Study: Rampant promotions lead to big margin reduction for retailers
Call 2016 the “year of promotions” in retail, with 44% of all orders during the year sold on promotion, and 67% of all orders sold using a markdown.
That’s according to the DynamicAction Retail Index: 2016 Year-in-Review and 2017 Outlook, which found that rampant promotional and markdown activity led to a 24% margin reduction for North American retailers in 2016.
Retailers are also entering 2017 with merchandise returns on the rise, already up 23% for the year versus January 2016.
On a more positive note, the focus in 2016 on customer experience and tightening of operations proved successful just in time for gift giving, with orders that shipped late down an average of 6% during the holiday season, according to the report, which analyzed more than $9 billion in consumer transactions globally.
Among the key findings:
• Merchandise returns were up an average 8% during 2016 and up an average 18% for the holidays in North America. Return rates are elevated headed into 2017 as well, with an average increase of 23% in the value of returns in the first two weeks of January, versus January 2016.
• There were fewer late shipments, and free shipping was used on less orders during the holiday season. Late shipments were the norm throughout much of 2016, with an average 48% more orders shipped late compared to 2015.
• However, retailers tightened up operations throughout the year, leading to a decline in late shipments during the holiday season, down an average 6%.
• Free shipping is still a consumer expectation, and an average 42% of orders shipped free in 2016, in line with 2015 numbers. Over the holidays, however, free shipping was used on an average 7% less orders than during the 2015 holiday season.
“The consumer mindset has been hardwired to wait for a sale, and retailers continue to reinforce this wiring with ceaseless promotions in all channels,” said Sarah Engel, senior VP of global marketing for DynamicAction. “As we enter 2017, retailers are more aware than ever that they need to re-engineer their strategies to balance customer expectations with the profit demands of the business.
“Promotions are a new reality, but retailers don’t have to accept the status quo. Savvy merchandising teams are adopting new metrics and employing different strategies to protect the bottom line.
According to Engel, customers that buy on discount can also be incentivized to make add-on purchases at full price by understanding affinities for products and brands.
“Retailers must also connect customer data across channels to understand what else motivates their customers beyond promotions – for example, early access to new product lines, exclusive services or curated selections,” she said.
Other strategies innovative retailers will be employing to re-engineer retail results in 2017 include:
• Gaining better insight into returns by connecting online and store returns, viewing and acting on them holistically. This will enable retailers to garner a timely and complete picture on returns, based on the reality of new shopping and return behaviors, in order to limit profit erosion and customer dissatisfaction.
• Test free shipping thresholds in order to determine how to increase average order value and improve shipping profitability. One women’s apparel retailer, for example, set a constant $100 threshold on free shipping after extensive testing. In 2016, the retailer’s free shipping orders were down 46% and had increased shipping profit per order by 121%.
• Work with suppliers and vendors to support the clearing of overstocks, going as far as to replace vendor-supported "customer rebates" with direct promotions so that the retailer bolsters their loss of revenue with a reduction in the wholesale cost.