Retail focus: Black Friday….Red January?

This week we’re sharing retail insights from Jessica Clayton, Head of Retail Transactions and David Larsson, a Partner in EY Parthenon. 

EY research shows UK retailers displaying more discount discipline during Black Friday week itself, when compared to 2016. But, the extended season, slipping sales and growing pressure on consumers doesn’t bode well. Retailers will need to be at the top of their game to succeed in 2018 – and they’ll need to get personal…

A discounted quarter

Since the UK introduction of ‘Black Friday’ in 2010, we’ve seen sales patterns evolve as consumers first embraced and then came to expect price reductions. It was especially noticeable this year how sales dipped in October as consumers’ held back – and how early retailers moved to try to get things moving. The Halloween pumpkins had barely flickered out before the Black Friday emails began to arrive.

Nevertheless, even though ‘Black Friday’ effectively morphed into what looked like a month of discounting in 2017, sales on the day rose 8% compared to 2016 according to Barclaycard.  This of course begs the question: how much did retailers need to give away?

A more disciplined approach

EY data shows that the top 50 UK retailers actually took a slightly more disciplined approach to discounting than 2016. The average discount in the week leading into Black Friday was 2-3% lower than the previous year and about the same across the weekend itself. The level of discounting also fell off sharply after Cyber Monday.

We think this reflects a wider increase in discipline across the sector that’s borne of necessity and experience. The new exchange rate era, alongside rising wages and business rates, have all motivated better inventory discipline and a stronger focus on gross margin. Retailers have also learnt the lessons from previous Black Fridays and planned well ahead, working with suppliers to bring in specially commissioned stock. Electronics retailers have been particularly adept at this. The longer discounting period and better preparation also means retailers have largely avoided the technological and fulfilment failures and negative headlines of the past.

An online phenomenon

This last point is vital because, more than ever before, Black Friday was an online phenomenon in 2017. According to Springboard, high streets, retail parks and shopping centres saw a 3.6% fall in footfall on the day compared with last year. Meanwhile, the number of online transactions rose 11.3% in the seven days before Black Friday and 5.5% on the day, according to PCA Predict.

So no more frenzied scrums. But, online sales are more expensive for retailers to fulfil and it’s tougher to assess their sales position immediately after the event. Some estimates also suggest that a quarter of online sales are returned to the retailer – who obviously then needs to turn around items for sale again before the season ends.

Holding out for a bargain

Thus, whilst on the surface the Black Friday weekend seems like a success with higher sales, lower discounts and no major infrastructure failures we need to put the period in a longer, less rosy context. The latest figures from the British Retail Consortium show non-food sales falling 3.7% on a like-for-like basis in the three months to November and 3% in total. The 2.2% fall in the last 12 months is the steepest fall since records began in January 2012.

It seems that consumers are taking a more considered and measured approach to their spending and it will be tough to get sales moving again. Heavy discounting ended on Cyber Monday, but sales also fell back sharply. Discounting is now normalised and it’s hard to put the genie back in the bottle. Some major retailers did opt out of Black Friday, but most in the mainstream had no choice but to participate to some extent by including limited ranges or by running their own discount events.

The continuing squeeze

The harsh fact is that it’s getting harder and harder to drive sales, whilst retailers’ costs also look set to rise going into 2018. The short but sweet spot of wages running ahead of inflation is well and truly over, whilst pre-Brexit sterling hedges have run out and the pound continues to fluctuate as negotiations continue. Consumers defied expectation through most of 2017 by spending their savings and increasing credit, but the former is finite and the latter is coming under increasing scrutiny.

A study from credit card group Visa and researcher IHS Markit indicated they expect Christmas spending across the UK to fall this year for the first time since 2012 – albeit in comparison to a very strong 2016. More concerning is what happens in 2018, if consumers have pulled sales forward they are reaching their credit limits.

YouGov/Cebr Consumer confidence Index

More stress in 2018?

Thus, for the retail sector as a whole, we now expect 2018 to be the most difficult year since the financial crisis. To the darker economic outlook, we can also obviously add the digital reinvention of the sector, which is also likely to claim casualties. We have already seen signs of distress and restructuring among retailers and their supply chain. We expect at the very least to see increasing numbers of retailers cut their store numbers and limit any expansion plans, but further distress is likely as costs rise and consumers retrench.

Looking across the sector, food retailing is a limited inflation-driven bright spot – although not without its challenges. Within non-food, big-ticket retailing is especially susceptible to a squeeze on discretionary spending – especially if house sales dip. Car sales are falling after a strong period of expansion. Retailers operating in the highly competitive and over-supplied world of fast fashion also look particularly vulnerable.

Embracing innovation

Retailers are in a bind, but they can mitigate against this tougher environment. The winners from Black Friday are likely to be those who planned their discounting strategy well in advance, engaged consumers and their suppliers, and captured the pick-up in online sales and managed the peak efficiently. Longer-term, retailers who carry forward these lessons and use the Black Friday event to their advantage will win out. The online nature of this year’s event showed how retailers could leverage their wealth of data for targeted purposes. Retailers should be using data from Black Friday to re-activate lapsed consumers and design targeted promotions to drive basket profitability – rather than offering deals at any cost.

Indeed, throughout the year, retailers should be embracing advances in technology to manage their business as well as supplier and customer relationships. Those who are using data analytics and AI to get to know their customers, drive traffic and build baskets are leading the way in this regard. Getting personal should really be on every retailer’s agenda in 2018.