"The silliness of it all is that the original price from which the discount is computed is often specious to begin with," sums up the seemingly obvious "retail theater" that plays out every Black Friday in mall after mall across America. As the WSJ reports [4], the common assumption is that retailers stock up on goods and then mark down the ones that don't sell, taking a hit to their profits. But that isn't typically how it plays out. Instead, big retailers work backward with their suppliers to set starting prices that, after all the markdowns, will yield the profit margins they want. Buyers don't seem to mind. What they are after, especially in such a lackluster economy, is the feeling they got a deal, "I don't even get excited unless its 40% off." The manufactured nature of most discounts raises questions about the wisdom of standing in line for the promotional frenzy that kicks off the holiday shopping season. It also explains how retailers have been able to ramp up the bargains without giving away the store - until now.
Because no one needs a thing this bad...
Via WSJ, [4]
"A lot of the discount is already priced into the product. That's why you see much more stable margins," said Liz Dunn, an analyst with Macquarie Equities Research.
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The number of deals offered by 31 major department store and apparel retailers increased 63% between 2009 to 2012, and the average discount jumped to 36% from 25%, according to Savings.com, a website that tracks online coupons.
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Stores also field loss leaders, true bargains that pinch profits but are aimed at getting customers into their stores. Most deals, however, are planned to be profitable by setting list prices well above where goods are actually expected to sell.
Retailers could run into legal trouble if they never try to sell goods at their starting price. Otherwise, there's nothing wrong with the practice.
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Penney, which made a disastrous attempt to move away from discounts... But first it has to adjust its prices.
"We must and will compete to win," Mr. Ullman said last week on a conference call with analysts. "That means initially marking up our goods to sufficient levels to protect our margins when the discount or sale is applied."
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Here's how it works, according to one industry consultant describing an actual sweater sold at a major retailer. A supplier sells the sweater to a retailer for roughly $14.50. The suggested retail price is $50, which gives the retailer a roughly 70% markup. A few sweaters sell at that price, but more sell at the first markdown of $44.99, and the bulk sell at the final discount price of $21.99. That produces an average unit retail price of $28 and gives the store about a 45% gross margin on the product.
Retailers didn't always price this way. It used to be that most items were sold at full price, with a limited number of sales to clear unsold inventory. That began to change in the 1970s and 1980s, when a rash of store openings intensified competition and forced retailers to look for new ways to stand out.
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Another tactic involves raising selling prices ahead of the holidays before the discounts kick in. In an analysis for The Wall Street Journal, price-tracking firm Market Track LLC looked at the online price fluctuations of 1,743 products in November 2012. Prices climbed an average of 8% in the weeks leading up to Thanksgiving for 366, or about a fifth, of the products; the items were then discounted on Black Friday. Toys and tools had the biggest pre-Black Friday price increases—about 23%.
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Retailers are supposed to offer items at regular prices "for a reasonably substantial period of time" before marking them down, according to the Federal Trade Commission.
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Retailers, having trained customers to shop for deals, are stuck with the strategy for now. Macy's tried to cut back on coupons in 2007.
"Customers stopped shopping," said Chief Executive Terry Lundgren, "so we knew that was a bad idea."