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Deep discounts? You bet!
Consumers hit by higher energy prices may yet have something to look forward to this holiday season.
October 20, 2005: 2:24 PM EDT
By Parija Bhatnagar, CNN/Money staff writer

NEW YORK (CNN/Money) - It's been a tough couple of weeks for consumers paying more at the gas pump and getting set for big increases in winter heating bills.

But for millions of weary American shoppers, some much-needed good news may be just a weekend circular away.

More and more retail analysts are growing increasingly certain that store chains will dig deeper with discounts this year to lure shoppers going into the all-important holiday sales season.

John Morris, senior analyst with Harris Nesbitt, who tracks store markdowns, said he's already seeing signs that merchants are prepared to "bargain battle" aggressively this year.

Morris' Sales Rack Index, which tracks discounting by item and depth of price-cutting at clothing and other specialty chains, is up 10 percent from a year earlier versus a 5 percent increase for the same period last year.

"There is a sense of urgency on the part of retailers," Morris said. "The caveat is that a lot of holiday (merchandise) hasn't debuted yet so much of this is fall clearance sales."

At the same time, he's betting that merchants will up the sales ante just as soon as they transition to holiday merchandise.

Retailers typically adopt a long lead time of six to nine months for seasonal inventory planning and sales, he explained. "With a sudden spike in oil and gasoline prices, this plan gets thrown off course," Morris said.

He estimated that retailers will have to work harder this year to effectively compete for consumers' dollars over the crucial November-December shopping season, which can account for half of a retailers' annual sales and profits.

How deep will the price cuts get?

It's still early to talk about the absolute level of discounting but Morris expects his discounting index to show 15 to 20 percent more price-cutting in the weeks ahead.

Expect to see the big red sales signs on clothing, footwear and home furnishings, Morris said.

In its annual holiday forecast issued Thursday, International Council of Shopping Centers' chief economist and director of research Michael Niemira estimated that the upcoming holiday season sales will fare "okay" compared with past years and "will likely be driven by price."

"But it will also likely be very uneven with those [retailers] that can compete successfully on price [doing] relatively better than other retailers," he wrote.

Niemira expects sales at stores open at least a year, a key industry measure known as same-store sales, to rise 3 to 3.5 percent in November and December, up from last year's 2.3 percent gain.

For its part, the National Retail Federation (NRF), the industry's biggest trade group, forecast total holiday sales up 5 percent to $435.3 billion.

Note to merchants: More than one-third of consumers, 38 percent to be precise, said that sales or price discounts are the most important factor when it comes to deciding what to buy from a particular store, according to the NRF's holiday spending survey released earlier this week.

Richard Hastings, senior retail analyst with Bernard Sands, said he's betting that consumers will find some dainty deals on clothes, electronics, toys, home-related and leather products.

"It's basically the same formula that we saw last year because once again there's an absence of a must-have item," Hastings said.

"Best Buy and Circuit City will be very promotional. Dell will be price aggressive," he said, noting the company's getting back into the high-end business. I expect to see some great deals on complete PC packages."

Wal-Mart (Research), eager not to repeat its mistake of skimping on discounts last year in a bid to boost profit margins, already threw down the gauntlet, announcing it will be very competitive on price over the holidays.

Analysts said Wal-Mart, the world's largest retailer, will probably dictate the response from other discount chains. But Hastings doesn't expect Wal-Mart's actions to influence luxury chains and some other niche marketers.

"I'm expecting the holidays to be a stimulating environment for (sales) growth," Hastings said. "But the deeper discounts could also mean that profit margins will be off for some retailers."  Top of page

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