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Holiday sales tip: Give 'em bargains
Santa in the store is nice but consumers this holidays much rather see some big red sale signs.
August 2, 2005: 2:45 PM EDT
By Parija Bhatnagar, CNN/Money staff writer

NEW YORK (CNN/Money) - Bargains! Bargains! Bargains!

That's the clear and simple message for retailers hoping to make a success of the 2005 holiday shopping season despite some forecasts that call for a softer gift-buying period overall compared to last year.

"Give consumers a legitimate deal and they will spend. In fact, merchants will almost have to beat'em away with a stick ," said Britt Beemer, retail consultant and head of America's Research Group, a Charleston, S.C.-based research firm.

The automakers already figured that out early this year and proved that good bargains equal big sales.

Said Beemer, "The success of GM's employee discount sale is a great example that consumers still are in a mood to buy. However, I think Christmas spending could be a little narrower than last year."

He anticipates holiday sales for the crucial two-month November-December shopping period -- which typically accounts for as much as 50 percent of sales and profits at many chains -- will grow between 3.5 to 4 percent.

For its part, the National Retail Federation (NRF), the industry's largest trade group, expects total fourth-quarter sales to grow five percent versus the 6.2 percent sales growth logged last year.

The group is expected to release its 2005 holiday forecast in September.

Why the pullback?

"The indomitable consumer has kept on spending in spite of high levels of debt and extremely low savings, but this pace cannot continue much longer," NRF Chief Economist Rosalind Wells, said in a statement earlier in the year.

"In addition to tough comparisons, which will plague the retail industry for most of the year, consumers will be stretched thin from rising interest rates, high energy prices, and modest gains in employment and income."

So far this year, consumers certainly haven't acted as if they're "stretched thin." To the contrary, they've shown an uncanny ability to shop -- a lot.

Retailers' sales at stores open at least a year -- a key metrix of retail performance known as same-store sales -- have been surprisingly strong for the past two months.

But don't be fooled by the latest spurt in purchasing, which analysts said has been fueled by an improving labor market and sustained growth in wages.

"In our forecast, we see consumer spending slowing a little bit in the fourth quarter to 3.1 percent from 3.8 percent for the same period last year," said Jim O'Sullivan, U.S. economist with UBS. "The rationale is that as the housing market slows, there'll be a cooling effect in the home wealth effect and the fluctuating energy prices will also have some drag on spending in the months ahead."

Craig Johnson, president of retail consulting group Customer Growth Partners, says it's may be too early to determine whether or not the current buying momentum can sustain itself through the holiday shopping frenzy.

"We can't extrapolate from the retailers' performance in the first part of the year how retailers' will fare in the second half of the year," Johnson said. "Will the holiday season be as solid as last year? I'm not sure of that yet. It may be a middle-of-the-road performance."

One thing he is certain about is that consumers today are more responsive today than ever to the big red sign with the word "SALE" printed on it.

Wal-Mart (Research), the world's largest retailer, learned that lesson the hard way last year when the company decided to skimp on the holiday discounts in favor of preserving profit margins. The result: consumer snubbed it in favor of its competitors that did offer the deep price cuts. Wal-Mart eventually corrected its misstep later in the season.

"It's really become a game of chicken," Johnson said. "But to mix my metaphors, the consumer has also become trained like Pavlov's dog. He expects the pre-Christmas sales and deeper price cuts through the holidays."

While America's Research Group's Beemer agreed with Johnson that retailers may be even more dependent on sales this year to lure bargain-hungry shoppers into their stores, he also pegged customer service as becoming increasingly important to stressed-out shoppers.

Whereas other retailers could struggle once again because of an absence of "must-have" items, Britt said high-end retailers will still have a good year not only because of the differentiated products that they sell but also for the superior service they offer to their clientele.

"A middle-income shopper may migrate to a Nordstrom from a Macy's and spend $65 instead of $45 on a gift because they are serviced better at a Nordstrom," Beemer said. "Department store chains like Sears and J.C. Penney need to be very aware of this if they want to retain their shoppers over the holidays."

Expect clothing sales to once again dominate the bulk of holiday shopping, industry watchers said. The wildcard for retailers, however, could be consumer electronics.

Said Beemer, "How many MP3 players and flatscreen TVs can people buy? This was a hot category last year. Prices have continued to fall on electronics. That means consumers will save more on electronics but it doesn't necessarily mean they'll buy more of it."

Correction: An earlier version of this story incorrectly stated that the NRF' expects 2005 holiday sales to grow 5 percent versus 6.7 percent last year. The NRF's total fourth-quarter sales forecast calls for a 5 percent growth versus 6.2 percent growth last year. The group is expected to release its 2005 holiday forecast in September.

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