JCP J C Penney Company Inc

By Suzanne Kapner 

As department stores gear up for the holiday shopping frenzy that unofficially gets under way this week, behind the scenes they have been locked in a battle with some big-name suppliers over rampant discounting.

More brands, including Michael Kors Holdings Ltd., Coach Inc. and Levi Strauss & Co., want to be excluded from storewide promotions such as "Friends & Family" sales. Their goal is to gain control of their pricing, even if it means shrinking sales.

"We've been watching this vicious cycle," said Uri Minkoff, the chief executive of Rebecca Minkoff, the apparel and accessories brand designed by his sister that pulled out of all such promotions at Neiman Marcus, Saks Fifth Avenue and Bloomingdale's this fall. "Discounting becomes a drug that is hard to get off, and it creates this basis for the consumer to not trust regular prices."

Department stores say they want to curtail discounts, but worry about turning off deal-hungry shoppers. J.C. Penney Co. and Macy's Inc. riled up loyal customers in the past when they sought to eliminate coupons.

Now, the issue is upending the delicate relationship between brands and retailers. Many brands got their nationwide starts after Macy's, Bloomingdale's or Nordstrom Inc. bet big on their labels. But today, these brands have retail stores of their own. Department-store executives say many of the brands demanding to be excluded from their promotions offer similar discounts in their own stores.

Diane Von Furstenberg is no longer sold at Bloomingdale's, and Kate Spade is out at Saks Fifth Avenue after the parties were unable to agree about promotions and other issues, people familiar with the situation said.

Representatives from Diane Von Furstenberg, Kate Spade and Saks declined to comment. A Bloomingdale's spokeswoman confirmed that Diane Von Furstenberg clothes and accessories are no longer sold at the retailer.

Labels with strong sales and customer pull have more power to negotiate terms with retailers. But retailers also can swap those brands with weaker ones that have less pricing power. Frugal consumers have shown a willingness to jump from one brand to another based on price.

"When you try to take these promotions away, people get upset," said Mortimer Singer, chief executive of retail consulting firm Marvin Traub Associates. "They still want the discounts, and will just find other brands."

Initially, Friends & Family sales were restricted to friends and family members of store associates. But they have evolved to include all customers. Unlike end-of-season sales that clear excess merchandise, Friends & Family promotions typically offer 25% off current season goods that would normally sell for full price. While they vary by retailer, they normally occur several times a year.

Certain categories such as cosmetics have always been excluded. But in recent years, the number of individual brands opting out has soared. When Macy's held its Friends & Family sale in April, more than 30 brands were excluded, including Fitbit, Kate Spade, Le Creuset and The North Face. During a similar sale in April 2011, only Louis Vuitton, Tempur-Pedic, Coach and Tag Heuer were excluded -- with the last two opting out of online purchases only.

John Idol, CEO of Michael Kors, in August blamed department-store discounts for "difficulties in our own retail channel, which is why you see our gross margins declining, because we're really trying to meet certain pricing." As a result, Michael Kors is removing itself from all department-store coupons and Friends & Family sales, Mr. Idol said.

Coach is pulling out of 250 department stores and reducing the amount of money it provides remaining locations to cover the cost of promotions. "The key is to create consistency so there is no confusion about why the price is different between one location and another," Coach CEO Victor Luis said in an interview.

Both brands reported sharp declines in sales to North American department stores in their latest quarters, part of a deliberate attempt to reduce the amount of merchandise they sell to these stores in the hope that scarcity will boost prices.

Department stores are also taking steps to reduce inventory. But there are few signs that discounts are abating. The number of U.S. receipts that included promotions increased 69% in the three months to Nov. 15, compared with the same period a year ago, according to retail analytics provider DynamicAction Inc., which analyzed more than $8 billion in online transactions.

Macy's CEO Terry Lundgren learned how attached shoppers are to discounts in 2007, when the chain tried to cut back on coupons. "Customers stopped shopping, so we knew that was a bad idea," Mr. Lundgren told The Wall Street Journal in 2013.

Penney lost more than $1 billion in sales in 2013 after prior management tried to do away with discounts. "We are very committed to being promotional," Penney's new CEO Marvin Ellison said last year. "I think if we learned anything from the failed strategy it is that this is a promotional space that we're in and we're going to have to compete."

Department stores acknowledge they need to look at other strategies beyond just lowering prices to lure shoppers. Some chains are asking brands to create exclusive collections such as Vera Wang accessories embellished with Swarovski crystals available at Kohl's Corp. this holiday season.

"We are never going to compete on price alone," said Kevin Mansell, the chain's chief executive.

Write to Suzanne Kapner at Suzanne.Kapner@wsj.com

(END) Dow Jones Newswires

November 22, 2016 11:14 ET (16:14 GMT)

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