Ah, the holiday season. Peace on earth, goodwill toward
men. And behind the scenes in the retail world, brutal,
no-holds-barred competition, with heavyweight contender
Wal-Mart Stores (NYSE: WMT) out to utterly
brutalize its rivals. Season's greetings!
Strong fourth-quarter performance is absolutely essential
for retailers, since that period typically makes up almost
40% of U.S. sales. So nearly two full months before Dec. 25,
the price wars have shifted into full swing. Wal-Mart has
already announced its second (!) round of price cuts on
popular toys. Back in September, Wal-Mart threw down the
gauntlet when it announced it was offering 100 toys at just
$10 each.
Another high-profile price war has been in the offing,
this one concerning best-selling books. Some hardcover tomes
by big-name authors are going for as low as $9, as retailers
like Wal-Mart,
Amazon.com (Nasdaq: AMZN), and
Target (NYSE: TGT) race to the bottom. Is it
any surprise that downmarket retailers are slashing prices,
when even traditionally price-insensitive luxury names such
as
Coach (NYSE: COH) now have to do much the
same (
albeit in their own understated way)?
You've got to wonder what will become of any weaker retail
names that may want a piece of the action.
Sears Holdings (Nasdaq: SHLD),
Borders Group (NYSE: BGP), or
Overstock.com (Nasdaq: OSTK) just don't have
the financial or marketing muscle to really make a game of
it.
Wal-Mart has thrown down the gauntlet. "We will not be
beaten in price this holiday season and we hope that will
draw comparable store sales," said Vice Chairman Eduardo
Castro-Wright in mid-October. When it comes to attracting
shoppers, no one should underestimate Wal-Mart's fearsome
firepower.
Not long ago, Wal-Mart's low-priced salvos blasted some of
the biggest toy retailers financial distress or bankruptcy.
FAO Schwarz and KB Toys suffered repeated bankruptcies before
being swallowed by Toys "R" Us, whose own survival looked
dicey several years ago, when it faced its own price war
against Wal-Mart.
Price wars don't just hurt competing retailers; they can
also squeeze manufacturers and suppliers. If shoppers get
used to $10 toys or books, the companies that make them could
find themselves forced to accept thinner margins in the long
run.
Wrapping up tons of toys, books, and other merchandise at
low, low prices will work out great for consumers on tight
holiday budgets. However, investors need to recognize that
the holiday season is crucial for retailers. Ruthless price
wars could curtail sales and profits for many companies.
That's yet another good reason to make sure your portfolio
consists of strong, fiscally fit businesses. If Wal-Mart's
declaring war this holiday season, its jingle bells might
toll a death knell for any weaker companies in its way.
This article was originally published as
Christmas Joy? No, a Bloody Battle for Buckson
Fool.com
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