It’s the most wonderful time of the year…Or maybe not, at least for Britain’s retailers anyway. Before anyone starts roasting chestnuts, buying Christmas trees or playing Michael Bublé’s ineluctable festive album, retailers must first contend with the event known as Black Friday. And dark it is, particularly when it comes to the effect this promotional period has on margins.
Mother of invention
Being an American import, the name is fairly meaningless in this country. But despite being invented to work like Boxing Day for US residents, who celebrate their national holiday Thanksgiving the day before, promotions weren’t always the focal point. Rather, it simply marked the start of the US Christmas shopping season because most people were granted an extra day off work. As shoppers flooded malls and main streets, it soon became the first day of the year when retailers turned profitable, or tipped ‘into the black’. But as more businesses cottoned on to the day’s significance in the trading calendar, competition to entice customers intensified and promotions gathered momentum. Soon enough, retailers with significant online power such as Amazon (US:AMZN) started offering these one-off, ‘special’ cut prices to its international customers. This got the global ball rolling, so to speak, and Britain’s retailers have been clamouring to keep up ever since.
Of course, the function of Black Friday has shifted dramatically following its exportation. For one thing, Britons don’t enjoy a national holiday in the same way their American counterparts do. Being largely office or school-bound means our version of the event is mostly digital, feeding the ever-growing dominance of the internet when it comes to modern retailing.
Singular spending
Black Friday has also spurred the invention of similar promotional events on the other side of the world, namely the Chinese shopping bonanza known as ‘Singles’ Day’, which takes place on 11 November. Originally designed in the early 1990s by Chinese university students celebrating their single status – as opposed to those in relationships – Jack Ma, the founder of the world’s largest shopping website, Alibaba (US:BABA), soon realised its sales potential. Although still not a public holiday in China, Singles' Day is now the world’s largest shopping event. This year, Alibaba alone notched up $1bn-worth (£777m) of sales within the first 85 seconds of the event, and $10bn within the first hour of the 24-hour cycle. By 5:30pm, total e-commerce sales had beaten last year’s record.
While UK Black Friday statistics pale in comparison, last year’s online sales record of £1.4bn was up 11.7 per cent year on year, according to online retail trade body IMRG. Conversely, high-street footfall figures fell more than 3 per cent on the same day, highlighting the relentless switch to digital channels. To talk about Black Friday as a one-day event is misleading, however. The promotional period often spans the entire preceding week, culminating in what’s known as ‘Cyber Monday’. Indeed, at the time of writing, my own personal inbox has already received several invitations to shop Black Friday offers early or sign up for exclusive discount codes. So it’s easy to appreciate the further opportunities it presents for online marketing.
The backlash begins…
Suffice to say, this year has been extremely challenging for UK retailers – especially those with significant exposure to the high street and bricks-and-mortar retailing. Many have been forced to invest rapidly to ensure their online operations can fully satisfy demands for convenient and flexible delivery options.
Although analysts at GlobalData reckon this year’s event could be worth as much as £10.4bn, and that Black Friday sales will grow faster than the entire retail industry in the final quarter, some companies seem to be putting their foot down. Figures from research group Retail Economics showed that, while21 per cent of consumers said they are looking to take advantage of Black Friday promotions this year, 43 per cent think discounts will be narrower. In Shore Capital’s view, retailers have become “savvier and pragmatic” when it comes to their participation in the event, not least because “the logistics and customer service requirements in fulfilling promotional offers causes spikes and extra operational costs in the supply chain”. But analysts there feel retailers can still prosper during the period, as long as they have “the right customer proposition”.
Superdry (SDRY) co-founder Julian Dunkerton – who is attempting to re-join the company’s board in protest at the current strategy – believes Black Friday promotions almost feel outdated, and increasingly harder to achieve in light of current margin pressure thanks to the continued sterling rout, climbing wages and steeper rents. In Mr Dunkerton’s view, it’s better for retailers to think about offering exclusive, limited-edition products to mark Black Friday, thereby still driving demand but without constraining profitability.
The ultimate distortion
There’s little doubt that Black Friday has fundamentally – perhaps permanently – changed the shape of the festive trading season. And to extend Shore Capital’s theory, it has allowed consumers to become savvier, too. Mid-autumn purchasing decisions are now often delayed as customers wait for more attractive prices.
This probably helps explain why October was such a weak month for the entire retail industry: data from the Office for National Statistics showed retail volumes down 0.5 per cent compared with the previous month – much lower than the 0.2 per cent growth predicted.
But the subsequent Black Friday weekend sales spike isn’t just representative of pent-up demand. Instead, the promotional bonanza also acts as a drag-forward on sales volumes which might have otherwise been more evenly spread – not to mention full-price – in the weeks leading up to 25 December. It’s also made the traditional Boxing Day sales far less appealing. Indeed, department store Debenhams (DEB) noted as part of its 2017 Christmas trading update that the market had become more “promotion driven”, saying it was forced into more aggressive markdowns during the first week of its post-Christmas sale – which was still classed as a "disappointment". For retailers, it represents an added operational challenge of maintaining optimal inventories without locking in excess levels of unproductive capital, although that's obviously less of an issue for pure online retailers.
Testing… testing…
For some high-street retailers, this year’s festive trading period will be a big test. And having already warned on profits three times this year, it’s possible that Debenhams faces the biggest test of all. In the past six years, the retailer has issued a profit warning after Christmas on four occasions. The group’s chief executive, Sergio Bucher, told The Financial Times recently that the company was focused on "having the best Christmas [we] can, for which [we] are fully stocked and well prepared", although special one-off 'spectacular' sales and promotional events have been curbed in the run-up to 23 November.
