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The secret life of discounts

Jennifer Collins Dec 16, 2011

Kai Ryssdal: Live from The Citadel Shopping Outlets in Commerce, Calif., it’s Friday, the 16th of December. Only eight shopping days left, gang, which is kind of why we’re here — what can only be described as the prototypical white-hot center of American holiday retail: a shopping mall. Fifty-foot Christmas tree, about all that’s missing is the saccharine holiday music (the stereo broke, they told us), shoppers bustling about with their bags. Guess, Coach, Gymboree, Tommy Hilfiger — you know the drill — because this is what we do this time of year: We buy.

But we’re four long years into a really bad economy. An economy that we’ve all been told I can’t tell you how many times depends on consumers. So we’ve come down to Commerce, 20 minutes or so from downtown L.A., to explore the way we shop and the way businesses sell.

In an environment where people are perpetually watching their wallets and retailers respond by discounting merchandise and hosting flash sales, how low does a price have to go before people buy? In other words, what’s the tipping point? 30 percent off? 50 percent? 75 percent? And, in this environment, when everything is always on sale at some point, do we even know what a bargain is anymore?

Marketplace’s Jennifer Collins picks up our theme of the day how we shop and how businesses sell.

Jennifer Collins:Harry Friedman is a retail consultant in Southern California. He’s been in the business for more than 40 years. I asked him to go shopping with me at a local Macy’s on a recent Monday afternoon.

Macy’s employee: Do you need some help?

Harry Friedman: There’s virtually nothing here that’s not on sale.

We’re in one the most profitable sections of the store: accessories . I’m looking at a table of cashmere scarves — plain, plaid, leopard print. The price tag says $88. But that’s the pretend price.

Friedman: So it’s 25 off. Everything is on sale. So, like, we quitted 20 years ago, retailing.

By that Friedman means, stores used to sell products – a winter coat, a silk blouse. Today, their selling price: 30 percent off, 50 percent off. And that has turned retail into a sophisticated numbers game.

Friedman: Your original mark up, right, is much higher, which accommodates bigger discounts. That’s what has changed the most.

Alison Levy is a former buyer for Bloomingdale’s. Now she’s a retail consultant with the firm Kurt Salmon. She says retailers have had to learned how to make a profit with discounts.

Alison Levy: If there’s an area of the store where there isn’t a deal, the consumer’s not going to shop that area.

So to offer those bargains without taking a loss, retailers are relying more on their private labels and they’re making bigger bets.

Levy: They say, we think it’s going to be all about the cashmere scarves. You know what? Let’s take a stand. And in the past we only bought 50,000 cashmere scarves. But I bet if we got to the supplier and we tell them that this year we’ll buy 75,000, that they can give us a better price.

And if the buyers bet wrong, that better price is yours. And all those promotions? They do more than goose sales. They let give retailers valuable data on what’s selling and for how much. Ever wonder why Macy’s has so many One Day sales?

Mark Santiago: We had one last week, we’ve got one this week and we also have another one going into next week as well too.

Mark Santiago manages 10 Macy’s in Southern California. And all those in-store specials? They’re strategic. It was no accident Justin Bieber was tapped to promote his fragrance Someday for one of the biggest discount days of the year.

Justin Bieber Ad: Yo, I’m going to Macy’s Black Friday sale. Taxi Driver: Ahh!

Santiago: It was a very fun commercial. It helped drive a lot of traffic into our stores.

At midnight, when the non-Bieber crowd may have been asleep. And a lot of those fans left with more than just the limited edition Someday gift set. Behind the scenes, vast data tracking systems help stores keep tabs on millions of pieces of merchandise so prices can be tweaked in an instant. Diana McHenry is with the software company SAS.

Diana McHenry: These tools really give you rocket science without having to be a rocket scientist.

For instance, when a collection is picked over – and just a couple odd-sized pieces are left, store managers can adjust the price to clear out the leftovers.

McHenry: When you’re dealing with so many stores and so many items and so much inventory, finding out what’s where for a merchant is really hard to do.

And all of this is designed so that when you pick up that perfect blue cashmere scarf for 75 percent off, you feel like you’ve pulled off a steal. But actually that’s been the plan all along.

Macy’s employee: Have a good holiday.

I’m Jennifer Collins for Marketplace.

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