Did retailers doom their holidays with deep discounts?

Photo: RetailWire
Dec 19, 2016
Matthew Stern

During the holidays, retailers hope to keep sales profitable by getting shoppers into stores without discounting too heavily. But a few studies on holiday spending indicate that this year’s discounts were some of the deepest.

A study conducted by DynamicAction Inc. and reported in The Wall Street Journal, indicated that receipts featuring promotions increased 79 percent year-over-year in November 2016. The receipts from the first week of December showed double the deals from the previous year. Another study by Nomura Instinet indicated that of 21 retailers tracked, only Gap’s Athleta and Ulta Salon Cosmetics & Fragrance ran fewer promotions in the first weekend of December 2016 than in that window the previous year.

Other research backs up the assertion that the holiday discounts are getting so deep that they’re undermining the sales volume they push. According to the National Retail Federation, three million more people bought something this Black Friday season than last, but total spending fell 3.5 percent, reported 24/7 Wall St. In the way of an explanation, analytics firm EDITED noted that the number of discounted items rose 20 percent and the average price reduction was 8 percent steeper than the previous year.

Deal dependency is a year-round problem for retailers that has grown since the recession. Retailers who have attempted to get off the discounting bandwagon have suffered. For instance, J.C. Penney’s attempt to shift from a promotional model to EDLP under the leadership of Ron Johnson had notoriously catastrophic results for the company.

In fact, the allure of deals has grown so strong that some big name retailers have gotten themselves into hot water pushing deals that weren’t really deals. A series of recent lawsuits have centered around the practice of posting “original prices” for products at which they are never actually sold.

And during the holiday season, when customers expect even more impressive promotions, that translates into wanting to see an unimaginably low price tag. Being able to create promotions that draw, whether online or in-store, without dropping prices below the threshold of profitability, may be the key to allowing both customers and retailers to have a happy holiday.

DISCUSSION QUESTIONS: In what ways are the pressures to employ discounts to drive sales during the holiday season different than at other times of the year? What advice do you have for retailers attempting to drive holiday sales without losing needed margins?

"This is a problem that seems to be growing worse every year. Somebody has to be smart — and brave — enough to be the first one to stop."
"I would prefer to see them bundle purchases (for a greater value claim) as opposed to discounting them too deeply."
"Amazon competes on convenience while brick-and-mortar retailers bloody themselves with doorbusters."

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26 Comments on "Did retailers doom their holidays with deep discounts?"

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Paula Rosenblum

Well, in my view it starts with better buying and less inventory. If you have just enough of the products shoppers want to buy, you won’t be driven wacky trying to insure you get the product out the door.

Once in season, it’s pretty important for retailers not to panic. When pre-season planning happens, there’s an expected gross margin and also a planned promotional cadence. But somewhere around December 10 through December 13, panic sets in and the bigger discounts get offered.

I really believe that consumers know there will always be more of what they want and if the local retailer doesn’t have it, Amazon will. But that just means retailers aren’t doing a great job of buying. Buy smarter, buy better, buy less and shoot for a gross margin dollar target, not percentage.

But I have to believe you guys know that already — so perhaps it’s just a matter of discipline to do the right thing.

Kenneth Leung

For a lot of retailers trying to make the numbers for stockholders and analysts, discount is the short term fix to maintain a positive spin to cover issues. Everyone is doing it from store to online and retailers attempting to get out of the game have been punished unless they are in a niche segment like luxury or brand exclusive products. I am wondering if what happens in the end is that retailers that have exclusive products/brand experiences survive, and those who are just distributors of widely available brands will just fade away by the pressures of discounting.

Bob Phibbs

When the human-to-human experience is so rotten as I’ve seen in countless boutiques and department stores — employees texting behind the counter oblivious to customers in front of them, employees standing at the front of store looking vacantly into the mall as shoppers are walking in the store and managers telling employees to get the items picked first before helping customers — those retailers HAVE to pay us to shop.

Until and unless someone at the top makes a true focus on humans over apps, look for more discounts and a complete collapse of seemingly healthy brands in 2017.

Discounts can’t hide a rotten shopping experience — no wonder so many shoppers brag about not visiting a mall this season.

Lyle Bunn (Ph.D. Hon)

Cross-selling and upselling must be the particular objectives of holiday retailing. Shoppers have many people on their gift-giving list and can add others while in-store. While discounts can woo shoppers, many consider the price they will pay against the original value of their gift selection. Multi-purchase offers make sense to drive impulse purchases. The short strokes in a competitive environment are of where digital signage should be maximized to generate traffic, revenue and margin.

Ryan Mathews
There is a certain frenetic quality to holiday deals. In the breathless rush to encourage sales most retailers feel compelled to drive volume on the back of ever-increasing discounts — real or perceived. Why? Well, there is a lot more public reporting and an increased focus by retail analysts. And … quite frankly … like an addict who has defended their addiction by claiming they can stop anytime, retailers are trapped in a compulsive pattern of discounting, afraid to stop and terrified to continue. The whole margin question is separate from compulsive discounting. The trick here — and it isn’t new — is to be selective about what you are offering on sale. The problem is when you are selling televisions — and all the other television sellers are discounting like mad — how do you maintain margins and still attract customers? Maybe it is by offering extended warranties, taking away old sets at no cost, offering free setup or whatever. If you are a lemming, there’s some comfort in getting caught up in the energy of the group, right up to the point that you hurdle over the edge into the abyss. This is a problem that seems to… Read more »
Mark Ryski

The oldest trick in the book — discounting — is still the “go-to” strategy for many retailers. While this has always been the case to some extent, competition from myriad online competitors is creating more price pressure today than ever before.

Pure-play online retailers don’t have the same cost structures as traditional brick-and-mortar retailers do, so it’s not even a fair fight. After what has been a bruising year for so many retailers, it’s not surprising that they’re trying to preserve top-line revenue with discounting and taking the hit on margins. There are no quick or easy answers, but differentiated product (exclusive lines, house brands, etc.), still provides one way to preserve margin. H&M is a good example.

Cathy Hotka

It’s worth noting that some of the very strongest retailers don’t discount. They sell their merchandise based on its perceived value. Imagine the damage to the Starbucks brand if suddenly lattes were half price. The industry needs to find a way out of the race to the bottom.

Ori Marom

The propensity to offer deep discounts is a response to intensifying online competition. Customers have access to the same discounts via their smartphones.

To state the obvious: this cannot go on much longer. Physical retailers do not have the cost structure required to compete with the lowest online price. Even online retailers have to lose money at the lowest available price point.

2016 has been a pivotal year that finally wiped out any illusion about the fate of physical retailers who refuse to innovate.

The physical store is going nowhere. It fulfills a vital function in all modern societies that online commerce cannot fulfill. In 2017 we will see whether the existing market players prefer to innovate or die.

It is not too late to save physical commerce!

Charles Dimov

If “receipts featuring promotions increased 79 percent year-over-year … ” during peak selling season, what does this signal for the discounting we might see during returns season? That’s a scary realization to have.

It is extremely difficult to get off the promotional bandwagon. If everyone else is doing it then you might lose sales to competitors. That’s where you need to differentiate and push other messaging. For example, there are few retailers’ websites deeply promoting the idea of “Why wait — when you can order it now and pick it up within an hour?” This is an area in which online pure-plays cannot effectively compete. When retailers do this, they can make sure their in-store associates do a good job of recommending the add-on gift ideas or add-on items.

There is no one magic bullet — but clearly in retail we need to start using some new tactics more effectively.

Tom Dougherty

It’s too bad retailers confuse VALUE and discounting. I would prefer to see them bundle purchases (for a greater value claim) as opposed to discounting them too deeply. I learned many years ago that consumers view ANY discounted price as the REAL price.

Deep discounts sacrifice future profits for short-term sales. Give consumers greater VALUE.

Camille P. Schuster, PhD.

The pressure for deep discounts is great but it is a spiral to the bottom, especially when “Black Friday” begins well before the Friday after Thanksgiving. The race for sales began early and has not stopped yet. As retailers chase each other for the lowest price, profitability disappears. What to do? I would be interested in seeing how the Marshalls, T.J. Maxx group did this season when they refused to do sales before Friday over Thanksgiving.

One strategy some stores used was to only put certain items on sale on certain days. As a consumer I found that frustrating but I am curious to know how that worked. One strategy might be to publicize the specific days certain items will be on sale. With apps providing information on who has the lowest price, companies either discount to the point of unprofitability or find another way to compete — maybe free gift wrapping or $10 certificates or offering coffee or a place to rest. Somehow retailers need to sort out the sales, free offers and profitability formula or the race to the bottom will certainly create bankruptcies.

Susan O'Neal

Amazon competes on convenience while brick-and-mortar retailers bloody themselves with doorbusters. That right there shows that there are a myriad of ways to compete for sales beyond discounts — for those willing to have the courage of their own convictions and think OUT of the box.

Doug Garnett

Quite often Amazon competes on price. Only recently have they claimed to avoid that competition — in fact they have algorithms that rapidly run around the web discounting like crazy to beat prices. It’s just not a classic retailer promotional program.

And let’s call Prime what it is … a massive institutional promotional program that’s costing Amazon massively.

Not to entirely disagree. But Amazon is no innocent. They continue to bleed badly in their retail equivalent sales and there’s no evidence of that changing anytime soon. Given those massive losses, I wouldn’t be looking at Amazon to find better approaches.

Lee Peterson

Once you start down the swampy discount road, you’re not coming back without at least twice the effort it took you head down it in the first place. Just ask department stores. Why are Urban Outfitters’ numbers better than Abercrombie’s? Why are Nordstrom’s numbers better than Macy’s? Keep going with comps like that and it’s very clear. The discount swamp is a dead end (unless it’s your brand promise, like Walmart).

Dick Seesel

First, I’m skeptical of the studies showing anywhere from a 79 percent to 100 percent gain in promotional activity on sales receipts year-over-year. Surely we all remember that 2015 was also a highly promotional year. I do believe, however, that the extension of Black Friday deals (starting in some cases two weeks before Thanksgiving) and Cyber Monday specials (now usually lasting over a week) has added to the promotional frenzy.

The irony is that several large national retailers started Q4 with deliberately lean inventories, but their promotional plans (probably put to bed months ago) ignored their own attempts at self-discipline. I still think we are likely to see improved margins this quarter if inventories are lower, even with over-promotion. It’s cheaper to sell something at 50 percent off instead of 70 percent off, after all.

Shawn Harris
Today shoppers are more prescribed — they have a list and stick to it. However, there may be opportunities to get shoppers to supersede their list through innovative value-based selling. I often like to compare retail today to commodities businesses, characterized by me-too products, overcapacity and frequent price cuts. To fight commoditization, retailers need to: Innovate. Truly consider your customer’s total experience with you and the products you sell. Think beyond the transaction. I know many retailers don’t believe it yet, but you are now a technology company. From the CEO down, driving an innovative total experience requires you to manage your business as a coherent set of products, like Facebook does. Bundle. Take a step back and reconsider profit models, and leverage the combination of adjacent and complementary items, services and partnerships to drive a value story with shoppers. (e.g., detergent for one year with the purchase of an appliance). An important element in making complex bundles work is having customer service aligned, to manage exceptions and enhance the total experience. Segment. Shoppers are not one size fits all. You’ve collected a lot of data — use it. You need to know who your price sensitive shoppers are and… Read more »
Ralph Jacobson

The problem with pulling back on discounts, either via EDLP or less severe discounts, is that shoppers don’t have that short of memories. They know they used to get what seemed like a bigger discount in the past. I think pricing strategies need to leverage technology more so than in past years. The capabilities available now can take into account multiple internal factors (e.g., margin targets, etc.) and external forces (e.g., competition, social trends, etc.) to drive high-impact pricing on the items that matter most to shoppers, and drive higher margins on high-volume but less visible items.

Tony Orlando
Does anyone reading this think that most retailers want to discount their products to the point that profits are next to impossible to come by? This topic comes up every year and, as someone who owns a retail supermarket, it is important to offer the right mix of staples near cost and to be able to promote the extras, such as our deli/bakery homemade goodies, dry-aged prime ribs and special cuts of meats that the big box stores can not even dream of doing. You must discount the staple goods or nothing will sell — period. I am not going to win over any customers by trying to sell Philadelphia cream cheese and all the other top-demand items at regular price. It is up to me to buy it right and sell it right at margins my father never had to in his day. For many people, selling the same thing creates an impossible situation and it is only going to get worse. So what do we do? Simply create products the big box retailers are not selling and get out on the floor to talk to everybody about what you do differently, and good things will happen. I ran… Read more »
Jeff Sward
Promotions and discounting go the very heart of brand integrity. Does the customer believe the ticketed price is the real price, or just a set up for the discount sign? I did a fairly deep dive on mall pricing during the 2015 holiday season (available at merchandisingmetrics.com). Time constraints haven’t allowed a repeat study, but the contrast in retailer behavior was startling. I always wondered why there was such a rush to use “all … ” or “everything … ” as a promotional headline. I understand the appeal from the customers’ point of view for about a nano-second. Then my margin protection instincts set in. That headline discounts best sellers at the same level as worst sellers. There are items with three weeks of supply and those with “eleventeen” weeks of supply — and they are given the same discount. It makes no sense. Old Navy does a terrific job of taking surgical markdowns. Gap and Banana Republic seem to love putting the whole store on sale. The biggest surprise last year was LL Bean. The mall would be promoting flannel shirts at $12.99 or $14.99 or $19.99. LL Bean was at $44.95. Finally they marked down one plaid flannel… Read more »
Mark Heckman
It’s just not the depth of these holiday promotions, but the length of time they are available to the shopper that ultimately dilutes their impact. Shoppers love the thrill of the hunt and when there is an element of urgency attached, the excitement of driving sales and traffic begin. However, when Black Friday becomes Black Friday Week or even the entire month is labeled such, the retailer is assuring themselves margin destruction and shopper interest will dwindle. While there are brands and retailers that lend themselves to an array of other value elements beyond price reduction, if you are selling commodity items such as electronics, packaged goods, and toys, there is likely very little chance that these non-price elements will supplant “price reduction” as the number one driver of purchase. My counsel is to pick and chose the depth of promotions and the length or frequency of promotions based upon the uniqueness of your product offerings. Further, if the majority of your products and services are easily found elsewhere, you will likely have no choice to discount, but do so, as others panelists have mentioned, in tandem with touting other free services or value-adds that could bring shoppers back another… Read more »
Lee Kent

It’s the Holiday Season folks and everyone is out shopping all at the same time. This means competition is at its greatest. Many retailers just don’t know how to compete on anything other than price. On the other hand, they can’t really expect much business if they are the only shop in town that is not discounting. It’s time for retail to start thinking seriously about how to provide services and/or opportunities that no one else is offering. This is not an easy fix after years and years of training the consumer that the holidays are all about discounts.

But that’s just my 2 cents.

Doug Garnett

This is a very tricky question. I’m not a big fan of holiday discounting. But also understand that retailers face far more complicated problems around holidays.

Given the hockey stick in sales, somewhere last March retailers made their gambles on volume to sell this holiday. And given the volume of inventory that moves in the holiday, there really isn’t a “lean” option for streamlining this. When you think you’ll sell 400,000 units in 7 weeks, you don’t have many options other than to order them.

As the holiday approaches, then, retailers are faced with the cost tradeoff between promotions and the cost of inventory/cost to vendor relationships. It’s not easy to sort out.

What we need to beware of is an oversimplistic condemnation of the practice. My advice? Refinished the damages that these promotions can do and balance them with the damages of NOT doing the promotions. Then make choices – neither data nor pure analytics will give a full answer. It comes down to taking risk or being conservative in ordering, then discounting or not. And all choices end up with difficult answers. Just don’t over simplify it.

Kai Clarke

This is a moot discussion. Retailers plan for holiday, and their suppliers are the ones who are asked to provide holiday specials, lower prices, increased promotional dollars, and to essentially cover the cost of the holiday pricing. Retailers have been doing this for years, and we should be clear that holiday pricing is supported by the supplier, not by retailers lowering their margins. January, 4th quarter earnings, have shown this to be true on all of the major publicly reported retailers. Retailers don’t show lower profits during the 4th quarter because of discounts, but instead show greater profits because of increased activity, more consumer dollars being spent and greater velocity of their inventory.

Holiday is a well-planned, concerted effort to increase sales, without retailers reducing margins.

Jeff Sward

It is accurate to say that the major department stores turn to their branded suppliers at the end of the season for “margin support.” It’s not the same scenario for the many specialty stores in the mall. For them the “supplier” is the factory, and the factory supplied what the retailer designed and contracted for … breadth of styles, depth of quantity, timing of delivery.

Factory participation in margin support is rare.

Mark Price

Every holiday season, it seems, we ask the same question, “When will this disease of excessive promotion before Xmas end?” and every season it gets a little worse. Retailers play a game of chicken with each other, seeing who will hold out longer and which retailers will succumb to anxiety about getting their fair share of the revenue pool out there. Revenue does not equal profits though, as we have seen.

What’s worse, by treating very customer the same and discounting like crazy, retailers are training customers to simply shop the best discount, brand be damned. A carefully crafted segmentation strategy might reduce sales slightly but afford both higher profits and increased brand engagement by best customers.

Peter Rose
9 months 1 day ago
I can never remember exactly how bad the over-storing of America is. I also can’t specifically recall having that issue elucidated on this website, but I’m sure it has been, it has to have been. But in the face of excessive discounting, I would submit that overbuying is tautological at best, and missing the point altogether regardless. There is one reason, only one, for the annual bloodbath that elicits all the sage punditry: There is FAR too much supply. If it were cut by 75 percent, we might start to come into line with demand, and you would indeed see an end to the high-low game that the public demands, because it just wouldn’t be necessary. 100 percent of the overkill is an endless parade of publicly-traded entities that have bastardized a once reputable, even venerable niche of capitalism (selling honest products for honest prices). This is not just sour grapes from the independent front lines; the mad rush to capture niche after niche, genre after genre by organizations that are required to continuously grow to satisfy shareholders has brought us to this state of unsupportable lunacy where price is the only differentiation. Buy less? Buy better? Nobody would argue,… Read more »
"This is a problem that seems to be growing worse every year. Somebody has to be smart — and brave — enough to be the first one to stop."
"I would prefer to see them bundle purchases (for a greater value claim) as opposed to discounting them too deeply."
"Amazon competes on convenience while brick-and-mortar retailers bloody themselves with doorbusters."

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