jaffray. “Ultimately, it comes down to having something unique and differentiated for the consumer. It’s really not about buying more of the same thing they bought last year.”

David Kohl

Many of the promotional strategies are aimed at driving traffic in the stores. For example, Wal-Mart and other retailers are allowing customers to receive free shipping on online purchases if they pick up the goods at their local stores.

This strategy may be beneficial for both the consumer and the retailer. The consumer saves on shipping, but the retailer has a chance to win incremental sales once shoppers enter the store.

Some retailers such as Best Buy are trying to go beyond simply price-cutting to find ways to build loyalty or provide better customer service.

Best Buy had special shopping events for its best customers. It also put extra effort into staff training this year. A third of Best Buy’s staff is being cross-trained so they can demonstrate how the various gadgets work with each other. This might mean showing a customer how to upload pictures from a digital camera to a computer. Best Buy also staged Black Friday dress rehearsals for it workers.

One reason for this is consumers are better able to arm themselves with information on price. If retailers are equally competitive, consumer loyalty or a reputation for better service will give them an edge.

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Mitchell Kaiser, a retail analyst with Piper Jaffray, expects Best Buy's strategies this holiday season to make it one of the few retailers who will be celebrating this year.

“Historically, product cycles trump economic cycles,” he said. Kaiser expects to see strong sales of HDTV and flat-panel televisions, computers, and video games.

Rival Circuit City also could benefit from the strong desire for electronics items. In order to stay at the top of consumers’ minds it has been giving away a Mazada CX-9 each day in November. The retailer also is offering customer 0% financing rather than cut prices further.

Wal-Mart’s Sam’s Club also is using contests, with give-aways to Nascar events, a NASA launch and other “once in a lifetime” events.

With all the interest in gift cards, retailers also are looking for ways to attract customers by making the presentation of the gift card more than just an afterthought.

Macy’s is allowing customers to personalize gift cards with photographs. Others are finding different ways to package them. For example, Land’s End is shipping gift cards of $25 or more in a miniature version of their signature canvas tote bag.

Retailers also are planning to maximize that second wave of holiday sales that occurs after the Christmas holiday. They will be restocking the shelves with fresh merchandise for this period. This is especially true of apparel retailers, who are expected to push hard to win customers during that period.

Christina Cheddar Berk is a News Editor at CNBC.com. She can be reached at christina.cheddar-berk@cnbc.com.

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