4 Ways Smaller Stores Can Compete for Holiday Shopping Dollars

CHICAGO (TheStreet) -- The great American shop-a-thon is in full swing, as anyone who's tried to find a weekend parking spot at their local mall can attest. After a few years of relatively restrained spending, it seems consumers are feeling more confident about the economy and their ability to pay off the post-holiday bills. The National Retail Federation expects overall holiday spending to increase 4% this year compared with last year.

There is no question the final months of the year are a critical time for companies in the retail industry. On average, holiday spending accounts for about 20% of retailers' annual sales. (The number can be higher for stores that specialize in big-ticket items such as jewelry and electronics). Shoppers are expected to spend an average of $750 per person on gifts and decor, but the bad news for small, independently owned stores is that a significant percentage of that spending goes to large corporations such as Amazon (AMZN) and Wal-Mart (WMT).

Which doesn't mean smaller retailers can't find ways to compete. The key is to offer something distinctive and exclusive, while also meeting shoppers' expectations about the holiday-shopping experience. Here are the key trends that smaller-scale retailers must keep in mind in order to stay relevant:

1. Gift cards
In a recent NRF survey, gift cards were the most requested and most purchased holiday gift item; 80% of the people surveyed planned to buy at least one. While gift cards used to be perceived as an impersonal cop-out to buying a "real" gift, they have become more widely accepted in recent years, especially among younger shoppers. (Teenagers, in particular, tend to be more excited about a gift card to their favorite store than a sweater hand-picked by grandma.)

That means independent retailers must stock and promote gift cards in their stores, talking up their advantages to customers who are trying to find something for a hard-to-shop-for relative. An added bonus: According to recent estimates, anywhere from 2% to 10% of gift cards are never redeemed. That's money that goes directly into the retailer's profits.

2. Classic gifts still sell
After gift cards, the two most popular categories for holiday shoppers are toys and clothing. Specialty retailers should get those items front and center, marketing them as gift choices to casual browsers. The advantage here goes to independent retailers that can position themselves as an alternative: offering unusual toys or unique items of clothing that can't be found at the local mall. The key is to have items that meet shoppers' practical needs while setting your particular stock apart from the crowd.

3. Free shipping
Any retailer that sells online must be prepared to take a loss on shipping costs, because such deals have now become the norm. According to the NRF, 92% of online retailers offered free shipping during the holiday season in 2011, and that trend has continued this year.

When every penny of revenue counts, it can hurt to have to swallow shipping costs, but these days, it might mean the difference between making a sale and encouraging a shopper to click "Buy" elsewhere. One possible bright spot: the last-minute buyers who will pay for expedited shipping to get their gifts delivered before Christmas.

4. Self-gifting
If holiday shopping has become a competitive sport, then buying something for yourself is its consolation prize. After years of penny-pinching and sticking to strict budgets, shoppers are more willing to spend on themselves, and the rampant discounting that has become common before the holidays makes it easier to justify. After all, what serious shopper can resist the lure of a great deal?

According to the NRF's annual holiday consumer spending survey, nearly 60% of shoppers planned to buy something for themselves. And those shoppers weren't talking about affordable add-ons such as candy or a Santa-themed mug: They estimated they would spend about 20% of their total holiday outlay on themselves. The biggest spenders? Young adults between the ages of 25 and 34.

Small retailers that display items geared toward that young-adult demographic might score an extra sale as shoppers pick up a little something for themselves. Who says you have to wait until an actual holiday to celebrate the season?

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.