Buying habits changing how stores are run and goods marketed

NEW YORK -- The Great Recession and Americans' retreat into thriftiness are teaching retailers a new lesson: How to survive when consumers are focused on "needs" rather than "wants."

For years, shoppers splurged on everything from $5 lattes to $200 jeans, and retailers responded by opening more stores and offering more choices. Now, beset by high unemployment and limited access to credit, shoppers are limiting most of their purchases only to essentials or the best deals.

Retailers' first response to the sudden and sharp pullback in spending last fall was to offer deep discounts and more coupons to keep merchandise moving. But to survive over the long haul, the watchword for stores and product makers is "small."

They're stocking shelves with slimmed-down milk jugs and half-sized pies. They're charging less for stripped-down products such as blouses with less-frilly designs and detergents with less powerful cleaning action. Brands are disappearing, too. Some stores are being reduced in size, if they're not shut down entirely.

The changes are likely to last for years. Even when the economy improves, it will take years before the debts that piled up during the decade-long shopping spree are paid off. Americans are also getting used to their newly adopted frugal habits of saving more and spending less.

"I don't think we are going to go back to business as usual," said Steve Sadove, chairman and CEO of Saks Inc., operator of Saks Fifth Avenue.

For retailers, the changes need not be devastating. In fact, those that survive will be leaner and more efficient.

"There's nothing like a good old-fashioned recession to make you run a better business," J. Crew Group Chairman and CEO Millard Drexler said recently.

Merchants are now keeping less stock on hand and delivering goods into the store more frequently to keep stores looking fresh. Retail executives hope that strategy will help cut down on aggressive discounting.

The long-term goal is for merchants to carry 1½ months' worth of inventory, compared with 3½ months in the past, says retail consultant Burt P. Flickinger III.

Apparel companies are focusing on the most popular colors instead of oddball hues.

Manufacturers and retailers that held firm on pricing a year ago to try to protect their brands have felt the sting.

Consumer products giant Procter & Gamble Co., whose revenue fell 11 percent in the latest quarter as it remained steadfast on pricing for its powerhouse brands, is experimenting with price cuts. P&G is even testing a lower-cost version of its signature Tide laundry detergent. Tide Basic sells for about 20 percent less than the regular powder form and lacks the latest cleaning ingredients.

And Saks has had to shift toward the lowest and mid-tier price points at its stores. More men's dress shirts range from $95 to $200 and fewer are priced at $300 or more.

Retailers are putting more stock in store-label products, which cost less for consumers and tend to be more profitable.

This year, 37.5 percent of business is expected to be from store brands, according to a survey by the National Retail Federation. Two years ago, that figure was 26 percent.

Consumers' focus on value and saving money has shaped how products are marketed.

Sellers are becoming more sympathetic to consumers' woes in their ad campaigns, a big shift from past recessions in which they focused on price-cutting.

In the past, "retailers had a hard time acknowledging [in ads] when things were bad," says Ellen Davis, a spokesman at the retail federation. They feared it would make their business worse.

Consumers aren't going to be "hyped" to buy merchandise anymore, says Bud Konheim, president of designer clothing maker Nicole Miller. They want to be convinced that they're getting more value.

Marketers are vying to be remembered as "the companies that helped see us through" the hard times, says Julie Winskie, president at public-relations agency Porter Novelli.

Chains have cut the number of stores they operate. Since last year, Starbucks Corp. has been working to close about 900 cafés. And office supply chain Office Depot announced in July that it was closing 9 percent of its North American stores.

About 143,000 stores closed last year, the highest number since 2001, according to an analysis of government figures by Michael Niemira, chief economist at International Council of Shopping Centers.

He predicts 140,000 more will close this year and 135,000 in 2010.

Suzanne Mulvee, senior economist at Property & Portfolio Research, says she expects mall and shopping center vacancies could reach 19.7 percent this year and rise to 20.2 percent in 2010.

A healthy market would be about 14 percent.