Retailers May Push Consumers' Limits This Back-To-School Season
July 14 2011 - 3:28PM
Dow Jones News
Retailers are walking a tightrope this month as the
back-to-school selling season gets under way, trying to balance
higher merchandise costs against consumers who are used to
promotions and uncertain because of the rocky economy.
Retailers and apparel makers are looking to raise prices 10% to
15% for products including jeans, t-shirts, sheets and towels
because of the surge in cotton and other raw material prices.
However, many will try to spread the pain across the entire chain,
with suppliers, retailers and customers taking a hit.
Back-to-school shopping, which traditionally runs July through
Labor Day, is usually the second-biggest buying season of the year.
Last year, consumers spent $55.1 billion on everything from pens
and backpacks to pants and sweaters, the National Retail Federation
said. They spent $462 billion during the Christmas holidays in
2010.
"The stakes are very high," said Adrienne Tennant, retail
analyst at Janney Capital Markets. "Retailers must pass along cost
increases to a consumer that is very used to a promotional
environment."
The back-to-school season will have an effect on third-quarter
earnings and margins, as well as help set the tone for the key
end-of-the-year holiday shopping period.
Patti Johnson of Elmhurst, N.Y., is just beginning her
back-to-school shopping. As a mother of two girls, one in
elementary school and another in junior high, she has a lot to buy,
and she's nervous.
"I only have so much to spend, and I hear things will cost more
this year," she said.
That skittish mindset is what retailers will be dealing with
this year. To cut merchandise costs, they are tinkering with their
offerings. Consumers may see synthetic thread used on cotton
products, thinner linings and more embellishments, like buttons, to
cut down on cotton use.
"Parents are going to be shocked and disappointed by the price
of goods," said Kit Yarrow, professor of psychology and business at
Golden Gate University. "They're going to make sure their kids are
outfitted, but won't go beyond their budgets like they have in the
past."
The cost of cotton began rising last summer at the same time
retailers had to place their back-to-school merchandise orders.
Given long lead times, the higher-priced product is now hitting
shelves, just in time for the heavy back-to-school buying
season.
The ability to pass higher costs to consumers "is uncertain and
will largely depend on the strength of the product or retailer and
the way the merchandise can stand out," said David Galper, head of
specialty retail and apparel investment banking at KeyBanc Capital
Markets.
Retailers are bringing out their back-to-school apparel, in
varying degrees, and largely at full and, in a number of cases,
higher prices than a year ago. A Gap Inc. (GPS) store on Sixth
Avenue in New York City is displaying children's jackets and
hoodies. An Abercrombie & Fitch Co. (ANF) Hollister store in
Massapequa, N.Y., had completed converting its male section to
back-to-school and fall wear and was preparing for women's wear.
Sleeves are getting longer in displays at Wal-Mart Stores Inc.
(WMT). Target Corp. (TGT) is preparing to roll out apparel, an
employee said, and is full of school supplies. "They start putting
it out fairly early," she said. Macy's Inc. (M) is on the cusp of
putting out its back-to-school merchandise, a customer service
representative said.
Retailers have been running tests to get a sense of how
customers will take to new pricing. Macy's Chief Financial Officer
Karen Hoguet said early indications suggest consumers are willing
to absorb some higher prices, although moderately-priced home
merchandise appeared to have seen some resistance. Target
merchandising chief Kathryn Tesija said increases on some products
the retailer took in the spring will be extended to apparel and
home goods and cover a greater amount of the products.
Dana Ferro, of Seaford, N.Y., who was shopping in a Target near
her home, said she is "very price sensitive," but welcomes early
rollouts of merchandise. "It lets me get my shopping done faster,
and I can spend the rest of the summer with my children," she
said.
-By Karen Talley, Dow Jones Newswires; 212-416-2196;
karen.talley@dowjones.com
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