October 30, 2008, 12:00 AM

As the economy sinks, will the sleigh rise?

Even in the face of economic turmoil, more than 80% of retailers believe their web sales will grow this holiday season.

With the economy teetering on the brink and consumers frazzled by the sinking stock market and manic efforts of elected officials, the big question in retail today is: Will holiday sales this season be HO-HO-HO or HO-OH-NO? It depends on the sales channel, retailers, research firms and analysts say. Sales have been down this year, in some cases significantly, in bricks-and-mortar stores. However, online sales continue to grow-though not at the rapid pace of years past.

Even amid economic turmoil, 81.1% of retailers believe their holiday web sales will grow to some degree this season, according to the latest Internet Retailer survey. This is good news-for the most part, some analysts say.

“It is encouraging to see four out of five expect to grow web sales in the face of such a poor economy,” says Jim Okamura, senior partner at retail consulting firm J.C. Williams Group Ltd. “However, that one-in-five figure is higher than I’ve seen in a long time, especially in the face of continuing online sales growth where the focus being paid to the online channel has never been higher.”

An edge

Retailers and research firms are predicting growth in holiday web sales in large part because of some advantages the web has over stores that are particularly important during hard economic times.

“The web has a certain degree of immunity from tough times,” says Patti Freeman Evans, research director and senior retail analyst at JupiterResearch. “Consumer perception is you can get things cheaper online. And there’s a much more affluent consumer buying online. It takes more dire circumstances to make more affluent consumers change their behavior.”

According to Internet Retailer’s holiday sales survey of 220 web-only retailers, chain retailers, catalogers and consumer brand manufacturers, 23.9% predict their online sales will grow 5% or less; 18.3% say 5.1% to 10%; 13.3% say 10.1% to 15%; 11% say 15.1% to 20%; 6% say 20.1% to 30%; 1.8% say 30.1% to 40%; 1.8% say 40.1% to 50%; and 5% say more than 50%. On the flipside, 4.1% of survey respondents believe their online sales will decline 5% or less; 6.4% say 5.1% to 10%; and 8.3% say more than 10%.

“This year we’ve been growing 25% year over year through August. But we’ve seen that slow down a bit in September and October,” says Brian Elliott, CEO of online bookseller Alibris Inc. He says the eruption of economic events beginning in September may temper growth for many retailers. “Consumers, like retailers, are now nervous they themselves will be financially impacted, one way or another. For us the holiday season will be OK.”

Indeed, many consumers have become wary of parting with discretionary income; but the holidays will still be the holidays, even if they’re pared down, says Gordon Magee, Internet marketing and analysis manager at pet supplies retailer Drs. Foster and Smith Inc. “The minor silver lining today is Christmas,” he says. “It will help, but it’s minor.”

72% of retailers say the current economic climate is affecting their plans for the holiday season, according to the Internet Retailer survey of IRNewsLink e-newsletter readers conducted last month with e-mail marketing and survey firm Knowledge Marketing. And they’re taking a variety of steps to make the most of the most wonderful time of the year, even when it’s not so wonderful.

According to the survey: 37.6% of retailers are including more lower-priced items in their assortments; 36.7% are beginning holiday promotions earlier than last year; 29.4% are reducing prices, either selectively or across the board; 21.6% are offering free gifts with purchases; 19.7% are increasing advertising spending; 17.4% are working more closely with affiliates; and 15.6% are conducting invitation-only sales.

“The top three are tried and true tactics to prop up top-line sales. However, every retailer needs to take a look at those actions in the context of what they are trying to do,” says Okamura of J.C. Williams Group. “An outdoors gear and apparel retailer may have worked a long time to establish itself as an outdoors authority, something fundamental to its strategy online and in stores. If it makes a knee-jerk reaction to pull the trigger on more lower-priced items and reducing prices, that may compromise its positioning.”

However, if the competition is adding more low-end items and reducing prices, then a retailer must decide if it’s prepared to compromise on brand positioning to match the competition.

“Whoever blinks first can trigger the snowball effect. The knee-jerk reaction to start cutting into margins to try to maintain the top-line sales numbers can be a slippery slope. Once the snowball begins, there goes the season for anything in terms of margins,” Okamura says. “What worries me most is the biggest players, like Wal-Mart and Target, are already out there saying this is what they’re going to do. They have the scale to withstand it. But when you follow this down to the small retailer level, if they eat away at what little margin they have, that could be disastrous for them.”

Promotion commotion

Retailers and other experts also urge caution when it comes to promotions. Just as lowering prices to combat economic conditions can eat into margins, promotions during a time when consumers are looking to get the most bang for their buck can hurt the bottom line.

“We’re seeing more price comparison shopping, and we’ll be doing e-mails that appeal to price shoppers-campaigns that talk about how sale prices are going to be more important this year,” says Elliott of Alibris. “But, at the same time, we’ll be more judicious with the use of promotions to help balance the e-mails out. Consumers are likely to get more intense when it comes to taking advantage of coupons and promotions this holiday season, so the model for promotion usage during a good economy will not hold in a bad economy.”

Promotions are important, but they’re a double-edged sword, adds Magee of Drs. Foster and Smith.

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