17 Nov 2016

Is Black Friday Actually Profitable for Retailers?

Each year the Black Friday shopping event dominates the news and breaks new sales records. But does this annual consumer frenzy really benefit retailers?

With savvy shoppers expecting huge discounts, and retailers facing massive logistical challenges for fulfilling orders, is it really worth retailers participating?

The last quarter of the calendar year – which includes the period from Black Friday to New Year – is generally the most profitable for the majority of retailers. But not all of them emerge as winners from the Black Friday selling period.

In 2014 UK high street retailer Argos didn’t find the shopping event especially helpful to its bottom line, despite a 45% increase in sales. The home goods retailer found that demand was high on the day itself but customers demanded deep discounting. Before and after the event, sales were flat.

It’s indicative of a worrying trend for retailers, where customers refuse to buy unless offered significant discounts.

In a competitive retail landscape where margins are already under pressure, this is bad news for retailers hoping to make profits. The danger is that discounters are encouraging consumers to do their seasonal shopping during the discounting period, cannibalizing their own sales for the rest of the season.

The Black Friday phenomenon isn’t confined to the US. As well as the UK, it’s also now an event in markets such as Brazil, Russia and Spain – with sales rising during the period and many special offers.

In 2014, Brazil saw online sales rise 12 times on the day. Whatever markets you are active in, it’s worth researching what kinds of products are on offer from US and other overseas retailers. Cross-border sales may be particularly strong over Black Friday, which may affect your sales in the discounted categories of goods.

Disloyal shoppers

Loyal shoppers are what every brand dreams of. These customers will buy the brand’s products year-round whether they are discounted or not, because they are not price sensitive.

By contrast, Black Friday shoppers are more mercenary in their brand choice. They’ll shop around for the best deal, searching only for what they judge to be a bargain. There’s no guarantee they will return to the brand’s products in the future when the discount is not available.

In fact, the frenzied shopping environment of an annual sale event may not be a good way to introduce customers to a new brand.

Research into the 2014 Black Friday sales in the UK found that ¾ of those who shopped on that day claimed to have had a bad experience. In addition, one in four claimed to have later returned what they bought.

These are the kinds of negative interactions that brands and retailers aren’t eager to generate with new and existing customers. Handling returns is costly and time-consuming, meaning that the brand makes a further loss besides any discounting it initially offered.

If a new customer’s first exposure to the brand and its products occurs during Black Friday, that’s much more likely to be an initial negative experience. And it’s very hard to get pricing right during this sale – offer too small a discount and customers will shop elsewhere; offer too high a discount and not only are profits compromised but shoppers are more likely to buy on impulse and return goods at a higher rate.

There’s also some evidence that some of these mercenary consumers may be engaging in retail arbitrage – selling the discounted goods on for a profit.

One British publication identified that one in five Black Friday shoppers may be doing exactly that. This damages future sales and frustrates retailers.

There’s also the high cost of managing customer expectations during a flash sale. Although events such as Black Friday can see extremely high turnover, customers have the same expectations as they normally would for their shopping experience. This means they resent having to queue or wait long for online goods to be delivered.

Meeting these expectations can represent a colossal business challenge for retailers. Many take on new staff at the start of the holiday shopping season, so these workers will be fairly new to the business when the Black Friday and Cyber Monday sales occur. IMRG, the online retailers’ association, claims that Black Friday does nothing to boost the total amount of sales but instead just squeezes them into a short period of time, which puts pressure on fulfillment systems.

Dirty tricks

Some retailers respond to the challenges of making any profits on Black Friday using techniques such as stocking loss leaders, and using the sales to price discriminate.

Customers willing to queue from 5am to get a discounted product perhaps wouldn’t be willing to pay any more than the discounted rate: less price sensitive consumers prefer to pay more and have a lie in.

Arduous sales events are one way to identify the customers who will accept a more stressful shopping experience in return for a discount.

Retailers also bank on the higher volume of sales during this period compensating for lower margins, and use the event to get customers in the door for the start of shopping season that continues until Christmas. This only works if the sales then continue through the period from Black Friday to Christmas: something that can’t always be guaranteed.

If your store’s Black Friday offers are too good, customers are likely to complete their shopping early.

Opting out of the madness

Perhaps it’s no surprise that some businesses opt out of the Black Friday madness altogether. US outdoor equipment retailer Recreational Equipment Inc. (REI) chose not to open on Black Friday last year and is doing the same this year.

After several widely-reported in-store incidents of bad behavior during 2014’s sales hysteria, ASDA chose to distance itself from Black Friday saying it would instead focus on delivering excellent value year-round.

Businesses participating in these kinds of seasonal sales events need to tread a fine line between retaining market share during the busy consumer period and not cannibalizing their own sales. The toughness of this dilemma reflects the challenges of the competitive retail landscape.

It’s a challenge that’s further complicated by cross-border sales.

Although your business may not think it’s affected by Black Friday sales in a local market, there’s always the possibility of cross-border sales winning your customers during this period. All businesses need to be aware of this major shopping event – which can threaten your profits as well as boost them.



 
 

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