Broken promises on Black Friday point to the future of retail

Two thirds of retailers think the price-slashing event is unsustainable.

by Stuart Higgins
Last Updated: 23 Nov 2016

We have witnessed a retail revolution over the past decade, which has seen customers increasingly take control. They choose when to shop, by which channel, and how (and when) they want to receive their purchase.

With Black Friday (and the Christmas rush) just around the corner, and a host of cut price deals about to go live, the transformation of this frenzied shopping period points to the future direction of travel for UK retail.

Last year, Asda’s decision to pull out of Black Friday hit the headlines, but the move was far from unprecedented. Even in the US, the birthplace of this price-slashing event, some retailers have also backed off. REI, which has more than $2billion in annual sales, closed all its 140 stores on Black Friday 2015, and this year they are set to do the same again.

In the UK, views on this pre-Christmas promotion are far worse. Our research has found that the number of leading UK retailers that see Black Friday as an unprofitable and unsustainable promotion has doubled over the last 12 months to almost two thirds (61 per cent) in 2016. Despite this, major retailers are still lining up and jostling for position – Halfords has already launched its Black Friday Countdown Deals, Debenhams will launch its deals next Monday (21 November), and Tesco is planning to do the same.

With most UK retailers claiming that Black Friday is margin erosive and unprofitable, the key question this year is how many more retailers will follow Asda’s lead from 2015 and shun Black Friday involvement in favour of deeper promotions across December. Or, will perceived competitive pressure lead many to continue to drive Black Friday sales despite the prospect of short term losses and the potential for service disruption?

To an onlooker it may seem that things are getting easier at peak times for British retail. We all witnessed fewer Black Friday queues and scuffles in 2015. Instead, customers chose to set their alarm clocks and ordered online - spending over £3.3billion online over last year’s Black Friday weekend.

So, with rocketing online sales, what is the problem with Black Friday and why is this battleground pointing the way to the future of retail? Well, heavy discounting combined with surging, unpredictable demand makes it difficult to maintain margins and meet customer expectations.

Black Friday represents a huge peak of demand and, as such, it amplifies the challenges we are seeing across the whole retail sector. Today’s ‘omni-channel’ consumer wants to browse, select, purchase and receive their merchandise in the way that is right for them – selecting and ordering in store, online or via mobile to take delivery at home, at place of work or via a collection point. It is extremely difficult for retailers to predict which channel customers will opt for and, particularly at peak, they need to invest significantly in contingency to guarantee a consistent level of service.

The same is also true of returns. Around 20% of online orders will be sent back by the customer. We estimate that this will mean up to five million returns because of Black Friday purchases this year – by post, to store and picked-up. That’s a lot of customer interactions to get right – let alone the margin erosion this causes!

At the same time, consumers want faster deliveries. Online-only retailers are setting the delivery bar higher and this is putting even more pressure on the retail sector at peak times. For instance, this year, we expect a million extra next day deliveries from Black Friday. But, as retailers struggle to get these next day orders to the customer, or for pick-up in-store, only half of the anticipated 3.5 million next day click and collect orders will be picked-up the following day. It seems many customers don’t necessarily need (or want) this service, but are taking it because they’re being offered it free.

The complexity and expense for retailers to meet all these expectations is substantial. The true profit impact of Black Friday is not driven by sales increases and gross margin; it is driven by the additional operating cost and the complexity of managing operational peaks.

Leading retailers not only invest in costly excess capacity to manage projected peak shopping days/weeks. They keep a close eye on order volumes in order to adjust their customer offer dynamically - ensuring they always deliver against their customer promise. For example, by removing next day delivery options from the website once available capacity for next day delivery has been reached.

This change requires a massive shift in a retailer’s business operating model, and those that invest now in this shift, will gain in the future - both online and instore.

Stuart Higgins is a retail partner at LCP Consulting, which works with six of the top ten UK retailers

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