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How deepening discounts and thinning profit margins could take their toll this holiday season

‘Retail vortex’: How deepening discounts and thinning profit margins could take their toll this holiday season

Author: Abha Battharai 

Source: Retail Wire

The so-called “retail apocalypse” has become a blanket phrase for the industry’s woes, which so far have resulted in more than 50 bankruptcies and 21,000 store closures since 2017.

Now some analysts are warning of a “retail vortex.”

A mix of thinning profits, soaring returns and ever-growing markdowns puts already-struggling retailers at risk of further decline this holiday season, according to DynamicAction, a retail software firm that analyzed more than $11.6 billion in online transactions from January to September.

The company defines retail vortex he as a post-holiday period of deepening discounts and thinning profits, as retailers try to unload piles of unsold inventory to a diminishing pool of customers. As a result, retailers end up absorbing higher costs related to marketing, logistics and returns, eroding already-shrinking profits. Last year, for example, holiday returns rose 26 percent in the three weeks after Christmas from the year before, according to DynamicAction, a number that is expected to rise this year.

“It’s a tough environment, and it’s getting tougher every year,” said John Squire, chief executive of the California-based firm. “Any decline in profitability has an overwhelming effect on retailers that are already struggling to hit their bottom-line numbers.”

There are already signs that this holiday season could be a challenging one for retailers, as political and economic uncertainty continue to wear down shoppers. U.S. consumers unexpectedly pulled back on retail spending in September for the first time in seven months, and the National Retail Federation has warned that economic upheaval, new tariffs and fluctuations in the stock market could negatively impact consumers’ shopping plans in the coming months. For now, it is predicting a 4 percent increase in holiday spending.

“The only option is a quick race to the bottom,” Squire said. “The constant drumbeat of discounts and promotions has only gotten louder.”

That dynamic, he said, is compounded during hypercompetitive periods like Amazon’s Prime Day sale in July. In recent years, the e-commerce giants’s competitors have upped the ante to keep up, offering more sweeping discounts and free shipping. (Jeff Bezos, the founder and chief executive of Amazon, owns The Washington Post.)

This year there was an 18 percent increase in discounts and promotions by North American retailers in the two-week period around Prime Day, compared with the same period last year, he said. The value of markdowns increased, too, by about 71 percent. For example, Squire said, an item discounted 20 percent last year would have been 35 percent-off this year. The company analyzed purchases of clothing, shoes, home goods and other general merchandise, but did not include groceries or Amazon purchases.

Marketing costs per order, meanwhile, jumped 16 percent, while profitability fell about 12 percent during that time. There was also a 19 percent rise in returns — a major cost for retailers — in the three weeks following the July sale.

Retailers, he said, “have had to really juice up the discounts to keep consumers interested.”

So far this year, average order value and customer profitability are down about 4 percent compared to last year, according to DynamicAction. At the same time, the number of online transactions with free shipping has grown 8 percent.

Retailers have announced roughly 7,600 store closures so far this year — more than the 5,524 that closed in all of 2018 — according to data from Coresight Research. An additional 75,000 stores are expected to close by 2026, according to UBS.


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