Antony Poole: “Black Friday is not value creation but value destruction”
As Christmas approaches, manufacturers and retailers will once again be getting into the spirit of giving starting on Black Friday and continuing with Cyber Monday –November 28th–. Consumers have some reason for cheer as they will be on the receiving end of the great margin giveaway. Finance Directors, on the other hand, might want to keep the excitement of their Marketing colleagues under control as many of their returns will heading for the red zone.
Black Friday: A time-shifted purchase
There are two fundamental reasons why Black Friday, in the words of Michael Silverstein, Senior Partner at the Boston Consulting Group, is “a very bad disease for retail” with “margins going out the window”.
The first reason is that price promotions largely stimulate temporary elasticity of demand in terms of purchases but do little to improve elasticity of consumption. In other words, people will buy more / more people will buy in a given moment, but most of the increase is represented by people who have simply time-shifted a purchase they would have made anyway. Black Friday is a particularly nasty example because it coincides with many people’s last pay packet before Christmas.
There is significant evidence that this effect occurs due to Black Friday. Quoted in Marketing Week, Gary Booker, CMO at Dixons Retail, stated that Black Friday “takes sales out of what would have been key early weeks in December.” In effect, footfall into stores in the UK declined by almost 3% in the first week of December 2015. Barclaycard purchase data from 2015 showed that people delayed purchases throughout November waiting for Black Friday deals. Additionally, consumer research by BCG in the U.S. indicated that lower income millennials dominated the Black Friday sales, many of them sticking to a shopping list rather than making impulse purchases they would not have made at normal prices.
In 2015 lower income millennials dominated the Black Friday sales, many of them sticking to a shopping list rather than making impulse purchases
A timely reminder of how black can so easily become red was given at the end of October by Procter & Gamble’s chief financial officer who announced a review of their promotional spending amid “concerns that promotions can be market and profit dilutive“. This may be especially true for discount events such as Black Friday that create significant resource pressures, forcing retailers (both online and bricks and mortar) to reinforce processes and staffing levels.
Black Friday: The impact on online businesses
Bricks and mortar retailers suffer the most because recent Black Fridays have shifted sales online. Online sales during Black Friday 2105 in the U.S. were up 14% (sales from bricks and mortar stores were down 10%). This will get worse in 2016 according to a study carried out by McKinsey in October 2016: 39% of U.S. respondents and 42% of UK respondents plan to do all or most of their Black Friday shopping online.
Some online retailers reap significant rewards from this. Shop Direct, a major British online retailed, claimed to have gained 21,000 new customers on Black Friday, about half of whom became repeat customers –and this type of event can fit well with their overall strategy and inventory management. But even here, the returns are far from overwhelming. The average discount for online purchases in last year’s Black Friday was 24% and the average order value was somewhere between -1.18% lower (according to IBM) and only +1.5% higher (according to Custora). Deduct the costs of executing the promotion and the immediate ROMI (return on marketing investment) will not look so rosy. Deduct the extra logistical costs and the bottom line may take on a definite reddish tone.
Despite having gained 21,000 new customers on Black Friday, Shop Direct’ returns were last year far from overwhelming
Black Friday: Retailers’ logistical problems
While some online and large format retailers may benefit, the retail sector as a whole will not. This is due to the second fundamental problem: mental conditioning. The more emphasis that is placed on discount periods, the more people learn to delay their purchases until they are offered a discount. The UK is again a good example. A 2015 study by IRI showed that 54% of all supermarket purchases in the UK are promotional deals of some kind. (The average across major European markets is 28.6%).
Consumers quickly become accustomed to constant promotions and expect them. This is rarely taken sufficiently into account and even major brands can find themselves unintentionally in “the valley of pain”. In certain channels in the U.S. for example, 70% of all tomato ketchup sales are made in promotional periods. J.Crew, a supposedly luxury fashion brand, found itself selling a similar proportion of its sales through outlets or on promotion at gross margins little higher than a discount retailer
So we should be seriously concerned by retailers’ aggregate response to the logistical problems of the Black Friday event and consumers’ shifting of purchases to the event: discount period creep across the whole season. In the U.S. we are now seeing “gray Thursday”, “Cyber Monday”, discounts throughout December and then again after Christmas…exactly in the season when for many people price is less important as we search to buy the best for the recipients of our gifts. People are being taught that buying at full price during the Christmas period is only for idiots. This is not value creation but value destruction.
It’s relevant that a third of UK retailers consulted in a study in 2015 stated that Black Friday “is not profitable and is unsustainable”
It is no surprise then that a third of UK retailers consulted in a study in 2015 stated that Black Friday “is not profitable and is unsustainable”. What can bricks and mortar retailers, especially independent retailers, do to fight back against the steady move to online sales and discount mentality in what should be a bumper season for high sales and high margins?
Black Friday: What about high street retailers?
It is not an easy question to answer. What is certain is that Black Friday is definitely not the answer. Some reactions have already begun, such as “Small Business Saturday” in the UK, designed to generate traffic to traditional retail high streets with support from local government, including the suspension of parking regulations.
High street retailers need to find the jobs that online and discount retailing cannot do for shoppers and create the experiences that they cannot replicate. They are unlikely to win in the area of price, convenience or assortment. They do have some other advantages to work with. Physical experiences are fundamentally more emotional than virtual ones, and emotional responses create stronger memory structures which can lead to higher brand preference. The challenge is to find the right job and design the experience that delivers the practical and emotional value that the job requires. In other words, the challenge is to create value.