United States

'Tis the season for nail biting


What are we seeing so far in the retail marketplace this holiday shopping season? Jeffrey Edelman, director in RSM’s retail and consumer products industry practice, provides his insights.

Black Friday and Cyber Monday: The usual hype
Holiday promotions began earlier this year, with many retailers advertising Black Friday pricing in advance of the weekend. Early reads by the National Retail Federation (NRF) reported purchases were up in units, but average spending was down 3.5 percent for both online and store purchases. The decline is simply an estimate, but it raises the question whether the decline reflected lower prices or shift in mix.

The NRF also stated that 44 percent of consumers made purchases online compared with only 40 percent in the store. Over one-third of the shoppers said 100 percent of their purchases were on sale versus around 10 percent last year. The big question is how much of these price reductions were planned and thus might not be as detrimental to margins, but this remains to be seen.

Price cuts were steepest within the department store sector with Macy’s leading the parade with an average discount of 63.4 percent compared with 56 percent last year according to WalletHub. Kohl’s was lower this year at 55.6 percent versus 66.7 percent last year; JC Penney’s was at 62.8 percent down from 63.9 percent. CVS saw a sharp increase to 43.9 percent from 37.8 percent as did Toys R Us with 40.5 percent versus 28.9 percent. Amazon, surprisingly was down slightly at 24.7 percent from 25.8 percent. It will be interesting to watch whether these discounts will be needed over the next several weeks to sustain sales momentum, or if lower discounts could actually lift average selling prices. This will be difficult to judge until later in the month, after the normal sales lull in early December.

Amazon has made brick and mortar stores better competitors
Boomerang Commerce noted Wal-Mart’s broadened product mix and more aggressive stance on toy prices has narrowed the price differential with Amazon. While Amazon has become the master of many price changes throughout the day, Wal-Mart’s advantage of store pick-up has been gaining traction. Toys R Us appeared to benefit from broadened assortment as well as exclusive products. Target, on the other hand, countered with special pricing promotions, including a two-day additional price reduction on all online purchases.

Brick and mortar retailers have been steadily gaining online traction all year
Successful omnichannel strategies have made the difference. Retailers, rather than vendors, had been the largest market share donors to Amazon, particularly those selling low-to-moderate price commodity merchandise. More recently, retailers have been benefiting from depth and breadth of brand selection, convenience, product information and store experience as pricing issues have become less of a differentiator.

Brands are benefiting from Amazon’s growth
The biggest benefit has been an increased channel of distribution, including international, and Amazon’s ability to engage with consumers and fulfill orders fast. Given Amazon’s rapid growth potential, it could potentially become one of the largest customers for a brand and lower margin revenues could offset return costs. This also might offset the volume brands lose from large retailers that are consolidating and provide exclusivity and a gain in pricing power. Lastly, a relationship with Amazon offers an opportunity to move clearance merchandise at an advantageous price. This is particularly important in minimizing seasonal merchandise flooding into the off-price channels as would occur in the past.

“It ain’t over till it’s over”
Odds are that the “white-knuckle period” will be longer this year as Hanukkah falls much later this year than usual, on December 25. Additionally, with that being a Sunday, Saturday promises to be one of the biggest days of the year. Furthermore, the following week has become more important each year through expanded use of gift cards, returns and exchanges, all of which have generally translated into a higher average ticket. 

Higher retailer profits still expected this year
Aside from easy comparisons, most retailers entered the holiday season with their lowest inventory-to-expected sales ratios in two years and it could equate to higher gross margins. These incremental gross profits may offset the effects of store level expense pressures caused by lower comparable store sales and increased shipping costs. Guarded optimism is beginning to carry over into thoughts about the new year, which could set the stage for recovery for brands and vendors.  The major flaw in this thesis is the extent to which consumers continue to focus on value and price rather than product differentiation and attributes.                                                                                                                           


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