Black Friday brings little cheer for retailers

Fram Hansotia

‘Black Friday’, the day after Thanksgiving, traditionally referred to as the first day of the year when retailers in the US turned profitable, or shifted “into the black”. Over time, online retailers like Amazon have realized the potential of increasing sales by offering one-off discounts to global customers. British retailers have been slower to react. However, in the last 6 years, this tradition has crossed the Atlantic and the cut-rate prices are now a fixture of the UK retail calendar. In 2014, the day became a media sensation, with widely publicized scenes of chaos in stores across the country.

 

However, this year there have been increasing concerns about the impact it has on retailers’ bottom lines. A study conducted for the ‘Future of Retail’ report by LCP Consulting surveyed 100 retailers in the UK and US. 61% of UK retailers saw Black Friday as ‘unprofitable and unsustainable promotion’, up from 32% in 2015, as compared to 35% in the US. After the Brexit vote resulted in the devaluation of sterling, several retailers forecast an inflating cost base in the future. Their attempt to counter this by increasing prices may be the reason why they have a negative attitude towards Black Friday and the associated promotions.

 

Asda, one of the pioneers of Black Friday in the UK, opted out of participating in 2015 as the management felt they ran enough promotions during the year. This was in response to feedback stating that customers did not want to be pressured by a day of sales, coupled with the questionable logic of discounting during the busiest period of the year. Instead, Asda has committed to investing £26 million in cutting the price of food and drink throughout the festive season. Similarly, Amazon has incorporated Cyber Monday and a Black Friday Deal Store, running until December 22nd, to smoothen customers’ purchasing habits and reduce the pressure associated with a single day of promotions. The actions of these retailers will have a negative impact on the absolute value of sales on Black Friday, however they might have a positive effect on overall sales during the festive period.

 

LCP predicts that 7.5 million parcels would be sold with next-day-delivery, and approximately 5 million parcels bought on Black Friday will be returned – an increase in returns of 50% in the week following Black Friday. Retailers must manage these returns, reimburse customers and resell the merchandise within a short enough time period to avoid having to mark items down.

 

LCP research also finds that Black Friday has polarizing effects. Some retailers have high levels of organization and high levels of returns, while some adopt a chaotic approach and fail to manage peak events. These predictions mean that the true success of Black Friday is driven by the flexibility of retailers in maintaining their supply chain capabilities, upon which revenue and profit margins are dependent.

 

In opposition to LCP’s dire outlook , PwC’s forecasts for Black Friday 2016 show:

  • Total Black Friday revenue in the UK growing 38% to £2.9 billion
  • Average spend planned per adult customer: £203
    • Online purchases planned: 77%
    • In-store purchases planned: 17%

 

Although revenue was forecast to increase, the study does not forecast the expected operating costs, preventing the calculation of overall profit and profit margins.

The large percentage of online purchases planned is consistent with the increasing share of total retail sales made online. Unlike the US, Black Friday is not a public holiday in the UK. This is an explanatory factor for the higher number of online sales, and the insubstantial increase in footfall in UK stores on Black Friday.

 

 

Ultimately, retailers seem to be facing a prisoner’s dilemma. Initially, they participated in Black Friday to gain a competitive advantage within their industry. Then it became an industry trend, and everyone’s margins were affected by lower prices despite unchanged costs. Instead of starting the peak festive season with full-price sales and maximum revenue, retailers that participate in Black Friday are forced to begin the season with promotions, and then spend the rest of the season increasing prices back to full price.

The majority of UK retailers seem to have agreed on Black Friday’s margin-erosive nature, and it will be interesting to see if they follow Asda’s example and disassociate from Black Friday, preferring to invest in year-round promotions instead. Or, whether the perceived competitive pressure may result in many retailers continuing to participate in Black Friday sales, despite the prospect of short term losses and disruption to their supply chain.

 

 

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