Retailers offer incentives that could shrink profits
NEW YORK (AP) - Retailers are so desperate this holiday season that they're willing to lose money to get you to spend yours.
Take online jeweler Stauer. It's offering a $249 amethyst necklace for free - provided customers pay the $24.95 it costs to ship it. Stauer will lose money on the deal, but it hopes to reel in new customers who will buy other jewelry.
"In this economy, you have to be outrageous in your offers," said Michael Bisceglia, the president of Stauer who found that more than a third of customers who took advantage of a similar deal on a $179 pearl necklace in 2009 bought additional items. "You have to shake up the world a bit."
Not every retailer will go as far as giving away merchandise during the holidays, but many will offer profit-busting incentives. It's a critical time of year for merchants, which can make up to 40 percent of their annual revenue in November and December. And they're so worried that Americans are spooked by the weak economy that they're willing to sacrifice profit for sales.
Nordstrom, for instance, is one of the first retailers to offer free shipping on most orders, no matter how small, even though it could wind up paying $3 to ship a $7 pair of socks. Furniture chain Raymour & Flanigan is allowing customers to go four years without paying interest on their purchases - the longest period it has ever offered - even though it will have to help cover a chunk of those charges itself. And Sears is not only offering to match the cheapest prices customers find online, but the department store chain is giving them an additional 10 percent off the difference.
"You may be making a $1 profit instead of a $3 profit," Fiona Dias, chief strategy officer of members-only shopping service ShopRunner.com, said about retailers. "But you're not losing a sale."
Retailers are nervous about holiday sales because many Americans are cutting back on spending as they grow increasingly concerned about the stubbornly high unemployment rate, stock market turmoil and an overall fragile U.S. economy. In fact, a recent Gallup poll found that eight of 10 Americans think the country is in a second recession.
"Retailers are now scared because some believe they're in a second recession," said C. Britt Beemer, chairman of America's Research Group. "And the second recession is hitting them in the biggest shopping season of the year."
Despite the challenging environment, revenue in November and December is expected to be up about 3 percent. The increase - below last year's 5.2 percent spike - is above the 2.6 percent average gain over the last 10 years.
But Americans are expected to do more online comparison shopping and spend less time in stores. ShopperTrak, a Chicago research firm that tracks how many customers come in at more than 25,000 stores, expects foot traffic to drop 2.2 percent during the holiday season compared with a year ago. So far this year, consumers have gone to an average of three stores during a mall trip, down from an average of five stores in 2006.
To get people to spend more money once they're in stores, retailers are offering incentives that could shrink their profits.
For instance, merchants long have matched prices at competing bricks-and-mortar stores, but not online retailers. After all, it's hard for them to compete with the online-only guys that can offer lower prices because they don't have the high overhead costs of running physical locations. But now a growing number of bricks-and-mortar stores like Bed Bath and Beyond Inc. are matching prices with online-only merchants like Amazon.com.
Staples Inc. doesn't have a formal policy to do so, but it has started leaving price matching with online-only competitors to the discretion of its store managers. Amy Lee, 40, found this out when she saw an Epson printer for about $25 cheaper on Amazon.com. A Staples sales clerk in New York City agreed to give it to her for the lower price.
"I was surprised. Twenty-five dollars off is huge," said Lee, who paid $124.95 for the printer. "I would have gone home and ordered on Amazon."
Sears Holdings Inc. is going one step further by giving customers an additional 10 percent off the difference between its price and a competitor's online price. So, if a shopper finds a TV that's $30 cheaper at Best Buy Co., they would get the lower price and an additional $3 off. The catch? The retailer will only match online prices of retailers that have physical locations, not online-only merchants.
"We're not focusing on short-term profits," said Tom Aiello, a Sears spokesman, about why the retailer is offering the deal. "We believe that if customers know they're going to get the product at the price they want, they will come to us more and more."
Some retailers, meanwhile, are sweetening incentives they already offer to the point that it could erode profits.
Raymour & Flanigan, for instance, is beefing up the terms of its no-interest loans, which have become popular among retailers of big-ticket items like furniture and TVs. The loans typically enable customers to forgo paying any interest on purchases for one to three years provided they make the monthly payments on time. Retailers must help pay some of customers' interest charges - about 12 percent for three-year terms - to the financing companies that provide the loans. But the companies hope to make up for those costs in sales volume.
This holiday season, Raymour & Flanigan is offering the loans on sofas and dining room sets until Jan. 1, 2016. Lisa King, the chain's senior vice president of marketing, declined to say how much Raymour & Flanigan will have to pay its financing company, but analysts estimate that it could wind up shelling out up to 16 percent on each purchase.
"These programs do come at a cost to all retailers that offer them," King said. "This reduces the profit in a sale to the retailer."
Likewise, luxury retailer Nordstrom Inc. used to require that customers spend at least $200 in order to qualify for free shipping because bulk orders make up for the merchant's cost to ship items. Now, Nordstrom will ship most items for free, which means it could wind up losing money: it could pay up to $3 to ship a $7 pair of socks, for example. Nordstrom is following a similar move by catalog retailer L.L. Bean, which got rid of its minimum-order requirement for free shipping in March.
"This is increasingly becoming an expectation of customers," said Colin Johnson, a spokesman for Nordstrom, which also is offering free returns instead of a $6 flat rate.