Claes Fornell
  Claes Fornell
 

Deck the Halls with Sales and Discounts

11/24/2008 --

But Ross professors say it takes more than cost cuts to save holiday season.

ANN ARBOR, Mich.—A slow economy coupled with a financial crisis makes for a bleak retail outlook heading into the 2008 holiday shopping season. But retailers aren't going down without a fight, and they have some weapons in their arsenal as they strive to post respectable numbers.

Stephen M. Ross School of Business Professors Claes Fornell and Aradhna Krishna see retailers driving deeper discounts, working harder to keep regular customers, changing marketing strategies, and employing some creative promotions this holiday season.

U.S. retail sales may have declined by 2.8 percent in October, the largest monthly drop since 1992, but that doesn't necessarily mean the season will be a complete disaster, says Fornell, the Donald C. Cook Professor of Business Administration at Ross and director of the National Quality Research Center.

In this kind of environment, discounts are the price of admission, and sales will run deeper and start earlier, he says. And it's the retailers with discounting in their corporate DNA already -- Wal-Mart, for example -- that are in the best position right now. "If you have a cost structure that can support a price war, you would do well," says Fornell.

Consumers will be drawn this season to stores with a reputation for low prices, adds Krishna (pictured at left), the Isadore and Leon Winkelman Professor of Retail Marketing at Ross. Her research shows consumers don't know the specific price of many items they buy, but instead are drawn to stores with a low-price image.

"So those stores that already have the low-price image will probably do better in this environment even if they don't have the lowest priced items," she says. "Stores that typically have an image that's not low-price probably will not do as well even if they have sales. Who do people turn to in times of crisis? Stable, strong, no-nonsense people. Similarly, they will turn to stable, strong, no-nonsense retailers."

High-end retailers face their own unique circumstances in tough times, says Fornell. A sure sign of economic stress is the discounting of luxury labels.

"On a cost basis, you certainly can do that because the margins on those items are so high," he says. "But the concern there is devaluing the brand. Retailers have to watch that. But in this environment, I think it's justified. Most people understand these are difficult circumstances."

In addition to adjusting prices, retailers of expensive, non-essential items also are changing advertising messages in an effort to broaden their audience, says Krishna.

"Those types of products used to be centered around lifestyle advertising, showing these very exclusive, expensive things," she says. "Now they want to show the average person that they can afford this product. It's not just rich people. They don't want to appear very frivolous."

One thing retailers must do (and seem to be doing) is work harder to keep regular customers in their good graces, Fornell says. Despite cutbacks at some stores and a sour economy, the third-quarter American Customer Satisfaction Index, which Fornell compiles, slipped only 0.1 percent with more companies gaining than declining.

"I see evidence that companies are working harder and smarter, with some success," Fornell says. "What we are not seeing is the usual slash and burn, where customer service really suffers. Retailers appear to realize they can't give customers an excuse to go elsewhere."

Krishna agrees that retailers are wise to focus on the loyal base right now. "It takes a lot of money to attract [new customers]," she says. "With less effort, you can keep your existing customers staying on with you."

But retailers definitely have to do more for customers than just cut prices, Krishna adds. "Sales have become so passť and boring that I suspect what excites consumers now is some kind of surprise, something unique," she says.

Kmart and Sears have gone retro by promoting a lay-away program in which customers can hold an item, pay for it over time, and walk away with it once it's paid off. Macy's is trying to connect with customers by having a Santa's Post Office at its stores. Children can drop off letters to Santa, and Macy's makes a $1 donation to the Make-a-Wish Foundation for every letter received.

Fornell thinks that while 2008 will be one of the slowest holiday sales seasons in years, the numbers might not be as bad as some predict. Food prices are slowly trending down, and the cost of gas is down 50 percent from its peak this summer, putting more disposable income back in consumers' pockets.

"There are some signs that all is not completely terrible," Fornell says.

In fact, patient consumers may have a happy new year after all, as Krishna predicts some very deep post-holiday discounts. "I have a feeling retailers won't be careful enough not to over-inventory and there will be huge sales after Christmas," she says.

—Terry Kosdrosky

For more information, contact:
Bernie DeGroat, (734) 936-1015 or 647-1847, bernied@umich.edu