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Spokane, Washington  Est. May 19, 1883
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SHOPPING LIFE

Starbucks dropped the price of a medium iced coffee to just under $2.

American Eagle cut out the ribbon from the inside waistband of its khakis and lowered the cost.

Pottery Barn launched a new “Comfort Collection” sofa that starts at $999.99, $300 less than the “Basic Collection” sofa.

Retailers have absorbed the lessons of a ruinous holiday season. Caught with shelves full of unsold merchandise, they slashed prices to draw in shoppers.

But the strategy was unsustainable: It decimated profits and resulted in massive layoffs, killing off a number of chains, including Circuit City.

Serving recession-era shoppers, retailers realized, would require a long-term strategy featuring lower prices.

The new consumer has curtailed spending and increased savings to 10-year highs.

Smaller houses are newly coveted, bringing the average size of a new home down in 2008 for the first time in 35 years, according to the National Association of Home Builders.

Fancy dinners out have been scaled back, prompting restaurants to reconfigure their menus.

A recent survey by Boston Consulting Group found that 48 percent of consumers said they traded down on products last year, an increase from 41 percent in 2007. The number of shoppers trading up fell by 6 percentage points.

Some price reductions have come from stripping out fancy details for which retailers once charged a premium.

Production costs have also dropped, allowing sellers to pass on the savings. Retailers are streamlining supply chains and creating new merchandise with cheaper components and lower price tags.

Getting shoppers to spend without resorting to discounting is crucial to retailers’ bottom lines. According to Michael Silverstein, senior partner at Boston Consulting Group, gross profit margin on so-called first delivery merchandise can reach 60 percent or more. After the first markdown, the profit margin shrinks to 40 percent. The second price cut slashes the margin to 20 percent.

But it remains unclear whether consumers are willing to open their wallets. Retail sales were down 10.7 percent in March from the same month last year, according to government data. Unemployment is near 9 percent, wage growth has stalled and home prices continue to fall.

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