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DISCOUNT RETAILERS ARE HOLIDAY'S BIG WINNERS

Gift Card Purchases Soar; Online Spending 30% Higher Than Last Year

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COLUMBUS, Ohio (AdAge.com) -- While the full results won’t hit until next week when major retailers report final December sales, forecasters are predicting discount retailers to end up the biggest winners this holiday season.
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“All the discount channels are doing well,” said Gary Drenik, president-CEO of Columbus-based Big Research, a retail research firm. “People were looking at their home heating bills and interest rates going up and had to go for the retailers offering the discounts,” like Wal-Mart, Target, Sam’s and Costco.

Late sales surge
All indicators point to strong gains, especially considering a late 2.8% surge in holiday spending at retail chain stores for the week ended Dec. 24, that helped comparable-store sales hold steady at 3.9 %, according to a report released this week by the International Council of Shopping Centers.

Major retailers, including Target, Wal-Mart and J.C. Penney, won’t have full tallies until Jan. 5, and the Commerce Department doesn’t release December industry-wide sales figures until Jan. 13. But whatever the numbers, some analysts say the final story can’t be told -- because of the unprecedented surge in gift cards.

“The season doesn’t even end at that point because of this huge pot of gift cards out there. It’s like the Energizer bunny, it keeps going long after the holiday,” said Michael Niemira, council’s chief economist and director of research.

Phase two
Gift cards, with sales up 6.6% this year to $18.5 billion, represent “an opportunity for some retailers who stumbled to play catch up,” Mr. Niemira said. According to the council, about 60% of gift cards will be used between Dec. 26 and the end of January. “It’s a different consumer in this ‘phase two’ of the season. Shoppers are oriented toward themselves, which is a big difference vs. buying something for someone else,” Mr. Niemira said.

He expects retailers to eventually evolve the January season away from deep discounting aimed at clearing excess inventory to an entirely new and fresh season. “I think the advertising strategy will change too,” he said. “If you are putting new merchandise out, you will want to communicate that. Retailers could benefit from getting a new message out besides clearance and sales in January. For now, though, consumers are still in the mind-set that this is a discount period.”

The ICSC is predicting sales in January to show only a moderate increase of 3% to 3.5%, compared to the same period last year.

Online reflects offline trends
Online, the retail story largely reflected offline trends, with shoppers sniffing out bargains as avidly online as off. EBay.com and Amazon.com were Nos. 1 and 2 in traffic, according to online research firm Hitwise. Next in traffic were Walmart.com, Dell.com, Bestbuy.com and Target.com.

In gauging winners and losers in the online retail battle, the numbers will always be hotly debated, since major online retailers like Walmart.com and Target.com still do not breakout sales results. Amazon said it saw its best holiday season ever with a record number of items shipped, but has not yet reported sales figures.

Gift cards were a hit online, too, this season. About 19% of online buyers said they would buy gift cards, up from 11% in 2005, according to market research firm Jupiter Research. Online gift card buyers mentioned convenience as a major reason for that choice of present, with 58% saying they wanted the recipient to be able to shop whenever they wanted to.

$30 billion spent online
Consumers spent $30.1 billion online this season, a 30% increase over last year, according to the Goldman, Sachs & Co., Nielsen/NetRatings and Harris Interactive’s fifth annual Holiday eSpending Report. The study looked at online behavior from Oct. 29 to Dec. 23. These figures show that the online growth rate is about five times higher than the offline growth.

But sales and growth rates don’t tell the entire story, analysts said. Online behavior has a huge impact on the overall retail performance, mainly because consumers research and browse online before they go into brick-and-mortar stores to buy, said Vikram Sehgal, research director at Jupiter. “For every dollar a consumer spends online, $6 is spent offline as a result of the research done online,” he said.

“Although online retail is only about 4% of the overall retail market in the U.S., if you combine the online retail sales plus offline sales influenced by online research, that combined number is 25% of the overall retail market,” Mr. Sehgal said.

'Strong but not spectacular'
Scott Krugman of the National Retail Federation is dubbing the season “strong, but not spectacular,” adding: “Considering what the challenges were -- higher energy costs and gas prices -- this season has performed way above expectations.”

He said although discount retailers Wal-Mart and Target will likely end up the winners, how much aggressive pricing drove sales gains and eroded margins isn’t yet clear.

On the losing categories of the season, analysts point to mid-tier department store chains. “Their [mid-tier department store] core customers are trading down for discounters, and the luxury consumers aren’t necessarily trading down to them,” Mr. Krugman said.

As always, there will be exceptions, said Big Research's Mr. Drenik, pointing to J.C. Penney and Kohl’s, two chains benefiting, at least based on store traffic, from the struggles at Sears Holding Corp., in the midst of merging the Kmart and Sears brands.

“At Sears, every month we are seeing less people say they are shopping there,” Mr. Drenik said. “There’s just a movement away from them and away from Kmart. Even on the appliance side we are seeing an uptick at places like Lowe’s and Home Depot.”

Wal-Mart vs. Target
In the closely watched battle between Wal-Mart and Target, the big question will be whether Wal-Mart’s profits will suffer in comparison to Target’s. In November, Wal-Mart’s mimicking of the upscale advertising and merchandising strategy of Target, coupled with sharp discounting in electronics and apparel, paid off. Same-store sales for the first time in 18 months bested those of its rival, with sales rising 4.3% vs. Target’s more modest 2.6 % rise.

For December, the numbers could go either way, although for now the odds appear to be in Target’s favor. Earlier this week, Target Corp. reaffirmed its December sales forecast of a 4% to 5% same-store sales increase for December, while Wal-Mart in its most recent weekly sales update said it expects comparable-store sales for the same period in the 2% to 4 % range. In other words, Target’s worst-case scenario is the same as Wal-Mart’s best-case scenario.

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