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Report: Aggressive holiday promotions to cut into retailers’ margins

BY Marianne Wilson

Retailers’ margins will be substantially lower in 2018 due to aggressive discounting and pricing.

That’s according to research from global strategic advisory and consulting firm Berkeley Research Group, which found that sales increases will likely come at the expense of increased profitability as added promotional activity and complexity will be required to generate top-line sales. In a survey of more than 100 high-level retail executives in October, 64% of the respondents said they expected promotions to play a more significant role in overall sales during the 2017 holidays.

Even consumable products are likely to see more discounting. Seventy percent of grocery store executives surveyed expect promotions to play a significant role in overall sales growth.

Sales results will differ meaningfully by retail segment, and given the calendar, holiday success will likely be driven by the final two weeks of the season, according to BRG.

“The extended holiday shopping season will likely require retailers to concentrate promotional activity on the final two weeks of the season,” said BRG managing director Rick Maicki, co-leader of the company’s retail performance improvement practice. “This, of course, will result in increased execution and complexity costs and will likely lead to further retailer challenges in 2018.”

Also, many retailers are entering the holiday season on the heels of soft sales in the late summer and early fall. Some struggling companies will be aggressive in their promotional activity, as they seek to clear inventory to generate cash and drive sales.

“The 2017 holiday season will likely generate less cash flow than what was achieved last year,” said managing director Keith Jelinek, co-leader of the retail performance improvement practice. “The impact of lower margins will put more stress on many already challenged retailers.”

Other findings from the BRG survey and analysis include:

• Executives sent BRG a clear signal that promotional activity will be higher this year, and this message crossed retail segments. Through the holiday sales period, success will hinge on retailers’ real-time agility.

• Retail sales increases will likely come at the expense of increased profitability, as added promotional activity and complexity are required to generate top-line sales. This dynamic will impact retailer success not just during the 2017 holidays, but will likely lead to further retailer challenges in 2018.

• Online sales are expected to increase by approximately 15% this holiday season, accounting for nearly half of the increase in retail sales dollars this year overall. The continued impact of e-commerce will push retailers to promote heavily to drive store traffic.

• Electronic retailers’ in-stores sales were down by 5% in 2016, and BRG expects just a 1% increase this year. Retailers in this critical holiday category may need to promote frequently and at deep price cuts to drive traffic in store.

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