The Christmas sales begin -- now

By BusinessWeek

Bargain hunters are in for fire-sale prices this holiday season, although shoppers at upscale stores still may have to pay top dollar.

On Nov. 2, a series of discount stores reported anemic sales for October, raising the prospect that lower-income consumers will have to be lured into stores with aggressive discounting.

The world's largest retailer, Wal-Mart (WMT, news, msgs), led off with a dismal 0.3% increase in same-store sales at its flagship stores in October. Even after adding in a 2% gain at its Sam's Club division, Wal-Mart's overall same-store sales climbed a mere 0.5%. Same-store sales is a closely watched retail barometer that measures the sales of units open at least a year.

Other discounters were in the same boat: Fred's (FRED, news, msgs) same-store sales declined 2.5%, while analysts were expecting growth of 4.6%. Family Dollar Stores' (FDO, news, msgs) same-store sales rose 1%, compared with forecasts of 2.9% growth. And Dollar General's (DG, news, msgs) comp-store sales rose 1.9%, while the Street expected growth of 2.9%.

Even the chic discounter Target (TGT, news, msgs) fell short of analysts' forecasts, with a sales gain of 3.9%, instead of the anticipated 4.2%.

On Nov. 3, Wal-Mart fired the first salvo, introducing deep price cuts on several electronic items. One of its deepest price rollbacks was for a Panasonic 42-inch HD plasma TV, which is available for $1,294, down from nearly $1,800. The Kodak C875 digital camera is available for $249.64, compared with $298.77 before the cuts, and the Cingular C139 prepaid phone is now selling at $19.97, down from $29.98.

The discounts are effective through Dec. 31. And experts expect Wal-Mart to continue leading the way.

Wal-Mart to 'come out swinging'

"The opportunities are too good to let the season get away, and I expect Wal-Mart to come out swinging with aggressive price promotions," says Darrell Rigby, head of global retail practice at consultancy Bain.

Wal-Mart will likely step up pressure on other retailers of toys and electronics. In a statement to investors that accompanied the October results, Tom Schoewe, Wal-Mart's chief financial officer, said: "Price rollbacks on key toys that went into effect in mid-October generated significant lift in unit volume."

Schoewe added that Wal-Mart is planning aggressive "rollback" advertising and marketing programs that should put the company into the "price leadership position" in the fourth quarter.

Consumer windfall?

What does this mean for Wal-Mart's rivals? A price war could blast the profits of competitors, particularly Target. "If Wal-Mart gets too promotional, then the pressure is on Target, Toys 'R' Us, Kmart and Sears Holdings (SHLD, news, msgs)," says Richard Hastings, senior retail analyst at researcher Bernard Sands.

For consumers, however, the deep discounting may be very good news. Consulting firms such as Bain and Ernst & Young have been predicting solid sales for the holidays, with increases of 5% to 7%.

Discounting will be particularly welcome news for lower-income shoppers. They haven't seen the same kind of momentum from wage growth and jobs creation that well-heeled consumers have felt. The Labor Department's latest numbers show that the industries that have been hiring are in services, education and health, while the number of retail and manufacturing jobs has fallen.

"Persistent gains in jobs and income are skewed toward the management and professional jobs held by higher-end consumers," says Frank Badillo, senior economist and vice president at research firm Retail Forward.

Luxury leads the way

On the other end of the spectrum, higher-income consumers are feeling quite flush. They've had more job security and wage increases, at the same time they've benefited from lower prices at the pump.

Perhaps it's little wonder then that high-end retailers have been faring much better than their discount counterparts. Luxury chain Saks (SKS, news, msgs) posted a 9.2% gain in same-store sales, beating Wall Street projections of a 3.6% gain.

In addition, Nordstrom (JWN, news, msgs) reported a strong 10.7% jump in sales, topping analyst estimates of 6.2% by a wide margin. "Even J.C. Penney (JCP, news, msgs) is doing well because it is moving away from middle income and is skewing upscale," noted Badillo of Retail Forward. Penney's same-store sales surged 8.1%, compared with forecasts of 6.2%.

So the high-end stores may not have to cut their prices as deeply as the discounters this holiday season. Wal-Mart is likely to lead the way in the price rollbacks, putting pressure on pretty much all of its rivals. For consumers, that means they can enjoy their shopping this year just a little bit more.

By Pallavi Gogoi