The promotional bloodbath is nigh!

Ouch! It is painful out there in the retail world. And that’s coming from a guy who likes to see the glass half full.

It only takes one glance at recent retail earnings reports to comprehend how tough things have become. Once-high-flying JCPenney just posted a 50% drop in first-quarter income. Home Depot announced it is cutting 1,300 jobs, closing 15 underperforming stores and slowing expansion. And Linens ’N Things filed for bankruptcy protection this month and has begun shuttering more than a fifth of its stores.

Try as I may to see the light at the end of the tunnel, I can’t help but notice all the signs of negativity: endless news streams about the mortgage crisis, water-cooler grumblings about the rising price of gasoline and an e-mail inbox filled with countless reports about drops in consumer confidence. Fortunately for me, not all the reports I receive speak of doom and gloom. In fact, if there’s a dissenting opinion about the dire state of today’s economy—you can be sure it will make its way into my daily data stream.

While fishing in that stream the other day, I came across a Stifel Nicolaus R.E.A.D. report that offered up a welcome glimmer of hope. Now, it’s not like Stifel Nicolaus is blind to the bad economy. The cover page spoke of “record bearishness,” “year-over-year declines” and the “significant impact of energy prices.” But if there’s one thing I’ve learned about financial analysts reports, it’s that the good stuff lies between the lines.

More precisely, on page eight of the report, was one of the most telling statistics. It turns out that while there is some variance—albeit small—in the general consumer view of the economy, it is the so-called upper-middle-income bracket (those with HHI of $75K and above) whose shopping behavior is changing most dramatically during the current downturn.

Over the last five months, when this $75K group was asked about its willingness to spend on discretionary items, the incidence of wanting to spend “more” dropped from 17% in January to just about 4.5% at the start of May. And when it comes to the touch points affecting one’s reason to shop altogether, “low prices,” a familiar mass mantra, increased in importance by some 1,230 basis points over the same five-month period. In fact, when asked specifically about where they plan to do the majority of their grocery shopping, this $75K HHI demographic is increasingly turning to “Wal-Mart and Target” (up 810 basis points).

In addition to making for riveting reading, statistics like these underscore the fact that in the current economy, customers are gravitating toward outlets they most closely associate with value. In fact, the economic downturn is turning out to be a true test of where retailers lie in the psyche of today’s consumer. Companies unequivocally associated with a strong value proposition are getting the bulk of traffic and dollars, while those conveying a higher-end, fashion focus are not.

And as long as the economy keeps headed in the same direction—talk has already begun of gas prices possibly reaching $5 a gallon—the consumer is only going to become more receptive to a value-driven message. At retail, this points to one thing: Merchants hoping to salvage the first half of 2008 better get cranking on that well-honed, on-point, hyper-aggressive promotional marketing message. Because in the coming weeks and months, it’s the marketing teams at the nation’s largest retailers that are going to have to earn their keep, as every single retailer in possession of excessive inventory and a cash register will be fighting tooth and nail over a pool of disposable income that is shrinking by the minute.