Holiday Central

The biggest threat to retail sales growth

Millions of shoppers will fight through tryptophan-induced comas and head to the stores on Thanksgiving Day, or set their alarms for daybreak on Black Friday.

What's a few hours of wrangling with the crowds when there's the chance to snag a 49-inch name-brand TV for $150, or get a $40 discount on a Fitbit Flex?

A pedestrian passes by a Black Friday discount sign at a Joe Fresh retail store in New York.
Scott Mlyn | CNBC

While many Americans still enjoy the thrill and madness associated with these doorbuster deals, the shopping bonanza over time has lost much of its ability to rouse consumers from their beds.

The reason? A deflationary spiral that's turned 40 percent off promotions into just another day at the mall.

From fast-fashion brands rewriting the economics of retail, to traditional stores slashing their prices to compete, and the Internet's capacity for making it effortless for shoppers to find the best deal, retailers have been pulled into a downward slide that shows no signs of abating.

Just take a look at the consumer price index. In the 12 months ended in October, prices in these government-tracked categories ticked just 0.2 percent higher, with apparel prices falling 1.9 percent.

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Paired with extreme price competition in categories including consumer electronics and toys, this decline is one reason why the National Retail Federation is calling for just a 3.7 percent increase in retail sales this holiday season — down from last year's 4.1 percent growth.

"They have to do promotions to get people into the store," said Ron Friedman, national leader of Marcum's retail and consumer products group. "They don't have a choice."

Though consumers have always been keen on discounts, the Great Recession "changed the way we do business," Friedman said. And while that period of economic decline officially ended six years ago, Americans still haven't fully recovered — a phenomenon Friedman attributed to what have been a series of less noticeable incremental improvements over time.

As a result, consumers have flocked to value retailers like T.J. Maxx and H&M, while department stores and specialty shops that cater to the middle class have been squeezed. This shift has also led to a flood of outlet stores and low-price spinoff concepts, as traditional players fight to remain relevant with this new breed of shoppers.

"All these off-pricers are growing, but at the expense of what?" said Farla Efros, president of HRC Advisory. "Are we now pushing [consumers] again toward lower-priced items? ... We're changing the landscape again."

Analysts have also pointed to Irish fast-fashion retailer Primark as a red flag for the U.S. market. Its rock-bottom prices, which make a pair of jeans from H&M look like a splurge, have the potential to once again lower consumers' expectations of how much a piece of clothing should cost.

Making things even more challenging for retailers this holiday season is an abundance of inventory, brought on by above-average fall temperatures across much of the U.S. Macy's CEO Terry Lundgren warned earlier this month that deep inventories will inevitably lead to discounts in the fourth quarter.

Though some of retailers' woes are being offset by lower cotton costs, a recent note from Goldman Sachs pointed out that low-price competition and "increased price transparency" from the shift to online shopping will "continue to place a downward pressure on pricing."

But perhaps the biggest shift of all has occurred in the minds of consumers, who have been trained that if they just wait long enough, they can get anything at a discount.

"Everybody loves a value," said Steve Barr, U.S. retail and consumer sector leader at PriceWaterhouseCoopers. "How do [retailers] stop? You just can't stop."