Some major retailers reported stronger-than-expected fourth quarter sales, and higher gross margins, after shifting their focus toward wealthier customers. Saks Fifth Avenue’s margin rose from 40.1% to a 40.8% in the fourth quarter, while Macy’s and Bloomingdale’s reported an average 9% increase in prices.
The link between margin performances and retailers’ move toward higher price points was clear. Walmart promoted price cuts throughout the holiday, and as a result it saw its fourth-quarter margins in the United States drop by $100 million.
A similar story played out at Macy’s, but for different reasons. The store’s free-shipping promotion and in-season markdowns on cold weather gear took a bite out of margins.
The stores that tended to rein in their promotional activities and focus on wealthy shoppers—namely Saks and Bloomingdale’s—reported historically high margins and an increase in purchases of fine jewelry and accessories.
These reports seem to indicate that focusing on the higher end is a safer bet when the economy is relatively stable. Competition at the lower end has been fierce since the recession and margins will continue to be lower, according to Steve Pruitt, Senior Consultant at Blacks Consulting.
“Last year was probably the first year that prices were higher coming out of China, so retailers had lower margins to work with in the first place,” Pruitt said.
He predicted that the same thing would happen with lower and middle market retailers this year, since Chinese manufacturing prices are continuing to rise, unless retailers try to reduce their promotions after Thanksgiving to retain some margin.
This seems unlikely, however, given many consumers are still price sensitive and trying to regain the spending power that they lost during the recession.
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