Originally created 02/03/03

Lower prices a boon to consumers, headache for retailers



NEW YORK -- Jakki Glivicky can easily list some of the bargains she's nabbed recently: two sweaters, a pair of pants and a skirt for a total of $200; a couple of CDs at $11 each, marked down from $15; and a Bulova watch for $200, discounted at least 30 percent.

She even picked up a Canon Elph digital camera for $399. Only three years ago, the average price for a similar gadget was more than $600.

"I definitely get a lot more for my money now," the Boston resident said.

Glivicky and other consumers are clearly enjoying the deep discounts in stores across the country, but the falling prices are causing great pain for the retail industry. Although overall consumer prices are rising modestly, many categories of goods, from toys and TVs to computers, apparel and autos, have been victims of deflation for more than a year.

At L.L. Bean Inc., men's cotton polo shirts are $19.50 this spring, compared with $22 a year ago. Men's cotton sweaters are priced at $36; a year ago, they were $29.50.

Circuit City Stores Inc. is selling Kenwood home theater systems for $700; a year ago, they were $500.

At TJ Maxx, run by TJX Cos. Inc., designer-name cashmere sweaters sell for $49 to $129, down $20 from a year ago.

While the trend - spurred by such factors as excess production capacity after the 1990s economic boom and cheaper imports - is expected to ease later this year if the economy picks up and the U.S. dollar continues to lose value against foreign currencies, analysts said deflation will remain a major challenge for retailers. It will also be tough to stop.

Deflation - a sustained decline in prices in goods and services - is a vicious cycle. A sluggish economy forces businesses to reduce prices, which prompts consumers to delay their spending because they believe even better bargains are in the offing.

That causes retailers to cut prices further to stimulate spending, which in turn hurts profits. Meanwhile, the stores are under pressure to cut costs to increase profitability to offset the sales shortfall.

After analyzing results from the holiday season, analysts believe deep discounting helped depress sales in dollar terms, but not in terms of merchandise units sold.

"People bought more stuff than people realized," said Richard Jaffe, an analyst at UBS Warburg Securities.

The Consumer Price Index, the government's most closely watched inflation barometer, rose by 2.4 percent in 2002, up from the 1.6 percent increase in 2001. But much of the gain came from rising energy costs.

Excluding energy prices, consumer prices rose just 1.8 percent in 2002, the smallest increase since 1964, and down from a 2.8 percent gain in 2001.

New car and truck prices, for example, fell by 2 percent last year, the biggest decline since 1971 as manufacturers lured buyers with heavy discounting. Apparel prices fell 1.8 percent, while prices for personal computers plunged 22.1 percent last year. Toy prices dropped 9.3 percent.

Some economists don't believe lower prices are making consumers feel wealthier, mostly because they feel squeezed by higher energy and health care costs.

"Consumers are trapped between price cutting on one hand and price hiking on the other," said Frank Badillo, senior retail economist at Retail Forward, a consulting firm in Columbus, Ohio.

Rachelle Pachtman, of New York, has saved money buying such items as $29 velvet dresses from catalog retailer Coldwater Creek, but she faces high medical bills for her dog.

"I think I am going to buy dog insurance," she said.

Meanwhile, Glivicky said she is using the money she has saved through buying on sale to pay down her $5,000 credit card debt.

The lack of pricing power among retailers has forced them to become even more efficient, although analysts question how much more leaner they can be.

Home Depot Inc., the home improvement merchant, acknowledged that deflationary prices in lumber alone depressed same-store sales by 1 percent for its third quarter, ended Nov. 3, 2002. Same-store sales are sales at stores open at least a year. For the quarter, same-store sales were down 2 percent.

Still, Home Depot expects gross profit margins to be up more than 1 percent for the fiscal year ending Feb. 2 because of more efficient sourcing and consolidation of its suppliers.

Hifi House, which sells home theater systems and TVs, said it is under pressure to do more TV advertising and be proactive about informing consumers about the latest gadgets.

"We are working harder because we have to sell to more people to keep the revenues up," said Jon Robbins, chief operating officer at Hifi, based in Broomall, Pa. Traditional big-screen TVs now sell for about $1,700, down from about $2,100 a year ago, he said.

Despite the merchant's efforts, holiday sales were only up about 3 percent over the year-ago period, he said.

Competitive pressures from discounters including Wal-Mart Stores Inc. have pushed prices down in consumer electronics such as digital cameras. But these latest technological gadgets are also getting cheaper because of mass production.

Even if deflationary pressures ease, the big challenge will be retraining consumers like Ann Rogers, who only want to buy on sale.

"I don't know why anyone would buy full price anymore," the Columbus, Ohio, resident said. "If you see something you like, you just wait couple of weeks, and you'll see it on sale. We are spoiled right now."