Recession creates ‘puzzle’ around holiday promotions

12/10/2009 - This holiday shopping season could turn chilly for consumers looking for deep discounts, says Kellogg marketing professor Eric Anderson.

In the U.S., the recession has cooled retailers’ purchasing, so most stores don’t have massive inventories that they need to move with dramatic price promotions, says Anderson, the Hartmarx Research Professor of Marketing.

As a result, Anderson says retailers will try to drive customer traffic by using targeted promotions rather than broad, category-wide sales. In fact, he says, consumers can expect fewer sale items and lower savings on discounted items compared to a year ago.

“When will the discounts start? They may never start,” Anderson says, noting that could lead to a battle of nerves between retailers and customers.

“If you survey consumers, they tell you they’re really worried about saving money. They’re looking for discounts. A lot of consumers will say, ‘I’m not going to shop this year until I get a discount.’”

But Anderson says retailers may not budge if they can satisfy enough demand from customers who are willing to pay higher prices: “You clearly won’t see the same degree of discounting that we saw last year, and consumers who wait [for sales] may find that they never arrive.”

Anderson, whose marketing expertise includes new product development, distribution channels and pricing strategy, offered additional insights into commercial prospects as 2009 comes to a close. He spoke recently with executive editor Matt Golosinski, author of Wide Awake in the Windy City, a history of the Kellogg School’s first 100 years.

Matt Golosinski: Holiday shopping traditionally begins the day after Thanksgiving — so-called Black Friday — when many retailers offer discounts and other incentives to attract business. Given the recession, how did this year’s Black Friday measure up?

Prof. Eric Anderson: The initial reports have been pretty good. Many retailers met expectations but their expectations were also ratcheted back. The retail news was positive on Friday, but the big question is, what’s going to happen next? The week after Thanksgiving is always a lull in the retail world. The days between that holiday and the following weekend are actually rather slow.

MG: In a world where a lot of shopping is done online, how relevant is Black Friday anymore? Does it still make sense to talk about this phenomenon when so many people don’t flock to stores as they once did?

Prof. Anderson: Black Friday has somewhat diminished in importance; the ability to promote online has changed that. A lot of promotions actually started online on Thursday or even the week before. But there’s still so much incentive to offer these huge deals to build store traffic.

MG: Even if it’s a loss leader — like promoting $3 appliances to help drive volume?

Prof. Anderson: Oh yeah. There were some crazy prices on Black Friday. Why are they offering those ridiculous discounts? It’s about trying to get customers into the stores, but also about driving a given retailer’s reputation as being a place to come shop on Black Friday. Given these benefits, retailers are willing to lose a bit of money on some of these items.

MG: How are retailers managing customer expectations of discounts?

Prof. Anderson: Retailers are facing a conundrum this holiday season, and so far there’s no resolution to the puzzle. The puzzle is really about how consumer expectations are going to be balanced against inventory considerations. That’s a huge unknown right now. The next three weeks will indicate how this will play out. Many consumers aren’t shopping now. They went out on Black Friday because of the great deals. But will they shop without promotions during the rest of the holiday season?

MG: Why won’t those deep discounts be there?

Prof. Anderson: Inventory. Because of the recession, retailers did not make big bets on many categories this year. They didn’t buy a lot in the first quarter of 2009, when they had to plan and purchase for the months ahead. As a result, they are not sitting on huge amounts of inventory, and so are not going to be discounting as aggressively as last year. A year ago, the situation was different: Retailers found themselves overbought. Every mass merchant was out offering big discounts because they couldn’t afford to go into January with lots of merchandise sitting around. Today, the inventory positions are way backed-off. Every retailer I’ve talked to says they were much more conservative with orders this year.

MG: But won’t customers expect holiday bargains?

Prof. Anderson: Right. The retailers don’t have the incentive to discount because of inventory, but will they still have to discount because of customer expectations? That’s the big puzzle. Who is going to win in this game? The coming weeks will determine that. For hot items, like the Amazon Kindle, though, you won’t see any deep discounts this year.

MG: With respect to the discounts that will be offered, what are we likely to see?

Prof. Anderson: What you’re going to see is much more targeted, strategic discounts, rather than broad-brush discounts. Last year you could walk into Macy’s and get 60 or 70 percent off — on almost everything — because they were so overbought. This year you will find fewer discounts and retailers will be much more selective on what products are discounted. Retailers will try to use some specific items to drive holiday traffic, but you’re less likely to see across-the-board price cuts.

MG: Will social media play any role this holiday season?

Prof. Anderson: A lot of these “surgical strikes” on promotions are going to be communicated through social media. That will be a delivery mechanism for many last-minute or targeted deals. Rather than blanket promotions across the store, you’re going to see a lot more promotions aimed at particular customers through Twitter and Facebook. Tools like Twitter really allow you to disseminate messages in a new way that you couldn’t do previously. Companies are out managing social media a lot more aggressively now.

MG: Will these promotions have any long-term impact on brand loyalty? If shoppers forego branded items to save money, might they later find that the off-brand offerings will do just fine — even once they can again afford the branded items?

Prof. Anderson: We have a lot of data on this. Every single recession over the last three decades has shown that customers buy more private label brands and stick with them after the recession is over.

MG: Does this force the brands to go out and find new segments or improve their offerings to entice customers?

Prof. Anderson: Firms are going to solve this problem by innovation. To get customers to switch back, you’ve got to convince them that there’s been some innovation — a reason to go back to the branded products. The P&Gs of the world are less worried about private labels because P&G is really good at innovation. They are really good at taking their leading brands and constantly making them better. They realize that private label is just another competitor. The people who are worried are firms that are lagging in innovation and finding their brands third and forth in a category. They are the ones who will lose their customers, and may struggle to innovate and get them back.

MG: How has the recession influenced what people are buying this season?

Prof. Anderson: Customers tend to be asking, “Do I really need it? And does it provide ongoing value?” People are looking for durability rather than splurging on things that may be fun today but that they’re not likely to enjoy down the road. If anything, this is pushing customers a little more toward utilitarian products, and not necessarily toward the hot trends.

MG: So vacuum manufacturers can sleep well this holiday season.

Prof. Anderson: [laughs] We’re having this kind of conversation in my household right now. I think this year consumers are spending more time selecting thoughtful gifts —considering how a gift will be used, how long it will be used, and whether someone really needs it and will value it.