Now is when investors begin wondering what exactly happened over the holidays. Some retailers had strong comp sales growth while others struggled despite practically giving merchandise away. The profit impact will be even more varied when fourth quarter earnings are released.
Women’s Wear Daily reported that December was difficult with strong headwinds due to concern over the fiscal cliff and bad storms that kept shopper away. To salvage the season, retailers turned to even higher markdowns “often as high as 60 to 80 percent off sweeping across a broad spectrum of merchandise.”
While many discounted heavily, effectiveness will vary widely. What separates the winners from the losers is how retailers planned for and managed two key risks with heavy promotions: reduced profit margins and the reality that traffic does not necessary translate to sales.
The first risk is obvious but the second is thought about less often. Around Black Friday we predicted that sales would be bigger than ever and that the biggest winners would not necessarily be the most crowded stores. Steep discounts draw a customer into a store, but the retailer may not convert that customer into a sale or the customer could cherry-pick only the most deeply discounted items. The Director of Consumer Research at Thomson Reuters highlighted in WWD that “‘even though traffic was strong over the last two weeks, shoppers really restrained themselves.’” In other words, the markdowns got people into the store but they did not buy much.
There were three key differentiating factors for retailers who were more successful with holiday promotions and markdowns:
- Smarter not Bigger Promotions
Big promotions help draw in customers, but those customers may not end up buying anything or may just buy a few heavily discounted items. The problem with big sweeping promotions (e.g. 50% off the store) is that there is no call to action, and customers do not have an incentive to shop different parts of the store or increase their basket size.
It is far better to focus on big discounts for specifics products that resonate with customers and tend to drive purchase of other products. Promotions can also be crafted to encouraging trading up and broader shopping of the store – think tiered spend, minimum spend, and bundled promotions. The risk is that more specific promotions may not drive as many customers into the store, so retailers need to walk a fine line to both encourage profitable transactions while also driving traffic.
- Know Your Customer
Walking that line requires knowing your customer well. Which popular products tend to promote more attached sales and more profitable transactions? For example, discounting designer jeans might bring in customers who shop the store and buy high margin products while customers simply cherry pick lower priced jeans when they are discounted.
Similarly, we find that some promotions bring in customers who were just waiting to buy that product on a discount. Knowing which products tend to appeal to new customers can help improve the promotion’s ability to convert new customers. For example, bras might be purchased only by existing customers waiting for a discount while promoting casual tops tends to bring in and convert entirely new customers.
The key here is to leverage basket and customer level data to understand your customer better. Use this information to craft markdowns and promotions that will still be enticing to customers and drive traffic but will also bring in the right customers and avoid cherry-picking.
- Unplanned Promotions were not Unplanned
Women’s Wear Daily quoted Deborah Weinswig from Citi saying that “retailers turned to unplanned promotions.” When faced with headwinds, retailers need to adapt and find ways to draw in customers. However, throwing out promotions when the environment is tough without prior planning is like spinning a roulette wheel and hoping for the best. You have no idea if the promotion will be a winner or if it will destroy margin without attracting any new customers.
The most successful retailers constantly test different promotions and markdown and rigorously evaluate the impact. They build their arsenal of promotions that work and discard those that fail. When the environment is challenging, they can select the “unplanned promotion” from the library of winners.
The retailers that will report the best performance over the holidays built smart promotions, knew their customer well, and leveraged previously tested promotions to respond more intelligently to changes in the environment. These tactics will also be critical in the coming weeks as retailers look to clear out excess inventory, and they will continue to determine which retailers are most successful with ongoing promotions and markdowns throughout the year.