Thursday, October 29, 2009

Wal-Mart Price War Sets Grim Tone For The 2009 Holiday Season

/PRNewswire/ -- American retail chains panicked last holiday season as they stared at overstocked shelves and wondered, "How will we sell all this stuff?" Their response to the collapse of the economy--namely, to markdown everything in sight and cross their fingers--was a last-minute act of desperation. Because they spent the past year ruminating about worst-case scenarios, however, many retailers now face a new problem as the holidays actually approach, says Stevan Buxbaum, executive vice president of Agoura Hills, Calif.-based Buxbaum Group, the consulting and turnaround investment firm.

"Retailers were so nervous they over-constricted their inventories," explains Buxbaum, who looks for comparable store sales to be in the flat to negative 1% range for the season. "They are now scrambling to stock up. The problem is that we have a worldwide supply chain. Much of the inventory comes from Asia and can sit on a boat for up to six weeks before it gets here. Beefing up inventories in time for the holiday season will be virtually impossible."

And that means parents hunting for hot-sellers like Disney's Netpal laptop or the Zhu Zhu Pets Hamsters might have a tough time fulfilling their kids' holiday wishes. "The best inventory--all the stuff that turns out to be the most desirable this year--will be gone by December 7," Buxbaum predicts. "From then until Christmas, shoppers will be picking through all the remaining merchandise."

Amid dismal holiday sales forecasts, meanwhile, Wal-Mart has embarked on a price war in which it plans to slap discounts on new groups of products every week until the season is over. The world's largest retailer is now selling 100 different toys for $10 each, and will make especially aggressive markdowns on books, DVDs, video games and other entertainment products. "The online price-war in best-selling books between Wal-Mart, Amazon and now, Target, speaks volumes about the cutthroat nature of retail in 2009," Buxbaum says. "Wal-Mart has fired the first shot across the bow and it is only October.

"In general," he continues, "consumers are still focused on price and value. The winners will be those chains that have the guts to slash prices the most. Eking out a profit in this environment requires highly rationalized SG&A (selling, general and administrative) costs and lower overhead. Wal-Mart is No. 1 in that regard, followed by the warehouse clubs and Target. Everybody else is in the rearview mirror."

The top 1% of richest Americans might unwrap a MacBook Pro or find a Lexis SUV parked in the driveway. But the vast majority of shoppers will not be maxing out any credit cards this year at the likes of Nieman Marcus, Buxbaum says. "We have gone from the 'aspirational' shopper--people who spent beyond their means for the sake of status or the sheer thrill--to the 'desperational' shopper," he observes. "Now, most people are just trying to find value."

That said, certain trends hint at the types of products that will go over best with budget-constrained and newly circumspect shoppers, Buxbaum says. Rave reviews of the new Windows 7 operating system, which Microsoft radically simplified after consumers railed against its feature-packed Vista predecessor, show the rising importance of simplicity and practicality in consumers' harried lives.

"Wired magazine talks about the rise of 'Good Enough' tech," he says. "Take digital cameras. People don't want another $1,000 camera. They're saying, 'Heck. I never figure out what 90% of these features do anyway, and I'm not Ansel Adams.' Personally, I use about 1% of the features on my Blackberry. People's lives are so complex, they want to simplify them. They don't want all this stuff that they neither need nor understand."

Even though devices like Apple's all-in-one iPhone or Amazon.com's Kindle e-book reader are expensive, they continue to sell because they help people reduce clutter and bulk. "If you simplify my life by putting four different devices, or thousands of books, into one device, that's convergence," Buxbaum says. "People are interested in convergence, not complexity."

Nor are American parents interested in short-changing their kids. They will continue to spend as much as they can on children and younger adults, and retailers focused on these segments will see stronger sales, especially if they have somehow managed to find a niche that enables them to avoid direct competition with Wal-Mart, Buxbaum notes. "People won't take out their frustration with the financial system and Wall Street on their nieces and nephews," he says. "But they will cut back on spending for themselves."

Sustainable or "green" products might have bright longer-term futures, but they won't set any records this year with the broad base of the American economy. "The extra cost of green doesn't fit the proposition of getting the best price," Buxbaum says. "The overwhelming thing right now is not whether something will disintegrate in a landfill--our economy is disintegrating in a landfill. You could call it the biodegradable economy. It will take a resurgence of that broad base for us to rebuild a new economy that doesn't break down."

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