Retail sort of stumbled out of the holiday gate, if you will, globally.
It’s the start of the ‘most wonderful time of the year’ (apparently) and the period when the retail sector is looking for the most cheer. That could be thin on the ground in 2022 with both retailers and consumer facing significant headwinds this Holiday season.
From early October through to last week, online holiday sales are softer than last year - flat in the US and down seven percent globally. That's according to Salesforce’s Shopping Index, which analyzes the activity and online shopping statistics of more than 1.5 billion unique global shoppers from more than 64 countries.
Online traffic itself is still slightly up on last year as Cyber Week kicks off - up three percent for the US and up one percent globally - but conversion to purchases is down as shoppers returned to the physical stores after the pandemic confinements of recent years. And there aren’t as many bargains to be had - or at least, not yet. Discount rates dropped by 16% in the US and six percent globally for the following four weeks, on average, after Prime Day 2022. This was also 11% lower in the US and globally compared to a 2019 base comparison.
I caught up with Rob Garf, VP and General Manager at Salesforce Retail, to drill down on the data and underlying trends. Last year when we did the same, the big question was whether Christmas would be cancelled. It wasn’t, of course, but any hope of a return to norms this year have been confounded by a number of factors. Garf explains:
On the retailer side, the cost of doing business has just got exponentially more expensive, from labor to energy, to the raw materials, to the shipping and everything in between. Whereas last year, there was enough margin to pad the profitability because discounts were an all-time low, this year the retailers are getting a double whammy. They're forced to discount to try to drum up demand and move excess inventory that's been clogging up in the supply chain. Plus, the cost of doing business is so much that, yes, they'll absorb a lot of it, but they'll also have to pass some of that along to the consumers, which is a really interesting equation if you really peel it back.
While discounts are back to normal levels, pre-pandemic, the price the consumer is going to pay is net more expensive than it was a couple of years ago. So, there's almost a shell game going on where the initial price is rising significantly. Even with discounts being layered on, the consumer is still paying more than they did a couple of years ago, but the retailers are trying to create a perception of value. It looks like they're getting a bargain, but at the end of the day, they're spending more than they did a couple of years ago.
On the consumer side, it's a similar story, but it's hitting individuals rather than businesses. Wages aren't increasing to the degree that the average selling prices are increasing. So they're forced to not be able to buy as much product or as many gifts as they were a year or two before. It's somewhat of a zero sum game, where something has to give. That means consumers are purchasing fewer items from fewer retailers with the same amount of disposable income that they have for gifts.
The end result is anticipated flat sales growth, with the US slightly higher than Europe and the UK, the latter two areas being particularly impacted by an energy crisis, continued inflation and a war on their doorstep.
Chicken with the turkey
A trend that’s been evident for several years has been the spreading out of the Holiday season. While it’s traditional to complain that Christmas comes round earlier every year, in the retail sector that has actually been the case, with discounts and Holiday offers starting further back up the calendar than Cyber Week. This led to the phenomenon known as ‘discount chicken’. Garf explains:
Retail would enter the Holidays with a well-thought-out promotional calendar. After the first weekend, they'd rip it up and basically chase the discount, because the demand wasn't exactly the way they saw. Consumers were so conditioned to wait [for better bargains], and therefore consumers would always win the game of 'discount chicken'.
The last years have been different. In 2020, the headline was all around the surge in digital and shipping capacity issues and last mile constraints. That forced consumers to buy a little earlier because they were afraid if they didn't do it in time, the shipment wouldn't get to their doorstep in time for the Holiday. Last year was all around inventory scarcity. So if 2020 was last mile, 2021 was around the first mile. People were worried that if they didn't order early enough, the product just wouldn't be available.
Either way, retailers weren't inclined to discount. They didn't have to and they weren't compelled to, because the demand was high, inventory was low. They were in a good leverage position. So people bought earlier. This year, we're sensing somewhat of a snapping back into the Holiday anatomy for sales.
Salesforce went back to October, ran the numbers for six full weeks and found that discount rates weren't as high as they had been in previous years. Garf says:
We knew they wouldn't be as low as they were in 2021, but what we found is discount rates were lower than they had been in 2020 and 2019. So, retailers went back to playing the game of 'discount chicken', thinking more consumers would purchase, even though the discounts weren't at a high enough rate. You know what? The consumers didn't bite. The consumers didn't buy it. The consumers know, 'We can do better. We can wait. We're going to win this game. And we have the time to do it'.
Back to the store
This softness in demand online was driven by two things, he adds:
One is the discounts weren't attractive enough to the consumers and they decided to hold on to their wallets until they saw a more aggressive and appealing discount. Second, don't forget about the store. People were going online, but they weren't clicking the buy button as much as they were before. The conversion rate was down, and sales were down. So consumers are actually getting back in the store and finishing the purchase in the physical environment.
That’s an interesting inversion of what many have perceived to be a more normal pattern from a few years back where, for example, shoppers might browse in a physical bookstore, make a selection, then complete the transaction at a lower price on Amazon. But it’s a trend that we’ve seen real world testimony to in recent weeks.
For example, Macy’s CEO Jeff Gennette observed last week:
What happened in the last couple of weeks of October was not a downshift in traffic. We didn't see less traffic coming on the websites or in our stores, which we now track through retail next. What we saw was a drop in conversion. That conversion was a market difference, not from what the trend had been from the previous weeks, but from what we were up against in 2021. That's what kind of showed us this idea that there might have been a supply concern and that with the supply concern being off the table, we go back to usual demand patterns.
It’s a general trend supported by what Garf identifies as “a pent up demand to get back in the world and experience life again”. Salesforce’s research has shown that 60% of digital orders are actually impacted and influenced by the store, a finding supported by other third party analysis:
Forrester actually came up with a stat that two-thirds of store purchases are influenced by digital to the point of, 'Hey, I want to do the research in the comfort of my own home and then will go into the store to make sure it fits, make sure I like the fabric, make sure it's the exact look that I anticipated’.
So, what does all that imply for the coming Cyber Week? The main expectation is that a sluggish start will translate to a bigger-than-expected Cyber Week, with a higher concentration of Holiday purchases in the period than has been seen in recent years. The biggest jump in discounts during Cyber Week will come in luxury handbags, general apparel and skincare and make-up. The best day to buy toys and electronics will likely be on Cyber Monday, and the best days to buy apparel and sporting goods will likely be Thanksgiving and Black Friday.
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