February 27, 2009


We’ve all heard about the current state of the U.S. economy—unemployment is way up, businesses are shutting down, the government is bailing out companies left and right, consumer spending has plummeted, the sky is falling, the sky is falling… This article discusses how Saks, a retailer that sells luxury clothing and accessories, is dealing with it all.

Saks has taken the obvious avenue of reducing prices in their attempt to stay alive in a market that has been experiencing drastically decreasing demand. This measure is in total compliance with the Law of Demand; however, Saks faces an unusual problem.

Many Saks’ fashion-forward customers are not your typical consumers—they defy some of the basic characteristics on which economic consumer theory is based. Such consumers receive more utility from relatively expensive goods because they assume a lower price means lower quality (not to mention their lowered egos when they wear lower-priced merchandise). Since they are put off by lower prices, those consumers may turn to other high-end retailers like Nordstrom or Neiman Marcus to quell their expensive taste. Saks risks losing an important part of their target market, and their image along with it.

The discounted prices on merchandise have helped Saks sell their inventory (at a loss) to consumers who perhaps otherwise would not have shopped there at all. In reference to the steep discounts taken, the article quotes Stephen Sadove, the company’s CEO: “Some actions were taken that you’ll probably never see again.” Maybe that will appease Saks’ traditional epicurean customers. In an effort to keep their new, more price-sensitive customers coming back, the article also mentioned that Saks plans to start carrying lines of “exclusive but more affordable merchandise.”

Saks is doing their best to carry goods that will provide a greater amount of utility to consumers with a wider range of budget constraints than they have in the past. If their plan is successful and more consumers start to spend their money there, the effect could be similar to that of an increase in income—an increase in demand. Best of luck to them.

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