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Cutthroat pricing this Christmas season is bleeding profits from traditional retailers — and online rivals are doing most of the damage.
The most recent victim of the price slashing onslaught is Best Buy, whose shares yesterday plunged more than 15 percent after the electronics giant reported a steeper-than-expected drop in third-quarter profits and margins — the result, Wall Street analysts said, of fierce price competition from Amazon.
The startling news was a wake-up call to investors throughout the retail sector — as they ran for the exits and pushed the S&P Retail Index down 3 percent.
From toys to designer togs, experts say online merchants increasingly are forcing stores to deliver bargains — even to well-heeled shoppers who are relatively insulated from the job and housing markets.
“At the luxury end, discounting has become very mainstream because of the Gilts of the world,” said Andrew Sacks of luxury research firm AgencySacks, referring to Gilt Groupe, the online discounter for designer fashions.
“I think the mindset of the affluent is that there are deals to be had,” according to Sacks.
Brick-and-mortar chains are not taking the pricing attack lying down. Yesterday afternoon, Bergdorf Goodman’s Web site listed more than 70 pages of discounts on designer fashions, with markdowns of as much as 40 percent.
Meanwhile, Barneys New York has been slashing prices by as much as 40 to 50 percent at its Madison Avenue flagship — steeper than a year ago despite tighter inventories, says Leslie Ghize, senior vice president at The Doneger Group.
It’s hard to gauge holiday sales trends at Barneys and its luxury cohorts, but “the concerns for the economy probably play into the decision on how steep the markdowns are at this stage of the season,” according to Ghize.
Despite strong results at European luxury firms this year, consumer confidence among the wealthy has remained flat, according to research firm Unity Marketing.
The obsession with price is even more intense among middle- and lower-income shoppers. The Fed’s decision yesterday to hold off on further stimulus — along with disappointing November sales data — sparked the sell-off in retailers’ shares.
In October, Amazon’s shares plunged after it reported disappointing third-quarter profits that were hit partly by price cuts. This month, Amazon isn’t letting up as it slashes its toy prices to undercut big-box stores by 10 to 15 percent, according to BMO Capital Markets.
Likewise, Amazon has been undercutting prices at Best Buy, Costco, Walmart and Target by as much as 10 percent this season, according to a report yesterday by Goldman Sachs.
While retail stocks are the losers, consumers are benefiting.
“Amazon’s prices are so much lower, you’ve got to wonder — how do they make money?” says BMO analyst Gerrick Johnson.
Best Buy is looking to counter Amazon’s low-price assault by ramping up its on Web operations. But the costs of the moves lately have hit profits, according to David Strasser of Janney Capital Markets.
As Best Buy sought to mimic Amazon’s model this fall, “the shift online with free shipping was a significant negative to the gross margin,” according to Strasser.