This Holiday Season, Shoppers Blinked

Unlike last year, retailers held prices firm. It looks as though their strategy paid off

This was the year Linda Weiler was finally going to climb off the holiday-shopping treadmill. The supermarket cashier and mother of three from suburban Chicago had a plan: Winnow her gift list, slash spending from $2,800 last year to $2,000, and apply the savings to something fun, such as a family vacation in Mexico. Only it didn't quite pan out that way. Weiler's final tally: $2,500. "Every little thing seemed to be more than what I thought it would cost because I didn't see any good sales," she laments.

After a couple of years of handily winning the promotional cat-and-mouse game with retailers, consumers this year seem to have blinked first. Sure, for every shopper like Weiler, you can find others who won't stop gloating about the fleece coat they snagged at 70% off, perhaps during a Dec. 26 doorbuster stampede. Still, as the dust settles on a holiday season that began with some foreboding and ended with a modest 5.5% rise in sales, it's clear the industry played a far more savvy game in 2003 than it has in some time.

By holding the line on prices and keeping inventories lean, many retailers are ready to replenish their shelves for the next few weeks, when many shoppers hit the stores to return or exchange unwanted gifts. What's more, consumers are expected to redeem a record $20 billion or so in gift cards and, stores hope, buy a whole lot more besides. "Retailers showed more fortitude and discipline than in the past," says Anne Brouwer, senior partner at retail consultant McMillan/Doolittle LLP in Chicago.

As recently as November, many analysts and investors were skeptical that retailers had the courage of their convictions. After all, for the past two years stores had vowed to keep discounts to a minimum but caved at the eleventh hour when the expected demand failed to materialize. Also, there were relatively few of the must-have items this year that usually prompt shoppers to buy whatever the price. Finally, retailers tended to hew closely to the expectations of Wall Street, which rewards sales growth.

Yet retailers largely ignored the pressure and stuck to their guns. They ordered less merchandise, created early-November sales events to get consumers shopping promptly, and largely held their fire on across-the-board discounts. Merrill Lynch specialty retail analyst Mark A. Friedman was surprised at how moderate the post-Christmas discounting was at chains as varied as Children's Place (PLCE ), Banana Republic (GPS ), and Pottery Barn. He pegged the range of discounts at 30% to 50%, vs. 50% to 75% in recent years.

By keeping inventories lean and prices high, many retailers forfeited potential sales. But now, at least, they aren't in the uncomfortable position of having to blow out mountains of unsold merchandise for pennies on the dollar. And while retailers won't report fourth-quarter earnings for several weeks, many analysts are expecting richer profits over last year.

STEALTH SALES. Plenty of retailers resorted to steep discounts, though. Struggling mid-range retailers such as Kohl's (KSS ), J.C. Penney (JCP ), and Sears (S ) were forced to chop prices as seasonal demand for their products withered. But others played the markdown game far more strategically, turning, for example, to unannounced sales, which got customers to open up their wallets a bit more without stores declaring open season on list prices. At a shopping mall in Charlotte, N.C., Gabrielle Culpepper, 34, snared a cocktail dress for herself for $49.99 at the J. Jill store and noticed a week later that it had been marked back up to $119.99. And high-end retailers such as Saks Inc. (SKS ) and Lord & Taylor slashed prices on everything from sables to sweaters by up to 60% close to Christmas as a way to get shoppers in the door.

The Stat
For the most part, though, the analysts and consultants paid to troll the nation's stores were surprised at the abundance of full-price merchandise at retailers that had discounted heavily last year. "I didn't see a big deviation from the plan," says retail consultant Gwen Morrison, president of WPP Group's The Store retail-consulting unit. "Certainly, sales were going on -- but not sale trauma."

Despite many retailers' willingness to sacrifice some revenues to maintain their margins, there's a chance they'll offer a surprise on the top line as well. Credit that in part to the boom in gift cards, which may have accounted for as much as 10% of total purchases this holiday season but won't be logged as revenue until they are redeemed in coming weeks.

Retailers are hoping that customers who redeem gift cards will buy other merchandise once they're in the store -- and become loyal customers. That's more likely to happen if the shelves are restocked with fresh merchandise and the store isn't stuffed with discount signs. "If it looks like a schlock house, too sale-y, they're not going to return," says NPD Group retail analyst Marshal Cohen. Those that manage the transition well could find themselves starting the new year with a bigger customer base.

For retailers spoiled by the double-digit sales gains of the 1990s, the modest increases of the season are bound to be a disappointment. "So far, nobody is saying 'we had great, great results,"' says NPD's Cohen. "It was better than last year, but did not exceed Street expectations." Still, in the current climate, where encouraging economic data and a rising stock market haven't yet convinced everyone to go on a spending spree, that amounts to a moral victory for retailers.

By Gerry Khermouch in New York, with Ann Therese Palmer in Chicago and Andrew Park in Charlotte

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