Merchants are going back to basics—cutting prices, broadening product lines, and even teaming up
Whenever the economy slackens, America’s shopkeepers slash prices and pray for consumers to pull out the plastic. Once again, retailers are doing their part, although perhaps with more zeal than usual. Discounts are deeper than they were a year ago. Nordstrom has slashed prices, starting at 40%, vs. 33% last year. Sales have begun earlier. Saks Fifth Avenue opened its first big sale in April, rather than May. And loyalty programs are getting sweeter. Neiman Marcus just handed out $200 gift cards to those who spent $500 or more.

Of course, this is no ordinary downturn. Yes, tax rebates from the federal government pushed retail sales higher in May than many economists had expected. But consumers will be paying lofty prices at the gas pump and supermarket long after the stimulus checks stop arriving. That leaves less for discretionary buying. “Moms who used to buy every member of the family their own brand of shampoo are buying one big cheap one,” says Sheila McKusker, who notes that, in 20 years of tracking the retail industry for market researcher Information Resources, she’s never seen such a profound or sudden shift in shopping behavior. In May, consumer confidence hit its lowest level since 1992.

Cutting prices may not be enough to get people into stores. So while Lowe’s is offering low-cost versions of Shop-Vacs and air purifiers, the home-improvement chain has also launched an advertising campaign to reposition itself as something that looks a lot like the local hardware store (the very mom-and-pop shop that Lowe’s and Home Depot helped drive out of business). In one TV commercial, a father and his sons marvel as a Lowe’s employee cuts duplicate house keys.

In many cases, retailers are going after a different customer altogether. Earlier this year, Gap’s troubled Old Navy chain began pitching trendier clothing at twentysomethings. Sales continued to tank, and the retailer is refocusing its message on price. Now the ideal customer is the budget-conscious mom shopping for herself and the family. Unlike this spring’s safari- and surfer-themed clothes, the fall line will include more basics, and TV ads now emphasize price over style.

Saks Fifth Avenue, too, is focusing more on value. This fall, the upscale department store will reintroduce a private-label line for women in their 40s and 50s. Called Real Clothes, the skirts, blouses, and dresses will be priced 20% below the store’s average brand-name items. “For a high-end customer, it’s not about a trade-off between food [and] gasoline,” says Saks CEO Stephen I. Sadove, “[but] how they feel about their net worth.” He also notes that, during tough economic times, consumers expect better service, too. That’s why Saks is putting more of its sales staff on commission—the better to compete for shoppers’ affections.

As they seek to hang on to existing customers and attract new ones, retailers are teaming up. In May, Macy’s announced it would partner with FAO Schwarz to bring toys back to its stores. Over the next two years, Macy’s will put an FAO Schwarz inside 685 of its locations. “If gas prices continue to rise, being in Macy’s is a really smart move,” says FAO Schwarz CEO Edward M. Schmults. “Customers aren’t going to want to drive to five different places looking for products.” The partnership also allows Macy’s to lease excess space and gives the toy retailer access to millions of new shoppers.

J.C. Penney is using an existing partnership with Sephora USA , the cosmetics and fragrance merchant, to go after freer-spending consumers. Sephora has opened boutiques inside 72 (of 300 planned) Penney stores, catering to 18- to 35-year-old women who typically spend more per item than Penney’s traditional base of middle-aged moms. Penney CEO Myron E. Ullman III says he’s discounting to keep his regulars buying while Sephora lures those willing to pay full price for new products.

Even as stores scramble to broaden their appeal, they are minding their core customers. Rite Aid is offering a $30 gift card and a chance to win a year’s worth of free gasoline to customers who transfer their prescriptions to the chain . Target is pushing its cheaper private-label food and beverages. And Saks in April rolled out no-interest loans on top-drawer jewelry. As Saks CEO Sadove says: “The high-end consumer likes a deal like everybody else.”

by Jane Porter and Burt Helm