MONEY Shopping

Why All Those Great Holiday Deals Aren’t Really Great Deals

deflated balloon saying "Sale Now On"
MONEY (photo illustration)—Kutay Tanir/Getty (string); Adrian Turner/Alamy (balloon)

Sale prices are faker than ever this holiday season, as retailers openly admit that no one buys items at the ridiculously inflated "regular" or "suggested" amounts listed on price tags.

When seemingly everything is always on sale, is anything really on sale?

That’s a question that any savvy, value-oriented shopper must ask from time to time—and especially during the annual holiday shopping season frenzy, when it’s routine to see entire stores discounted by 40% or 50%. When such markdowns are a dime a dozen, who is foolish enough to actually buy anything at full price?

The answer could very well be no one. Something called “price anchoring” is a widely employed tactic in the retail world. Basically, the concept involves the establishment of a high price anchor, which locks into place a perception of value. You’ve probably seen tens of thousands of these anchors, in the form of “list,” “regular,” “original,” “suggested,” or “compare to” amounts shown on retailer websites or price tags. Anchor prices are set intentionally high, not with the idea that consumers will actually pay the inflated prices, but so that the retailer can create the perception of a tremendous deal when the item is inevitably placed “on sale.”

For example, picture a sweater listed with an original price of $100. When it’s placed “on sale” for $50, that seems like quite a deal—a far, far better deal than if the original price were listed at $55 or $60. All along, however, the store selling these sweaters has been planning on getting around $50 apiece for them, and it would probably make a profit even if it sold them for $25 each—which the store surely will during after-Christmas sales.

There’s nothing new about price anchoring. What is new—and pretty darn galling among consumers who expect more pricing transparency—is that in today’s promotion-heavy retail world, “original” prices appear to be getting exponentially more inflated. What’s more, retailers aren’t even pretending that a single customer ever paid its “regular” or “original” prices for anything.

In a new New York Times column, Farhad Manjoo wades into this murky world, trying to figure out how shoppers can evaluate whether or not a deal is a deal when seemingly everything is presented as one. What he reports, among other things, is that this season in particular has seen an “explosion of less-than-stellar deals advertised on the web,” in which there’s really nothing special about all but a very few of the sale prices available on Black Friday and other supposedly amazing days for bargains.

While nearly all retailers engage in the practice of inflating list prices more or less with the sole purpose of making discounts seem more impressive, a Macy’s spokesperson openly admitted that it came up with its original prices “based on many different factors, including the cost of the item, overhead, benefits we offer … as well as our ability to offer the item at a lower price during sale events.” Macy’s also pointed out some fine print on its website alerting shoppers of the following:

“Regular” and “Original” prices are offering prices that may not have resulted in actual sales, and some “Original” prices may not have been in effect during the past 90 days.

Holiday season sales and discounts are presented as being very special, but in fact there’s often nothing special about them—because in all likelihood, the only purchases occur when these items are “on sale.” If a price exists that no one ever pays, it shouldn’t be referred to as a “regular” or “original” price. It could be described by another term: a fake price.

There was a lot of discussion about the topic of fake pricing back in early 2012, when J.C. Penney tried to shake up its business model, in which more than 99% of its sales were below list price, and items were routinely marked down by 50% or 60%. J.C. Penney’s attempt to get rid of such extreme discounting and offer fair prices from the get-go failed miserably, at least partly because shoppers are compelled to buy more when retailers use the ruse of inflated price anchoring. And now we’re left in a situation in which sales are ubiquitous, both sale and original prices are arguably more meaningless than ever, and it’s never been more difficult to tell when a deal is actually a deal.

To some extent, shoppers seem to be aware of all of this. Some of the reason that Black Friday purchases were down this year is that the majority of consumers felt that Black Friday sales are meaningless because they assumed—rightly so—that there would be “more sales throughout the holidays.”

MONEY Pick from a Pro

Food Lion Parent Delhaize Faces Down the Big-Box Challenge

Delhaize Group, the Belgian parent of the Food Lion grocery chain, has struggled. But updating its image and offerings could be a big boost, says this fund manager.

The Pro: Jonathan Matthews, manager of the T. Rowe Price International Growth & Income Fund.

The Fund: T. Rowe Price International Growth & Income Fund ROWE T PRICE INTL GROWTH & INCOME TRIGX 0.3615% seeks out shares of large, under-priced companies around the world. Under Matthews’ tenure, which began in 2010, the fund has beaten two-thirds of its peers over the past three years.

The Pick: Delhaize Group DELHAIZE GROUP DEG 0.3594% . Based in Belgium, the retailer operates grocery chains in eight countries. U.S. operations include more than 1,100 Food Lion stores, as well as smaller chains like Hannaford and Bottom Dollar Food.

With low margins and little customer loyalty, the grocery business has never been easy. Then add in a sluggish economy that’s hurt value-oriented consumers. Then toss in stiff competition from giant box stores such as Wal-Mart WAL-MART STORES INC. WMT 1.1038% and Costco COSTCO WHOLESALE CORP. COST 0.7195% , and it’s no surprise that Delhaize — whose U.S. operations make up about 60% of its $21 billion in annual sales — has been struggling of late.

In 2012, the company closed 126 U.S. stores and last year replaced its chief executive. The upheaval has taken a toll on its stock price. The grocer’s shares trade about 3% below their level five years ago. Meanwhile, the rest of the market has more than doubled.

Delhaize

Matthews is quick to acknowledge Delhaize’s woes. But he thinks investors may be overreacting.

Not in dire straits.

For starters, while some retailers — think Best Buy BEST BUY BBY 0.9228% and Barnes & Noble BARNES & NOBLE BKS 0.9178% — are fighting for their lives, that’s not an immediate concern for grocers like Food Lion.

Moreover, with the stock having logged such poor performance, a merely modest improvement in profits could boost the company’s shares. “It’s priced for no growth,” Matthews says, “when two-thirds of the business” — Food Lion — “is underperforming its business model.”

It’s no secret that many types of retailers have been decimated by online players such as Amazon. But grocers are different. Unlike books and DVD players, groceries can’t be stored for months on end in remote warehouses. What’s more buyers are used to being able to inspect foodstuffs — squeezing the avocados and melons and feeling apples for bruises — before they buy. That means at least so far online grocery delivery has been largely a niche urban phenomenon. While prices can be competitive, inconveniences like annual membership fees and minimum order sizes remain. “It’s much harder to do food online, especially fresh food.” says Matthews.

Facing a big box challenge.

Still, grocers are facing that other big retail threat – the big box store. Wal-Mart is often cited as the nation’s largest grocer. Target, although less successful, has also gotten in on the act. While competition from those two would make life difficult for any chain of stores, grocers face the additional problem that big box stores don’t necessarily need groceries to generate big profits on their own. These competitors might be happy just to have their food aisles lure customers in to buy other stuff.

So has Wal-Mart hurt Food Lion’s sales? Sure. But Wal-Mart has been at it for more than 20 years, and Food Lion is still here. While Matthews acknowledges it’s tough to match Wal-Mart’s prices, Food Lion doesn’t necessarily need to. It’s 1,100 stores scattered across the Carolinas and Mid-Atlantic states tend to be more convenient than their big box rivals — typically located close to downtowns, rather than out on the highway. That means Food Lion probably has lost shoppers who make a once-a-week trip to stock up.

On the other hand not everyone wants to drive half an hour every time they run out of butter or ketchup. Then they go to Food Lion, according to Matthews. “These are more convenience-store like,” he says. It’s an advantage that Food Lion itself has sought to play up in clever television ads.

Leveraging its existing customer base.

Of course, merely holding the line against Wal-Mart won’t be enough. The company has to find a way to grow too. Matthews believes it can. The strategy won’t necessarily be opening new stores, but wringing more money out of its existing ones.

One of Food Lion’s problems, Matthews argues, is that during the 2000s, the company took too much money out of its U.S. stores, essentially milking them in order to invest in its overseas operations. Ultimately, the strategy didn’t generate the hoped-for profits, while the U.S. stores grew “stodgy,” in Matthew’s words.

“They have an old fashioned assortment, and they have far too many products. They need to modernize, and they need to focus on the products that actually sell well,” he says. But he’s optimistic. “The challenge is to get people to spend just a few more dollars in the store.” He says. “It’s not easy, but it’s not that difficult.”

Food Lion seems to have taken that kind of criticism to heart. According to one of Delhaize’s own recent investor presentations, sales per square foot in Food Lion stores amounted to $7.90 in 2013, up nearly 6% from $7.50 in 2010. But — as if to underscore the room for improvement — the company also pointed out that a group of rivals including Wal-Mart and Publix managed $10.20 of sales per square foot.

In May, Food Lion unveiled what it calls its “Easy, Fresh, and Affordable” initiative – essentially a plan to overhaul its stores, starting with 29 Wilmington, N.C., locations in 2014 and to improve its product line. These updates, according to the Charlotte Business Journal, will include a “fresh garden cooler,” grouping organic and gluten free products together, and focusing on trendier items like premium coffee and Greek yogurt.

Food Lion also tweaked its familiar logo (while keeping the distinctive old-timey lion) to provide “a more modern look for customers,” according the chief executive’s statement.

Of course, hurdles remain. Not least is Delhaizes’s non-U.S. operations, where the turn-around strategy isn’t as clear cut. The head of the company’s 850-store Belgium arm departed in May, followed in short order by an announcement that the company is considering shuttering 14 stores there and laying of 2,500 workers in an effort to cut costs. Meanwhile, Delhaize also recently sold its Bulgarian operations, and reached a deal to sell its 39 stores in Bosnia & Herzegovina.

With its stock at $16.65, Delhaize trades at a price/earnings ratio of 11.3, based on estimated 2015 profits. That compares to about 13.1 for Ahold, the Dutch supermarket company which owns Stop & Shop, and 14.7 for Wal-Mart.

Matthews doesn’t have a specific price target for Delhaize. But so long as management makes good on its plan to boost sales and profits, he thinks the stock could trade “towards the rest of the market.” A multiple of 15, inline with the S&P 500 index, suggest a price of $22.

TIME retailers

Yep, RadioShack Is Still Doing Terribly

That well-received Super Bowl ad might end up being the only successful endeavor by RadioShack in 2014. The struggling electronics retailer posted another huge loss in the first fiscal quarter, with both overall and same-store sales plummeting.

RadioShack generated just $737 million in the first quarter, down from $848 million a year ago. Same-store sales were down 14 percent due to decreased foot traffic and underperformance in mobile sales. The company’s net loss was $98 million, more than triple the $28 million loss during the same period last year.

The retailer has faced headwinds for years, but RadioShack’s problems have escalated as consumers have grown more accustomed to buying electronics online through sites like Amazon. RadioShack CEO Joseph Magnacca said in a release that the company will reverse its fortunes by expanding its line of concept stores and launching new, exclusive products.

RadioShack said earlier this year it’s planning to close more than 1,000 of its U.S. locations, but in its earnings report the company said it now plans to close just 200 this year.

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