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Heavy Discounting Evaporates Retailers' Holiday Profits

Written by Ken Gaebler
Published: 1/10/2014

Scores of national retailers downgrade earnings forecasts due to the heavy discounts they offered during the holiday shopping season.

The holidays are over, but the financial impact of the holiday shopping season is far from finished for the nation's retailers. According to a recent Reuters report published in the Chicago Tribune and other media outlets, many retailers have been forced to readjust their earnings forecasts due to heavy discounting during the holiday season.

Impact of Christmas Sale Retail Discounting

On the upside, sales were generally robust during the 2013 holiday season. Retailers tracked by the Thomson Reuters Same-Store Sales Index reported a 2.7 percent increase in December sales, outperforming industry expectations.

But to achieve strong sales, many retailers were forced to offer deep discounts much earlier in the holiday shopping season. Additionally, declining store visits and aggressive pricing by big box retailers early in the season forced other retailers to jump on the bandwagon and offer large discounts throughout December.

In contrast to 2012 and previous years, during the 2013 holiday retail season, "the discounts needed to be deeper, and they needed to be longer," said Joel Bines, managing director of the consulting firm, AlixPartners.

The practice of effectively using price promotions can be extremely valuable for retailers. But when price-based promotions cut too deeply or occur too soon in the holiday season, they can also have a devastating impact on profitability--a scenario that now seems to have occurred for many large retailers.

Examples of heavy discounting can be found across the retail sector. During November and December, eight national retailers, including Wal-Mart, Target and Macy's, increased published circular ads by 6 percent and the volume of promotional emails by 57 percent. Fewer shoppers further complicated retailers' holiday efforts. This year, foot traffic decreased by nearly 15 percent during the holidays.

The big winners during the holidays appeared to be low price retail brands. For example, Costco reported a 5 percent increase in December same-store sales, significantly outperforming Wall Street's forecast of 1 percent.

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