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On Saks and Starbucks: Demanding Value in Tough Economic Times

Retailers now have to accept that we're not in the mood to pay for 'luxury' goods.

by
Katherine Berry

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February 22, 2009 - 12:00 am
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It may sound counterintuitive given the state of the economy, but the power of discretionary spending has never been higher. Consider the thousands of Americans losing jobs every day. For most of them, unnecessary expenses are the first budget items to be cut as they tighten their belts and look for more work. Even the still-employed know, with few exceptions, that there is no such thing as job security anymore. In an economy like this, every household penny has to go farther. As a result, where we spend our discretionary dollars and what we spend them on can have serious impact.

Last fall, high-end retailer Saks Fifth Avenue slashed prices by 70% in an effort to jump-start the holiday shopping season. The move set off a domino effect. Neiman Marcus and Barney’s quickly followed suit, then brands with their own retail outlets joined the fray. They had to, or shoppers would have steered clear of their stores in favor of savings offered elsewhere.

This trend isn’t limited to high-end retailers. Computer purchases are often discretionary items, with consumers buying a second or third machine solely for their kids. As a result, manufacturers in the tech industry are cutting costs, too. Dell’s $250 Netbook, for instance, represents what Wired refers to as “a race to the bottom.” Lesser known makers of HDTVs are cutting their prices in the hope of wooing value-conscious consumers.

Wherever you look in the discretionary spending sector — cruise trips, hotel stays, airline travel, wireless services, broadband, even the cost of Blu-Ray DVDs — prices are dropping because so few consumers are willing to shell out for things that ultimately won’t put food on the table or keep a roof over their head.

At first glance it might seem like the conditions are ripe for those whose finances are a bit more rosy to make a killing, but the fact is we all stand to gain. Sure, many formerly premium stock prices are low, which can be enticing to those with a few thousand dollars they’re willing to risk today for a big payoff whenever the country recovers. But the cash-flush aren’t the only ones with power here. When discretionary spending is tight all over, those willing to spend discretionary money have a greater say in the industries seeking their money.

Take the entertainment industry, for example, and the movie industry in particular. Ticket prices have remained fairly stable, but the cost of popcorn has gone up. And the quality of the movies being offered? Please. I give you He’s Just Not That Into You as an example of how Hollywood isn’t that into providing value for your entertainment dollar. Despite being roundly drubbed by critics and moviegoers alike, the movie was still the #1 box office draw.

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