Saks “Gets It” – Starbucks Not Quite There

Brutal Days For Retailers

Retailing has suddenly become a lot more complicated than simply planning how many more stores to open next year and projecting sales increases.   Today, the toughest job is surviving. Job losses, pay cuts and lack of credit have turned the once profligate American consumer into a modern day Scrooge.   Many consumers have cut back on all but the essentials – frugality has become a necessary virtue.   Retailers that over expanded with borrowed capital  will not last as they discover that cash flow does not cover debt service.

The great American retailers that will survive have already adapted to the new age of frugality.  Consider Saks Fifth Avenue and Starbucks, both of whom market their goods at the higher price points.

Saks Upends Luxury Market With Strategy To Slash Prices

When Saks Fifth Avenue slashed prices by 70% on designer clothes before the holiday season even began, shoppers stampeded. “It was like the running of the bulls,” says Kathryn Finney, who says she was knocked to the floor in New York’s flagship store by someone lunging for a pair of $535 Manolo Blahnik shoes going for $160.

Saks’s deep, mid-November markdowns were the first tug on a thread that’s now unraveling long-established rules of the luxury-goods industry. The changes are bankrupting some firms, toppling longstanding agreements on pricing and distribution, and destroying the very air of exclusivity that designers are trying to sell.

Sak’s risky price-cut strategy was to be one of the first to discount deeply, rather than one of the last.  Sak’s chief executive says his actions were done to “make sure that the company survives”.  Last Thursday, Saks said January sales fell nearly 24%.

Saks will survive but its strategy is putting many of its smaller competitors out of business since they cannot compete with the massive discounts Saks is offering.  Saks also recognizes the risk of discounting to their future sales.  How many customers will pay $3,000 for a “designer luxury good” in the future, when they can now buy such an item for $900?   Discounts of 70% make one feel foolish to have overpaid so much even when times were good.

Starbucks Plays Common Joe

Starbucks Corp., which built a coffee empire on its premium image, wants to convince customers that its drinks aren’t that expensive.

The company said Monday that it’s selling discounted pairings of coffee and breakfast food for $3.95, a type of promotion long used at fast-food chains. It’s the first move in an aggressive campaign to counter the widespread perception that Starbucks is the home of the $4 cup of coffee.

The move shows how premium brands are trying to reposition themselves for a prolonged economic downturn.

“I strongly believe we are going to be in this environment for years,” Howard Schultz, chief executive of Starbucks, said in an interview. “It is a reset of both economic and social behavior.”

Asked whether Starbucks is considering simply reducing drink prices, Ms. Gass said: “Today, no. But never say never.”

Mr Schultz is correct.  This is a new world for retailers and you adapt or you go under.  Starbucks has cut costs in its operations over the past year but has not cut product prices.   If sales continue to decline Starbucks will be forced to discount, just as Saks is doing.   Expect to see price cuts coming soon on your favorite Starbucks beverage.

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