Save or Spend?

When sales are slow, the natural inclination is to conserve your resources. Problem is that is often the opposite of what you should do. Here's why:

Retailers Refining Their Sales Strategies to Fit the Economy

Rather than pinching pennies as consumers rein in spending, some retailers are plowing money into standing out from the crowd, hoping to grab market share and emerge from the economy's slump in better shape than their rivals.

Some, like home-improvement giant Home Depot Inc., are sprucing up their stores and investing more in customer service. Others, like discounter Wal-Mart Stores Inc. and consumer-electronics specialist Best Buy Co., are touting their commitment to low prices or promoting special deals to help strapped consumers stretch their dollars.

Their strategies are built at least partly on the premise that shoppers typically are creatures of habit and that the economy's doldrums offer an opportunity to change those habits as households try to economize. Moreover, Wall Street tends to put less pressure on retailers to perform when the economy is weak, which can give them room to finance strategic investments.

"This environment presents opportunities to capitalize on," says Frank Badillo, senior economist at TNS Retail Forward, a retail-marketing firm in Columbus, Ohio. A recent study by the firm found that about 20 percent of the nation's consumers are changing where they shop because of job or other economic worries.

Among the beneficiaries of those shifting dollars is Aldi Group, a no-frills, deep-discount grocer that operates more than 900 stores in 29 U.S. states. The chain, based in Germany, used to shun television advertising, but it recently ran a series of national commercials stressing its low prices on private-label products. The campaign's slogan: "Shop Aldi Smart."

Last month, a survey by Retail Forward showed that consumers were doing 25 percent more of their spending at deep discounters like Aldi than they were a year earlier.

In the past year, Home Depot has moved away from costly promotions, such as hefty discounts on carpeting, and is returning to an emphasis on everyday value, says Craig Menear, executive vice president for merchandising. It is improving performance-based financial incentives for its employees and managers. The chain is also planning to spend $3 billion over two years to improve its customer service and store maintenance, and build a new centralized distribution system in a bid to regain market share lost to smaller rival Lowe's Cos. in recent years.

For its part, Lowe's hasn't backed off on its heavy promotional spending, luring customers into its large warehouses with "project starter" coupons that provide $10 free on purchases of at least $50 and $25 off on purchases of at least $250.

While sales at stores open at least a year were down sharply in the latest quarter at both home-improvement retailers, Lowe's sales were a little better than Home Depot's. Both chains claim to be pulling market share from weaker, independent competitors. Last quarter, Lowe's gained share in all but four product categories, while Home Depot gained share or held steady in half its merchandise areas.

On a recent trip to a Lowe's store in North Dallas, shopper Amy Barrentine says she noticed retailers were blanketing the market with coupon offers. "They eventually cancel each other out, becoming less an incentive to lure you into a store than simply a reward for shopping where you normally shop, anyway," she said.

In the electronics field, Best Buy is taking aim at weaker rivals in part by offering a no-interest payment plan for big-ticket items, such as home-theater systems. Executive Vice President Michael A. Vitelli said Best Buy's sales and market share have increased in part because of shoppers adding items to their cart to reach the $999 minimum required for the no-interest plan. Best Buy estimates its share of U.S. consumer-electronics sales rose 1.5 percentage points in the latest quarter.

The financing program boosted the chain's sales of big-screen TVs by a "low double digit" percentage at stores open at least 14 months, Best Buy said. By contrast, rival Circuit City Stores Inc. reported lower television sales for the first quarter ended May 31.

Best Buy also is rapidly expanding sales of mobile phones through in-store sales kiosks, cutting into sales of one-time cellphone leader RadioShack Corp. It had 599 mobile-phone kiosks in its U.S. stores on May 31, up from 181 at the end of the year. Same-store sales of mobile phones were up 50 percent in stores with the kiosks. RadioShack blamed increased competition for a 10.5 percent decline in sales for the first quarter.

In addition, Best Buy is pursuing niche markets, grabbing business from musical-instruments retailer Guitar Center with expanded sales in California and pulling from local service companies with its Geek Squad computer-services stores. "We're playing offense in the marketplace," President Brian J. Dunn told investors in a recent conference call.

Wal-Mart, which has chased after more upscale clients in recent years, this year has stepped up advertising to promote its low-price offerings and reinforce its discount image. It spent $107 million in the fiscal first quarter to promote its Save More, Live Better campaign, up from its $75 million in ad spending in the year-earlier quarter.

The world's biggest retailer also recently offered to cash shoppers' tax-rebate checks for no fee and expanded its $4 generic-prescription-drug program to cover many over-the-counter drugs. As a result, the company reported sales rose 2.9 percent at stores open at least a year in the quarter ended April 30.

Sears Holdings Corp., however, said it plans to cut back on marketing spending for the rest of the year to lower costs. People familiar with the situation say the retailer cut about 10 percent, or $200 million, from its annual marketing budget.

Discounter Costco Wholesale Corp. is keeping sales humming by doing more strategic direct-mail promotions to its customers, steering shoppers to lower-price, but higher-margin, items such as jewelry. In the first quarter, Costco increased the number of jewelry offerings priced between $100 and $500 by 15 percent, says Kristin Badowski, a senior analyst at retail consultants Management Ventures Inc. "There are fewer items at the very high end," she says.

Drugstore chains CVS Caremark Corp. and Walgreen Co. are making a play for health- and beauty-product shoppers who are trading down from department stores.

Both chains have been selling private-label cosmetics goods that are pricier than those usually sold at the corner drugstore but generally cheaper than department-store versions.

CVS, for example, is marketing an exclusive line of skin-care products called Lumene. Walgreen recently began a promotion called "Satur-date," which offers customers miniconsulting sessions with beauty advisers and free samples of health and cosmetic items in its stores.

(Source: The Wall Street Journal, 07/09/08)

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