Welcome to retailing’s hottest trend: trading down. After the worst Christmas season in five years for the $750 billion retail industry, shoppers are cautiously returning to the aisles. But, in the lingo of merchants, they’re “down-shopping,” gravitating to bargain-basement retailers like Wal-Mart, Target and Kmart. New spring fashions have gone begging at department stores and specialty retailers like the Gap and AnnTaylor, chains where sales are off more than 10 percent this year. In contrast, sales at discount stores have increased 4.4 percent this year, almost double the rate of retail sales overall. With all the pocket-book anxiety lately, even discounters aren’t enjoying the heady growth of a year ago. But they are increasingly becoming a safe haven to buy everything from toilet paperto capri pants. And warehouse clubs like Costco and Sam’s Club, which feature a variety of bulk goods at cut-rate prices, are doing even better, with sales jumping by 6 percent. Even the no-frills, $1 stores that cater to low-income consumers with inexpensive basic merchandise are attracting more well-heeled shoppers. More than half of U.S. households shopped $1 stores in the past year, according to AC Nielsen.
The purveyors of cheap chic are moving quickly to take advantage of newly frugal shoppers. Wal-Mart is snatching up the credit-card customers of bankrupt Montgomery Ward, while Target will soon affix its bull’s-eye logo to 35 old Ward’s locations that it acquired last month. The dollar retailers are also racing each other to grab vacant storefronts. “We are looking at these slowing times as an opportunity,” says George Mahoney, executive vice president of fast-growing Family Dollar. Kmart is spending big on national ads promoting the comeback of its “Blue Light Special”–the spur-of-the-moment sales that the retailer extinguished a decade ago to shake its cheap image.
The discounters’ popularity is bad news for department stores. Even during the booming ’90s, department stores saw their share of the retail market dwindle from 52 percent to 31 percent, while discounters gained share. Since the demise of Ward’s and Bradlee’s department stores in December, other old-line stores like Sears and JCPenney have closed dozens of outlets and laid off thousands. More retailing casualties are anticipated. Moody’s Investor Service predicts that the retail industry will be second only to telecommunications in defaults this year. Last month Moody’s cut Penney’s credit rating to junk-bond status. New Penney CEO Allen Questrom promises to turn around the threadbare stores with fresher fashions within three to five years. But after six years of declining earnings and four years of sinking sales, Penney, analysts say, is running out of time.
As old stores struggle, discounters are enjoying reverse snob appeal. When friends admire Mindy Young’s stylish cashmere sweater set, she proudly responds: “Costco.” Young, a part-time social worker with three kids, calls Costco her “first line of defense” against the slowing economy. It’s a place where she can find good deals on everything from frozen chicken breasts to big-screen TVs. For others, though, discount shopping has become a necessity. Julie Woods began shopping at discounters last month after her husband lost his job as a software-company executive. “We’re going to be more frugal in everything we do,” says the Ann Arbor, Mich., mother of two. That kind of anxiety is making discount executives sleep well at night.
