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Retailers' Big Test: Picking the Right Price

As summer comes to an end and students go back to school, the retail industry is preparing for its first big test of the fall semester—picking the right price.

Back To School
Back To School

“I think what the retailers are going to have to do is price, price, price,” says Howard Davidowitz, chairman of Davidowitz and Associates, a retail consulting firm.

This means retailers will have to continue placing pressure on their margins in order to lower their price points to attract those precious back-to-school dollars.

“In the apparel arena it will be again ‘how low can you go?’” Davidowitz says, adding that, “The trick is to go low out of the box, not wait.”

The challenge, he explains, is retailers are going to have to price just right while still retaining room for a profit margin as the economic downturn has created an appetite from consumers for lower-priced, but fashion-forward apparel.

While retailers will be faced with the obstacle of picking the right price and the right style, Richard Hastings, a consumer strategist at Global Hunter Securities, says the retail industry is prepared to counter these challenges.

“Yes, the dollars are not what they were five years ago, but the industry is much sharper and more effective and scientific,” says Hastings.

A survey released by the National Retail Federationpredicts families will spend around $225 on back-to-school apparel such as jeans, shirts and other types of clothing, and around $102 on new shoes. That's part of an overall budget that's expected to show an increasecompared with 2009.

But some are skeptical.

“A lot of people are saying it’s going to be up,” says Davidowitz. “I don’t believe it, because I think the economy is going the other way.”

“There may be a slight increase over 2009, but I don’t see anything like robust growth,” says George Whalin, president of Retail Management Consultants.

For retailers, back-to-schoolis the second-biggest business season behind the Christmas holiday.

“It’s usually a leading indicator for how the holiday will perform, but it’s not necessarily a correlation,” says Paula Torch a research associate with Needham and Company, an equity research firm.

Attempting to attract bargain buyers, retailers will once again drum up promotions this season.

“Since the recession began back in 2008 retailers have learned that innovative promotions along with aggressive, value-oriented pricing will bring customers into their stores,” says Whalin.

"“Prices are important because budgets are squeezed and everybody’s feeling it." -, Howard DavidowitzDavidowitz and Associates

While retailers have been aggressive in their promotions this year, the problem, he explains, is retail sales have been "anemic" and retailers have been reluctant to attract shoppers except with their low prices.

Teen clothing retailer American Eagle Outfitters went to great lengths to attract back-to-school shoppers into its stores by offering a free smartphone and $25 American Eagle "Money Card" if they signed up for a new two-year phone contract. To get the offer, customers only had to try on a pair of jeans.

According to its Web site, rival Aeropostale is offering shirts and jeans for around $20 or less for back-to-school.

Online, many retailers are offering free shipping promotions with no minimum purchase.

The biggest beneficiaries of teenagers shopping for school are chains such as Gap , Abercrombie & Fitch , American Eagle and Hot Topic , according to Davidowitz.

No doubt, retailers are feeling the effect of higher-than-usual teen unemployment, which is forcing them to place more pressure on their prices.

“Teen unemployment is very important—that’s life or death for retailers,” says Davidowitz.

But the NRF survey shows the average teenager typically spends around $31 of his or her own money toward back-to-school shopping.

Ellen Davis, vice president of the NRF, says that’s a small amount overall for back-to-school retail because teens rely more on their parents.

“As a result, teens are influencing their parents’ purchases more than ever,” says Davis.

With parents weighing in, it's important to get the word out to the entire family. Needham's Torch says she expects Aeropostale to be a leader this season.

“One winner will be Aeropostale, because they have the mindshare of the teen and the mindshare of the parent,” she says, noting that, “You will see more spending by the parent subsidizing the teen pocket.”

Time-pressed parents also will be looking to retailers offering a wide selection and convenience as well as price. This will help discounters such as Walmart and Target , according to Davis.

“Discounters have done a nice job of positioning themselves with good value and good selection,” Davis says. “Where you can buy a laptop, jeans and scissors at one place, you will see an increase in shopping.”

“Discounters are the lowest priced and they will win and have the most market share,” says Davidowitz.

"Even with very low prices some retailers were only able to improve sales slightly from last year. Others saw no increase or a decrease," Whalin says. "We are not through the recession yet and shoppers are still very cautious in their spending."

“Prices are important because budgets are squeezed and everybody’s feeling it,” says Davidowitz.

Questions? Comments? Email us at consumernation@cnbc.com

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