Can Apparel Stop Its Downward Discounting Spiral?

What consumer doesn’t need to buy clothes? And what average consumer with a little extra cash isn’t going to feel fine spending a little more to get the latest fashion trends in their closets? It’s temptingly tautological how success and profitability should follow in so-called “essential” industries like apparel, grocery and restaurants, but the extended rough patch established apparel retailers are mired in proves that even their vertical isn’t immune to turbulence.

Especially if it’s apparel retailers themselves who are a little loose on the controls steering the ship.

Rumors of apparel’s imminent, self-designed demise started circulating as far back as November, when outlets started reporting on Macy’s escalating emphasis on its Backstage stores that featured overstocked inventory, sometimes at up to 80 percent off the regular retail price.

“We are finding that Backstage is definitely attracting a younger consumer,” Macy’s CEO Terry Lundgren said during a call with investors in late 2015. “And assuming these pilots work, we’ll be ready to roll this concept out as a hybrid model quickly.”

While the department store may be determining the success of its Backstage gamble through increased in-store traffic, it’s a lot harder for any high- or low-end apparel retailer to make the same argument relying on revenue and profit. In fact, Nordstrom Executive Vice President Peter Nordstrom recently baldly admitted that his company’s insistence on discounting and promotions to drive traffic and transactions did increase some sales metrics, but nowhere near enough to offset the losses incurred by heavy price decreases.

Nordstrom concluded grimly, “So it’s not a good situation for us.”

For Nordstrom, for Macy’s and for apparel retail as a whole.

Complicating the situation, however, is the argument that retailers more or less made this bed through aggressive and unrestrained discounting, and though they’re currently finding it uncomfortable to sleep in, there’s too much momentum in the market to do much to stop it. London-based retail intelligence firm Euromonitor International explained how the diffusion of time-sensitive sale-heavy days during the holiday shopping season — realistically, customers are hunting and researching deals from Halloween up until Christmas Eve itself — has engendered a shift in priorities in the mind of the average consumer. Availability is no longer a paramount concern, so shoppers can focus on securing the most advantageous price. This means a greater capacity for patience and a shift in the balance of power from retailers to consumers. While the average shopper knows he or she is going to make a purchase eventually, why not wait a week for the price to edge down?

This hurts retailers both by chipping away at already razor-thin profit margins and via the more pervasive damage to their perceived brand equity, especially for luxury names like Nordstrom. Low-end retailers don’t have to lose when slashing prices, but a high-end one sacrifices years and sometimes decades of brand identity generation by slapping a 50-percent discount on a designer handbag. Euromonitor explained that U.K. retailers have been at the drawing board trying to think of ways to combat this downward spiral of discounting — some have encouraged “conscious consumerism” by eschewing sales altogether in favor of closing on retail holidays — but those radical moves at weening customers off may be misguided, especially since it was these same retailers that got shoppers hooked on bargain hunting in the first place.

In short, retail’s selling strategies may be coming apart at the seams right in front of the market’s eyes. And while the loudest voices in the room are never the best barometer of how to get out of the mess they find themselves in, pundits like Jim Cramer can be effective canaries in collapsing coal mines.

“Apparel, department stores, in other words, stay away,” CNBC‘s resident celebrity analyst remarked on Friday (Feb. 19). “I was going to shop this weekend. I got to hold off. I’m too depressed.”