And the spendin' is easy

Markups are notoriously high when it comes to the fast and frivolous sales of summer. For mainstream retailers, the seasonal factor is just part of the story.

In addition to fleeing work and school this summer, American families may take a break from another component of the daily routine: frugality.

The shift in consumer psychology is evident at the InCharge Institute of America (IIA), where the number of consumers looking to reduce their credit-card payments dwindles considerably each summer.

The reason: financial discipline seems to evaporate under the hot summer sun.

"I think it's part of human nature," says Tim Raftis, an IIA spokesman. "You're eating out all the time, going to the go-cart track or the beach. Money just flies out of your pockets."

Seasonal retailers, who often earn 75 percent of their profits between Memorial Day and Labor Day, bank on that recurrent phenomenon. They often charge dozens of times as much for a product as it cost them, knowing few people will dampen their leisure hours with penny pinching.

Markup, of course, is a fact of retail life not limited to tourist traps. But this summer in particular, consumers may confront more markups among mainstream retailers. Higher prices could result, in part, from an acute awareness among retailers of Americans' desire this year to put family fun ahead of financial prudence.

"People are looking after those who matter to them this year," says Paco Underhill, a consultant and noted retail anthropologist. "They will be treating themselves."

Experts are quick to point out that markups typically fall well short of price gouging. They cover advertising and labor, and allow manufacturers and retailers to earn a profit. Nevertheless, they say, some markups are clearly excessive.

In some cases, they rise and fall depending on the season. Others result from shifting trends and tastes in popular culture.

In many cases they can be dodged with a little investigative shopping.

"If people are willing to go through hoops, they'll get a better deal," says Gerald Smith, a marketing professor at Boston College.

Car costs and cola wars

The basic law of supply and demand explains the logic behind most markups: When more people want a product, the retailer can usually charge higher prices.

Recently, the most sought-after automobiles, for example, have generally been priced about $2,000 above the manufacturer's suggested price, according to Chan Choi, a marketing professor at Rutgers University in New Brunswick, N.J.

Film processors normally implement markups of more than 400 percent. Their margins get even higher nearing the end of summer, experts say, as consumers rush to get their vacation photos developed.

Photography stores usually charge no less than $6 to develop a roll of color film with 24 exposures. The cost to produce 24 standard-size color prints, however, is significantly less – about $1.20.

High demand during the summer can sometimes work in consumers' favor. An increased volume of sales can allow a retailer to ease prices by cutting into standard markups.

Many retailers lower prices early in the season, observers say, in order to win a larger share of customers from competitors.

One example: soft drinks. One of the major colamakers – several of which have launched new products in recent weeks – will likely discount its soda early this summer and kick off a wave of advertising.

Others may follow, prompting a price war, according to Professor Smith. Their total profits will likely remain relatively steady, but consumers will end up paying less. (The same phenomenon occurs after Thanksgiving, when department stores offer huge discounts despite the holiday shopping boom.)

Generally, retailers don't tie their discount schedule exclusively to the onset of the four seasons. Some tweak prices based on preferences in popular culture.

The restaurant industry, for example, began offering pasta and salad as full meals after observing Americans' increased craving for lighter and healthier food over the past decade.

Both dishes are now included next to meat entrees in many menus. They are also priced much higher than they used to be.

Both pasta and salad, however, cost the restaurants far less to produce than a meat entree. Customers have not balked at their prices, experts say, largely because tomato sauce and most salad dressings have robust flavor and they satisfy diners with a "high flavor profile," according to Christopher Muller, an associate professor at the Rosen School of Hospitality Management at the University of Central Florida.

Some consumers will be willing to pay even more during the summer, when lighter fare is even more sought after.

A 40-cent slice of cheese

Beverage prices now represent the largest markup in the restaurant industry. The ice, cup, and syrup only cost about 15 cents for every dollar, according to Mr. Muller. In the case of hamburgers, the cost is 40 cents for every dollar.

Customers often pay an additional 40 cents just to get cheese on their burger, an add-on for which the restaurant pays pennies.

Other industries have beefed up markups by finding new ways to cut costs – without necessarily passing the savings on to consumers. Both the furniture and apparel industries, for example, began manufacturing many more products overseas in the past decade.

Medium-grade to high-end furniture sets are now marked up 250 to 300 percent, according to Mike Pierce, director of communications of the National Home Furnishings Association.

High-end clothing stores such as Neiman Marcus generally mark up clothing about 60 percent, according to Robin Sackin, a professor of fashion merchandising management at the Fashion Institute of Technology in New York. Discounters such as T.J. Maxx carry about a 30 percent markup.

The level of the increase varies from product to product. Common goods, like jeans, are usually marked up less than an item that is unique to the individual retailer.

Blouses, skirts, tank tops, and T-shirts often carry higher prices in the summer. Many retailers, like Nordstrom and REI, sell flip-flops for about $30.

The wholesalers' approach

Wholesale clubs and discount stores appear to offer a reprieve from high prices.

Stores such as Home Depot, for example, are selling plants and flowers this spring for very low margins.

They aim to outsell independent nurseries, many of which mark up the most sought-after flowers, primarily perennials, by 100 percent or more, according to experts.

But discounters make up for their low margins by hiking up prices on accessories, such as garden equipment. Photography stores similarly discount the price of film, hoping that customers will later spend on processing, enlargements, and photo albums, which often do carry substantial markups.

In the summer, discounts on film are more common outside of traditional travel hot spots.

Different, but the same

Product variety in the American economy is rightly viewed as a boon to consumers. But retailers have found ways to use the diversity to their advantage.

Few consumers have time to educate themselves about products' merits. Ambiguity and consumer ignorance allow companies to charge more for products that are different in name, but not in quality.

Electronics manufacturers often assign very similar products separate model numbers to allow retailers to charge different prices for them, experts say. They frequently tout features that make them appear distinct.

"If product assortments are not directly comparable, it's more difficult for consumers to clearly find the best deal," says David Bell, a marketing professor at the University of Pennsylvania in Philadelphia.

Markups of personal computers are comparatively small – about 15 percent – because consumers have become relatively well-informed about their basic features.

"Consumers are more likely to see the important similarities among them," says Smith.

In order to attract consumers of different income levels, companies will often mark up the "official" price of a product, and then offer opportunities for savings, including bulk sales through wholesale outlets.

Just 30 percent of the full price of an average box of cereal, for example, covers the cost of production, says Smith. The rest goes back to the manufacturer to be reinvested in product development or kept as profit.

The high margin takes advantage of impulse shoppers, who buy without hunting for bargains. They are essentially paying for convenience.

But cerealmakers do not alienate frugal consumers altogether. They issue coupons to attract consumers willing to spend more time to save money.

About these ads
Sponsored Content by LockerDome

We want to hear, did we miss an angle we should have covered? Should we come back to this topic? Or just give us a rating for this story. We want to hear from you.

Loading...

Loading...

Loading...

Save for later

Save
Cancel

Saved ( of items)

This item has been saved to read later from any device.
Access saved items through your user name at the top of the page.

View Saved Items

OK

Failed to save

You reached the limit of 20 saved items.
Please visit following link to manage you saved items.

View Saved Items

OK

Failed to save

You have already saved this item.

View Saved Items

OK