Courting thriftier shoppers, retailers take fewer-frills tack

Retailers have begun to embrace the new cost-conscious consumer, developing products they can sell at lower prices without driving themselves out of business in the post-splurge era.

Starbucks dropped the price of a medium iced coffee last week to just under $2. American Eagle cut out the ribbon from the inside waistband of its khakis and lowered the cost. Pottery Barn launched a new “Comfort Collection” sofa that starts at $999.99, which is $300 less than the “Basic Collection” sofa. Even Rock & Republic, whose trendy denim has graced the backsides of celebrities such as Victoria Beckham, recently unveiled a line of recessionista jeans selling for $128, a 29% reduction.

Retailers have absorbed the lessons of a ruinous holiday season. Caught with shelves full of unsold merchandise, they slashed prices to draw in shoppers. But the strategy was unsustainable: It decimated profits and resulted in massive layoffs, killing off a number of chains, including Circuit City. Serving recession-era shoppers, retailers realized, would require a long-term strategy featuring lower prices.

“What we have is retailers reacting to a very low-appetite consumer and a consumer that has been now taught to wait,” said Michael Silverstein, senior partner at Boston Consulting Group.

Retail sales were down 10.7% in March from the same month last year, according to government data, and consumers have boosted their savings rate to 10-year highs. Smaller houses are newly coveted, bringing the average size of a new home down in 2008 for the first time in 35 years, according to the National Assn. of Home Builders. Fancy dinners out have been scaled back, prompting restaurants to reconfigure their menus.

Retailers reassess their prices and their assortment of products every season. But this year, they are being particularly conservative. They are less willing to take risks on trendy, unproven merchandise and are stocking tried-and-true customer favorites. Many are putting more emphasis on lowering prices on the cheapest version of their products.

Some price reductions have come from stripping out fancy details for which retailers once charged a premium. Production costs have also dropped, allowing sellers to pass along the savings. Retailers are streamlining supply chains and creating new merchandise with cheaper components and lower price tags. In some cases they are sacrificing profit, hoping to make it up in volume.

Gretchen Hitchner sent back the $400 cocktail dresses she ordered from a vendor in favor of stocking up on a more versatile minidress that sells for $98 at Ginger, her boutique in Bethesda, Md. She cut her purchases for the fall by roughly 20% and is trying to offer more clothing for less than $200.

Starbucks is tweaking pricing on its coffees after closing hundreds of stores over the last year.

“Consumers want to feel good about every hard-earned dollar they spend, and we certainly understand that,” Chief Executive Howard Schultz told analysts.

Profit at accessories manufacturer Coach fell 29% to $115 million during the most recent quarter compared with a year earlier. The company responded by pricing its merchandise 10% to 15% lower and offering more styles for less than $300. Next fiscal year, it plans for nearly half of the merchandise in its stores to cost $200 to $300, compared with 30% selling in that range this year.

And J. Crew plans to lower the price of its entry-level jeans by about $20 from $92.50.

“We do know for sure that there is an enormous price sensitivity out there,” J. Crew Chief Executive Millard S. Drexler said in a recent conference call with analysts. “We’re just being real conservative now.”

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Mui writes for the Washington Post.