Even a Strong Holiday Season May Not Save Some Struggling Retailers
As we look ahead to the beginning of the holiday shopping rush, with a consensus expectation of a low single-digit increase in sales over 2022, we see a mixed picture in retail. Some organizations are set up well to succeed, while others will require a turnaround in current performance trends to head into 2024 with confidence.
Although July retail sales numbers looked strong and indicate that consumers are still spending freely, when you peek behind the curtain it becomes clear that there are some pockets of underperformance. One notable example is department stores, which declined 3.4% in July compared to the previous year– an inevitable result of management teams persisting with unviable business models.
U.S. department store sales currently sit at $10.98 billion, down from $11.36 billion one year ago. Macy’s expects 2023 sales of between $22.8 billion and $23.2 billion, but says comparable owned-plus-licensed sales will fall between 6% and 7.5% as compared to 2022.
As these struggling retailers look forward to the fourth quarter, they will need to make Hail Mary efforts to bring in the levels of revenue necessary to offset weak performance during the first half of the year. And they should probably start preparing now for some very uncomfortable conversations with investors in early 2024.
Losers…
The shock of the pandemic led many retailers to rethink core aspects of their business model, everything from their level of commitment to e-commerce and omnichannel experiences, to how much real estate they wished to hold, to partnering with other brands. But there are also numerous examples of companies that came out of COVID exactly where they started and did not use the opportunity to reset their business.
This “losers” category isn’t strictly confined to brick-and-mortar brands. Many purely online e-tailers who may have thrived during the pandemic ecommerce boom, are now finding that the cost of acquiring and retaining customers, coupled with operational challenges such as returns, are making it difficult to grow and make profits.
Across both brick-and-mortar and online brands, common factors we see in businesses that are close to tipping into failure include:
1) persistently high levels of debt and a lack of liquidity; 2) a lack of recognition by management teams that the core business model needs to be revamped;
3) a failure to recognize disruption in the marketplace (either driven by technology, a change in consumer behavior, or new competition); and
4) Inventory and supply chain miscalculation, leading to massive discounts/clearance.
…and Winners
On the other side of this mixed retail picture, there are a number of likely holiday winners. This includes both luxury brands and value-focused companies.
Luxury is set to do well for a multitude of reasons. With the stock market picking up from the doldrums of 2022 and fear of recession on the wane, wealthy people simply have more to spend. Higher-end brands also tend to be laser-focused on re-assessing, evolving and enhancing their customer service, through highly personalized service, loyalty programs, efficiency of deliveries, and memorable post-purchase experiences.
On the value side, both Walmart and Target are great examples of mass-market brands that are dialed into their customers’ desires and expectations. They also have embraced new AI and predictive technologies to connect with key audiences, have sophisticated supply chain visibility and are set to benefit from inflation-focused shoppers who want to make their money go further.
Early discounting and the evolution of holiday shopping
Part of the reason why it is unrealistic for struggling brands to hope for a holiday turnaround is the nature of holiday shopping itself and its evolution from an end-of-year frenzy to a year-round phenomenon. Key dates such as Black Friday and Cyber Monday continue to be massively hyped and receive outsized media attention, but they are increasingly less significant.
Discounts are happening sooner and lasting longer. In 2022 about 20% of consumers say they completed their holiday shopping in October. This year, we can expect to see a further acceleration of that trend, as consumers take advantage of pre-holiday sales and events earlier in the calendar year such as Amazon’s Prime Day.
Given these dynamics, retailers who are already struggling would be well-advised to get in early with discounts, booking a greater profit from sales in October versus the astronomical discounting that will be necessary to clear out excess inventory in December or January. By focusing on being aggressive with discounts and getting ahead of the market, they can make price a compelling proposition even if product assortment is not.
In conclusion, the forthcoming holiday season will be an important litmus test for retailers, separating those who have been able to adapt and thrive from those who are struggling to keep pace. The crucial decisions made in the coming months will not only determine their holiday success but also shape their future prospects in a retail environment that continues to evolve at an unprecedented pace.
More Blog Posts in This Series
Three steps to take before equipping frontline retail workers with body cameras
Buy online, pickup in store — Understanding and managing the complexities
Deterring Retail Crime: From the storefront to the backend
