US consumers have been trained to never pay full price for anything, and it’s crushing some American retailers.
Shoppers started gravitating toward discount stores during the recession, and many have failed to return to shopping in full-price stores.
Once they realised they could get steeply discounted merchandise, they became addicted to seeking out good deals on food, clothes, shoes, and other items.
Now retailers like Macy’s and Nordstrom are paying the price.
Macy’s reported Wednesday that its same-store sales declined for the third straight quarter, and Nordstrom reported Friday that same-store sales slowed drastically in the most recent quarter.
Macy’s shares have declined more than 40% this year and Nordstrom’s are down 33%.
In addition to seeking out discounted merchandise, consumers are also starting to save more money, while splurging less on clothes, shoes, and other fashion items.
When consumers do shop, they are spending their money on “big-ticket” items like cars, houses, and electronics over clothes and shoes.
“The shift we have seen over the past several years in which consumers have chosen to spend on ‘big ticket’ merchandise (cars, homes and home renovations, electronics and smartphones) and experiences seem particularly apparent given the results at Nordstrom,” Stifel analysts wrote in a recent note.
“‘The religion of consumption has been proven to be unfulfilling’ is an observation that is proving to be particularly true this season,” Stifel analysts wrote in a recent note.
Shares in retail companies were falling across the board on Friday following the reports from Nordstrom and Macy’s this week, as well as news that overall retail sales rose by a disappointing 0.1% in October.
Even shares of JC Penney fell by as much as 16% Friday, after the company reported third-quarter earnings that beat Wall Street’s expectations.
The flurry of negative news has some analysts questioning whether the American economy is heading into another recession.
Macy’s CEO Terry Lundgren says he doesn’t think that’s the case. In an earnings call this week, he said consumers aren’t contracting spending in the way they did in 2008 and 2009.
They have money to spend, but they just aren’t spending it on clothes and shoes, he said.
“They still indicate that there is money to spend if the consumer chooses to do so … We’re just waiting now to see if, in fact, they will,” Lundgren said.
Nordstrom co-President and Director Blake Nordstrom echoed a similar sentiment.
“We’ve said this many times: we’re not economists, we’re merchants,” he said on an earnings call Thursday. “And we concur … that if you get to a higher altitude and you look at the scorecard, there are a number of economic indicators that look real positive for US and the consumer and spending. Yet all we can tell you is in our business, we saw a slowdown.”
Macy’s and Nordstrom both have off-price chains designed to capture the consumers who won’t shop in their full-price stores anymore.
Macy’s just launched its new off-price chain, called Macy’s Backstage, in September and revealed plans this week to open 50 more stores over the next two years.
Nordstrom’s, called Nordstrom Rack, sells the department store chain’s merchandise for up to 90% off.
It’s too early to tell how Macy’s Backstage will do, but Nordstrom Rack is performing well with 12% sales growth in the most recent quarter, compared to 3.2% sales growth for Nordstrom’s full-price business.
“Rack stores offer an outstanding merchandise selection at everyday low prices,” Stifel analysts wrote. “Nordstrom, with strong vendor relations, has demonstrated its ability to excel in this sector…Continued expansion of the Rack operation makes sense, given its success and operating margin rate higher than the company average.”
Some analysts and retail experts have warned however that off-price brands are undermining retailers’ full-price businesses.
“There is now going to be no end to discounting because all the players must dance as long as the music is playing,” retail expert Robin Lewis writes onThe Robin Report. “And it will ultimately drag everything down with it, including brand image, potentially quality and essentially the value of all things.”
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