Wal-Mart Stores fired its first volley in the holiday pricing wars this week, slashing prices on toys and calling it an "aggressive move to lead the market on holiday savings."
That could be good news for consumers looking for deals but bad news for other retailers as Wal-Mart , the world's biggest retailer, tries to drive shoppers into its stores with ever lower prices this holiday.
"From the department stores on down, it's going to become a very price-conscious Christmas," said Marshal Cohen, chief industry analyst at The NPD Group.
While deals, discounts and Wal-Mart price cuts have become as entwined with the holiday season as Christmas trees and candy canes, the questions ahead of each season are always how promotional it will become and how deeply the season's deals will hurt retailers' margins.
The outlook is even more uncertain this year as retailers wait to see whether consumer spending will hold up for the holidays or falter in the face of a deteriorating housing market, credit crunch, and higher food and fuel costs.
Already, sales at U.S. chain stores have been rising at a slower pace than a year ago, and the National Retail Federation said it expects holiday sales to rise 4 percent -- the slowest holiday sales growth since 2002.
After watching U.S. shoppers delay back-to-school spending, Wal-Mart wasted no time waiting to see whether its consumers needed prompting to start their holiday shopping, implementing its first holiday toy price cuts on Sept 30.
"Like last year, we expect Wal-Mart to be as aggressive as ever in rolling back prices entering the holiday season," wrote Deutsche Bank analyst Bill Dreher in a note, saying Wal-Mart shoppers appear to be running low on money between paychecks.
"We anticipate that Wal-Mart will focus intently on maintaining its position as the low-price leader over the next few months leading up the critical holiday period."
Building Some Insulation
But the difficult environment leading up to this year's holiday season also means many retailers have reduced holiday orders, which could help mitigate cut-throat pricing wars.
Target, the No. 2 U.S. discount retail store chain behind Wal-Mart, said it is being more conservative in its planning assumptions for the rest of the year, while clothing retailer Talbots cut its fall inventory commitments so it could reduce markdowns and sell more full-priced goods.
Having fewer goods to sell may mean retailers will not feel the need to as aggressively undercut other's prices, said Stacy Janiak, vice chairman of retail at Deloitte & Touche.
"It's very easy for them to get irrational when they've got to move a lot of inventory, but they have very strong inventory positions" this year, she said.
Consumer electronics retailer Best Buy has also indicated that the fallout from last year's intense flat-panel TV pricing wars might help insulate it from similar wars this year.
It has forecast a less-aggressive promotional environment for the second half of the year, saying store closings by CompUSA and Tweeter Home Entertainment Group mean there will be fewer competing stores.
Craig Johnson, president of Customer Growth Partners, said the toy price cuts are a strategic move for Wal-Mart, which is trying to improve its sales at U.S. stores.
Its efforts last year to sell more upscale merchandise and downplay its discount roots alienated its core lower-income shoppers, whom it is now trying to woo. But those lower-income customers are the same ones who are being squeezed by higher gasoline and food prices, and by the fallout from the sickly housing market.
"You will not find them doing that on every last toy item," he said. "You will find them doing it on selected items that are the demand items that kids want, and that makes sense. That's a traffic builder."
NPD's Cohen said all the early price-cutting efforts could fall on deaf ears as consumers take a wait-and-see stance before starting their holiday shopping amid a dearth of must-have hot items to lure them into the stores.
"They were slow to start for back-to-school and it's going to be exactly the same thing for the holiday -- they're going to start slow but finish strong," he said.