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 / ASSOCIATED PRESS

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 Stores began 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-Sonoma and 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.

CONTINUED : Will the High-End Hold?

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