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Eric T. Anderson, the Hartmarx Research Professor of Marketing

Prof. Eric Anderson

Retailers try not to lose cheer — or shirts — during holiday downturn

Pricing expert Eric Anderson surveys tough landscape as merchants battle for seasonal sales. By giving away too much, do they risk long-term trouble?

By Matt Golosinski

12/2/2008 - Story updated on 12-10-08

With the country now officially in an economic recession and consumer confidence still waning, how are U.S. retailers coping this holiday season as they try using deep discounts to attract shoppers? 

Competing on price, however, can result in a downward spiral, with dramatic cuts on big- and small-ticket items, something that’s good for customers, but grim for businesses looking to stay competitive. This year, though, many retailers have few options other than pushing their profit margins to the breaking point if they want to lure increasingly nervous consumers who find themselves with less disposable income. 

According to Ad Age, nearly 90 percent of chief marketing officers expected to offer a disproportionate number of discounts and promotions this season, but that may not be enough to offset the damaging economic climate. Another report published by The Wall Street Journal indicates that about half of the top 40 retailers anticipate negative fourth-quarter profits. Indeed, November sales as tracked by the International Council of Shopping Centers were characterized as the weakest in 35 years. Retailers who balked at offering big discounts, such as Abercrombie and Fitch, saw larger drops in sales, while low-cost retailers like Wal-mart continued to benefit from the downturn, particularly as a greater number of consumers demonstrated a reluctance to charge purchases using credit cards.

Some manufacturers are introducing innovative coupons this season, says the Kellogg School’s Eric T. Anderson, the Hartmarx Research Professor of Marketing. As one example, he cites a New York Times story that shows how Lucky Brand jeans is offering an online computer game that consumers can play to earn coupons. Procter and Gamble, meanwhile, is offering BrandSaver coupons on Dec. 14 and is opening a temporary BrandSaver retail store in Manhattan for the holiday season.

Anderson offered additional insights about how retailers approach pricing during tough times.

Matt Golosinski: Every holiday season it seems as if retailers are on pins and needles as they wait to see how sales turn out, but this year it feels like there’s almost a panic in the air. Is that your sense?

Prof. Eric Anderson: I think everyone’s a little nervous. That’s for sure. This selling season is two or three times as important as any other month and everyone is watching to see what happens over the next four or five weeks.

MG: How long do we have to wait to get a feel for the numbers and how things are going after two of the biggest holiday sales days, “Black Friday” and “Cyber Monday”?

Prof. Anderson: I was on the phone with a retailer this morning and they knew how Friday and Saturday went, so they had a pretty good idea of what’s already happening. The market research firms are already out there touting their studies about what’s going to happen. In overall retail, people are saying it’s going to be flat or down 1 to 3 percent. Store traffic is going to be down 5-10 percent. On Black Friday, many online retailers, including eBay, Amazon, Wal-mart, Target, Best Buy and Circuit City (Direct), experienced a huge increase in Web site traffic. On Cyber Monday, order rates rose, but average price per order fell, which left overall sales flat compared to last year.

MG: With the thin margins that many retailers face, could even these seemingly modest declines result in, well, companies closing up shop?

Prof. Anderson: That’s a little extreme, but retailers are definitely going to be facing sales declines — just about everybody will.

MG: Is anybody doing well, or at least better in this tough environment?

Prof. Anderson: The guys who are playing on price are doing well. The multichannel retailers are good examples. The person I was on the phone with this morning said their clearance site is buzzing with lots of activity. Factory stores are doing really well. Things are ticking along just fine there, but the retail stores are hard hit. The Web site is still pretty slow.

MG: Can this discounted part of the business carry the entire enterprise through the holiday season?

Prof. Anderson: I think the attitude on the parts of most retailers is “Let’s just get through the season and make it. Let’s hold on.” It’s not a matter of making a lot of money this season, but of making enough money to pay the bills and keep the doors open. A lot of firms are just trying to make their way and hope that things become a little brighter next quarter and next year

MG: Do you see any persistent, long-term implications of this season’s “low-low” pricing dynamic? Are retailers, out of desperation, training customers to expect — and wait for — deep discounts even when the economy turns around?

Prof. Anderson: These discounts will have long-run effects. We know that once you give consumers “the candy” then next time they want the candy again. When they get the 50 or 60 percent off, they come to expect it. For a firm to get them back inside the store, they are going to have to use price and deep discounts.

MG: Is there any other way for retailers to think strategically about price in these times, other than simply dropping it? For instance, can they do anything on the customer experience dimension that might mitigate the need to move the price down?

Prof. Anderson: A good example is the tradeoff between Circuit City and Best Buy. Circuit City is closing stores and liquidating merchandise. Their competitor here in Chicago, Tweeter, is doing the same thing. So Best Buy can be tempted to get into some really aggressive price promotions to keep up, but we know that customers who buy on deep discount at Circuit City won’t go back to one of their stores that are still open, unless they get another low price. So the good news for Best Buy is they can still get those customers to come to their store without having to go to those [very low] prices. The bad news for Circuit City is that for the few stores they do keep open, they might generate some sales now, but they’re going to have a tough time getting those customers to shop at Circuit City without big price cuts.

MG: And some customers simply won’t buy a product from a retailer that they know is going out of business, right?

Prof. Anderson: That’s right. And you can say the same about products that need ongoing support and service. Customers are going to be a little wary about buying from somebody that’s closing their doors. With deep discounts you may be getting an incremental customer today, but you’re losing a sale tomorrow.

Everybody is trying to attract customers and move merchandise; they’re relying on different marketing strategies to do that. The easiest way to get people into your store is to lower the price, but unfortunately that’s the strategy with the most disastrous long-term consequences. In that case, retailers are moving away from selectively discounting items designed to attract customers and then win them over with better customer service once you get them in the store. Those are strategies that are a little less risky in the long run. The challenge is going to be that customers aren’t responding to these [more moderate] attempts. In today’s market, customers just aren’t buying unless it’s on sale. They won’t even stop to look at a product unless they see that they’re getting a discount.

MG: Can we segment the retailing space to see if the same dynamics hold true for, say, luxury goods merchants? Are there some retailers for whom this holiday season is business as usual?

Prof. Anderson: Super-premium luxury retailers are insulated from a lot of the economic downturn. People shopping at those stores are extremely wealthy. You go a tier down, though, and you’re in the $1,000-$25,000 items, and those retailers are being hurt this season, even though in the past they were maybe a little insulated. Consumer goods, but even more durable goods retailers who are selling big-ticket items, they’re seeing a slowdown. Think about a subzero refrigerator: It’s a $5,000-$7,000 item. You’re seeing a slowdown in the number of people buying those items now. The Cartiers of the world, at their high end, aren’t going to be hurt, but they are not going to sell as many of their less expensive items. That’s where they are feeling the pinch. In economic downturns, it’s mid-tier retailers like Kohl’s, Sears, Kmart, Target that are really squeezed. The ones that are helped include retailers like Walmart. The segments doing well are the price-driven retailers, so that’s why factory stores, Walmart, Sam’s Club, and outlet malls are doing well. The other part of the economy that’s doing well is store brands. The numbers don’t sound big, but they are moving up from, say, 21 to 22 percent.

MG: Once people switch to these private label brands, one wonders how the premium brands can win those customers back. Or can they win them back? What does the evidence suggest?

Prof. Anderson: There are academic studies that show these customers don’t come back. We know from research that consumers during downturns turn to private-label products and in every recession, save the early 1980s recession, we’ve seen customers stick with private labels. Not everybody sticks, but a chunk of customers are not going to go back to buying the national brands once they try out the private label. This is also happening because private label quality has improved dramatically in the last 10 years. Customers are just not aware of it, because for a lot of these goods you have to try it to understand what the quality is. Now this [downturn] is an opportunity for customers to do some sampling, and once they do they find that the [private label] is pretty good and they may not go back to the national brands. Retailers that are trying to build their store brands out use this downturn as an opportunity. That’s one of the few, small silver linings. Overall sales are down, but if they can keep a customer by getting them to switch from a national brand to a store brand, they make more money and build their store brand.

MG: Is there anything that the government could do to mitigate the effects of the downturn for merchants? It seems as if policy tools — like an economic stimulus that we saw earlier in 2008 — might offer some opportunities, but clearly this would have had to roll out a month or two ago if it were to have a chance to impact this holiday season. What are your thoughts? Are we simply at the mercy of the market cycle right now?

Prof. Anderson: I’m not sure there are any great policy recommendations that come out by looking at this from a marketing angle. That’s pretty limited. The broader picture that people start to realize once they see all this discounting, is how difficult it is to line up supply and demand. The reason you’re seeing these huge discounts on many products is because there is way too much supply sitting at the retailers. They’ve got to clear out that excess because they know that starting in January and February the next round of purchases are going to come flowing in. Where you’re seeing the really deep discounts is on products where they had to make big bets well in advance — 6 to 12 months in advance — not anticipating the November meltdown. Now you’re seeing that this is a huge problem for them. You’re not going to see huge discounts at places that don’t have these big supply problems: local retailers that are managing week to week or month to month don’t have this problem and don’t have to do heavy discounting to manage supply. They’re doing discounting just to get people to come into the store and spend.

This supply side problem is contributing to the deep discounts, though, and you come back to the question of what the government can do about it. I’m not sure. On the supply side, retailers have to buy well in advance; on the demand side consumers have less to spend. The retailers buying week to week or month to month aren’t hurt so much by having to buy much in advance because they are able to forecast what’s going on on the demand side. They just have to manage the consumer problem. The retailers that buy durable goods, like the apparel retailers, make all their bets for November and December 12 months in advance, so their holiday purchasing is done by April or May. Now they find they’ve placed the wrong bets.

MG: Some small consolation must come in knowing that, across that sector, most of the competition is all in the same situation.

Prof. Anderson: That’s right. So the macroeconomic issues are much more about trying to do something on the supply side problem, and it’s hard to say that you do anything with policy about this. It’s a constant battle every year for any retailer who has to play this game. So the policy is really more about the demand side and the consumer and how much they have to spend. Things like the stimulus package and getting more money back to consumers to spend — that’s really the only policy thing you can point to. We do know that when people get the rebates, they tend to spend them. It’s unfortunate that they didn’t have the rebates come out on Nov. 1.

MG: In addition to pricing, you are also a channels expert. What are your thoughts about how channels and pricing intersect for retailers? Do multiple channels result in stronger opportunities, or can an argument be made for niche players exploiting a single channel while trying to manage through a downturn?

Prof. Anderson: The multichannel retailers have more levers to pull to manage the problem. That seems to be their biggest advantage. They can communicate with their customers through e-mailing and the Web site, as well as through their retail stores and factory outlets. So the more channels they operate in, the more opportunities they have to communicate with their customer and roll out different kinds of programs across their channels. That’s their biggest competitive advantage to these retailers who are just a Web site or just a retail store. They’ve got more arrows in the quiver.