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How Higher Retail Sales Could Mean Lower Prices

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Retail sales are up, and though it sounds counterintuitive, that could be good news for bargain hunters this holiday season.

Looser purse strings mean department stores will have to fight for your dollar and cut their prices, analysts explain. “The combination of high inventory levels and a glum economic outlook could translate to strong discounting on par with what we saw in 2008,” says Jeff Contray, managing editor of DealNews.com.

Retail sales climbed more than expected last month. They were up 1.1% on the month – better than projections that hovered at an increase of 0.8%, according to a Dow Jones Newswires survey. That doesn’t sound like much. However, it’s the clearest signal to retailers that consumers are willing to spend in spite of the weak economic backdrop – just as long as our favorite department stores give us enough incentive to shop.

Some retailers have kept a tight rein on their inventories, which means consumers may not see dramatic discounts of 70% off before Black Friday, but they could see price cuts of 40% on small household appliances. “Necessities are going to make a lot of sense for consumers when it comes to gifts this year,” says Kathy Grannis, spokeswoman for the National Retail Federation.

There’s also more competition between different kinds of retailers: Department stores, Grannis says, realize that their customers are going to discount stores, too. Price-conscious consumers still burnt by the economic downturn in 2008 are fickle when it comes to where they shop. “It’s no longer about market share it’s about dollar share,” Grannis says. “Retailers are keeping a keen eye on how their shoppers adjust to holiday shopping.”

There’s another reason to expect bigger sales over the coming months: This wave of positive sentiment may not last. Incomes are stagnant and show no sign of recovery anytime soon, according to a Wall Street Journal survey. Any further market correction or escalation of the debt crisis in Europe could send consumers running for cover. “That’s the elephant in the room,” says Odysseas Papadimitriou, CEO of CardHub.com.

Banks are already tempting consumers to prevent this. As Pay Dirt reported last week, interest rates on credit cards fell below 13% for the first time since the onset of the Great Recession in 2008, according to the Federal Reserve. But don’t expect a Black Friday bonanza every day: Sherif Mityas, a partner in the retail practice at AT Kearney, says “reactive and frantic” sales are a thing of the past: “Retailers are more rational and proactive.”

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    • P.S. This SmartMoney article is anything but intelligent.

    • When are journalistic publications going to start hiring journalists with some basic economic education?

      Tightened supplies and increased sales from pent-up demand suggest the equilibirum price of goods and services to at least stay constant or go up.

      It also suggests that the price elasticity of demand will go down (i.e., their demand is more price inelastic than elastic).

      What it DOES NOT suggests is what the “journalist” is repeating from so-called experts: That prices are likely to go down with the increased demand and decreased supply.

      Tut tut.

About Pay Dirt

  • Pay Dirt examines the millions of consumer decisions Americans make every day: What to buy, how much to pay, whether to rave or complain. Lead written by Quentin Fottrell, the blog examines these interactions, providing readers with news, insight and tips on shopping, spending, customer service, and companies that do right – and wrong – by their customers. Send items, questions and comments to quentin.fottrell@dowjones.com or tweet @SMPayDirt.

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