Let the games begin: Retail places holiday wagers

With incomes on the rise, more jobs being filled and shopper confidence trending higher, it seems like a pretty safe bet that retailers will benefit from a stronger consumer during the winter holidays.

But as evidenced by the turmoil in Greece this week, there are still plenty of unknowns that could cause consumers to snap shut their wallets, leaving retailers with excess inventory, and resulting in another year of price slashing.

Decorations inside The Shops at Columbus Circle at the Time Warner Center in New York.
Ben Hider | Getty Images

Though the Greek debt woes feel a world away to many U.S. consumers, the ongoing crisis caused stocks to log their worst day of the year on Monday, and broke a nine-quarter streak of S&P 500 quarterly gains. It also has prompted speculation that the Federal Reserve could change the timing of an expected interest rate hike.

Such ripple effects could result in more uncertainty for U.S. shoppers as time goes on. A deeper, more prolonged drop in the stock market, for example, could cause high-end consumers to reign in their spending.

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Experts said that retailers' performance over the back-to-school shopping period—the second-largest selling season—should give retailers a better sense of what's to come later this year.

"A lot of them are looking to back-to-school as the final test of what they can do to lay out their holiday strategies," said Steve Barr, U.S. retail and consumer sector leader at PwC. "It's going to be a really important indicator."

Being in the right place at the right time

Although retailers have adopted a wait-and-see attitude, many expect to see a bounce back in the second half, said Rod Sides, U.S. consulting leader for retail and distribution at Deloitte. As such, he predicted that "a lot of them are going to be fairly aggressive" with their orders, most of which have already been placed.

Sides added there will also be a greater emphasis this holiday on the allocation of inventory, as retailers look to boost their margins by storing their merchandise in the most profitable locations. This has become increasingly important as bricks-and-mortar stores are filling more of their orders from their local shops, including the option to ship from or pick up online orders in store.

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More retailers are also tapping into the read and react capabilities used by fast-fashion retailers such as H&M and Forever 21, made possible by a more streamlined the supply chain. This allows companies to place smaller bets on their initial orders, and then replenish their stores with the best-selling products.

Though names including Victoria's Secret have made strides in shortening the amount of time it takes to get product onto the selling floor, Barr said there has yet to be a wide scale transformation in retailers' supply chains.

"Even for the best of retailers it's still taking a significant amount of time to get product from Asia or Southeast Asia to the U.S.," he said.

And while PwC doesn't anticipate retailers will experience a repeat of the port strikes that delayed retailers' shipments earlier this year, "What we learned," Barr said, is that "it's very expensive to get product from especially Southeast Asia to the U.S."

"If you push that and you close that window, you're going to increase your shipping costs because you're going to have to expedite the delivery," he said. That increases retailers' production costs and squeezes their margins. It's also not as plausible for retailers that sell electronics, given the lead time required for manufacturing, he said.

'Athleisure' trend still strong: Gap CEO
'Athleisure' trend still strong: Gap CEO

Though Barr said he doesn't expect to see a big spike in inventories over the holidays—cutting down on the potential need to cut prices to move product—consumers may refuse to make purchases unless the items are severely discounted.

"The pre-recession shopping behaviors still have not returned," he said. "We are very curious about the shopper and, have we conditioned the shopper to pattern their holiday shopping around discounts?"

The need for discounts should be less burdensome on retailers with in-demand product, such as the luxury or athleisure names. Sides added that as brands try to move away from deep promotions—Coach and Bebe are two examples—retailers will instead try to incentivize their best customers with personalized deals.

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But Britt Beemer, chairman of America's Research Group, isn't convinced that retailers will be able to avoid the dramatic discounts that have dented their revenues over the past few seasons. His biggest concern, he said, is that retail sales for the season could be flat or up a point and a half, in part because he expects to see more deflation.

Also pressuring December sales are early deals, which shift shoppers' spending to earlier in the quarter, along with rising gift card sales, Beemer said. Gift cards are not counted in a retailer's sales until they are redeemed.

Mobile to separate winners and losers

As shoppers grow more comfortable browsing and making purchases online—and in particular, on their mobile devices—retailers with an exhaustive digital strategy will be the big winners, PwC's Barr said.

According to a new report by IBM's Digital Analytics Benchmark, mobile sales accounted for 22.6 percent of online revenues and 45 percent of online traffic in the November and December period, and their adoption continues to rise. As of March, mobile traffic to U.S. retail sites hit 47.4 percent, with mobile sales reaching 24.4 percent.

The rapid increase in mobile penetration caused a number of retailers to stumble last holiday, most notably Best Buy. While there will still be some laggards, Sides said he expects companies will be better prepared for the shift. He added that a properly functioning website can be critical for retailers, as online shoppers have a much shorter attention span than those who took the time to drive out to a physical store.

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At the time of Best Buy's failure last year, ChannelAdvisor estimated a retailer could lose about 8 percent of the day's online sales each hour that it's down.

"If you have a failure either via mobile app or website, folks move to the next option," Sides said.

Sides also expects to see a continuation of the bifurcation that retailers experienced last season—where high-end and discount retailers perform well but those positioned toward middle-income shoppers continue to get squeezed.

Along those lines, a report released by Moody's on Tuesday said that the off-price segment will continue to outperform the broader home and apparel categories for "at least the next five years."

For Beemer, the winners will be those retailers who don't give away the store with 60 percent discounts.

"I don't know how many more promotions we can run," he said. "When you start selling items [for] that much less … it's pretty hard to make up for it."