Shoppers flock to stores to take advantage of sales, driving up revenue – hurting profit margins

As stores work to entice customers by offering steep discounts through their online websites, their campaigns are successfully augmenting sales – and squeezing profit margins, Bloomberg reports.

Consumer spending has slowed in the wake of the recession, as the tepid economic climate has prompted many Americans to rein in their disposable income. Retail executives at stores including Sears, J.C. Penney and Target, among others, have worked to spur customers to spend by offering substantial price cuts through their e-commerce stores.

The strategy is working, as stores have reported sharp rises in sales thus far during the holiday shopping season. Still, businesses are struggling to keep profit margins elevated. They are relying on the higher sales to lift overall earnings this year, but they are carefully working to implement business cost reduction initiatives to offset the new pricing structures.

Companies are overhauling spend management and working with procurement consultants as they endeavor to increase profits, according to the news provider. The upward sales trend is encouraging, according to experts, but it is difficult to determine whether they will be successful until after firms report quarterly earnings in the new year.

Stores' strategies this year differ significantly from ones they have employed in the past. Retailers have historically drawn customers to their stores by offering deep discounts, but they would quickly reverse those deals after Black Friday, which is typically the single biggest shopping day of the year. This year, retailers are not only keeping most deals in place, but also expanding upon them both online and in stores.

Experts assert retail chains are improving their supply chain management in an effort to keep profit margins high. Moreover, they are overhauling retail sourcing to help find lower priced goods. They are also contending with rising commodity prices, which are further affecting profit margins.

"Investors expected margins to be down due to inflation, but they didn’t expect margins to be down from more promotions," Bloomberg Industries analyst Poonam Goyal said. "The promotions don’t get deeper necessarily after Black Friday, and to see them at the same level is a bit alarming."

This year, Black Friday weekend sales totaled more than $52.4 billion, according to National Retail Federation data.