Shoppers only buying when on sale leaves retailers with dramatic drop in margins
Shoppers love sales, but it appears now that retailers have created a “sale culture,” where the majority of shoppers don’t buy unless it’s on sale.
Dynamic Action bills itself as a retailing tech firm. It recently released its Retail index at the National Retail Federation show in New York with some startling results:
- 44% of all orders during the year sold on promotion
- 67% of all orders sold using a markdown.
Here’s the big shocker, and the most troubling one for the retail industry:
- In 2016, North American retailers saw a 24% reduction in margin due to all the markdowns.
“The consumer mindset has been hardwired to wait for a sale, and retailers continue to reinforce this wiring with ceaseless promotions in all channels,” — Sarah Engel, SVP of Global Marketing for DynamicAction.
- Free shipping is now a consumer expectation. An average 42% of orders shipped free in 2016.
Shifting consumer shopping habits lead to surge in major retailer bankruptcy filings
2016 saw a surge in retail bankruptcy filings, most of which were blamed upon shifts in consumer spending behavior. Some of those that filed for bankruptcy reorganization or liquidation were Aeropostale, Direct Buy, Sports Authority, Vestis Retail Group, Golfsmith, Movie Stop, Backwoods Retail, Nasty Gal, Pacific Sportswear, Hancock Fabrics, and Total Hockey.
Additionally, just before Christmas, the Limited stores announced that it will be filing a bankruptcy proceeding shortly after the new year, and possibly close and liquidate all of its stores.
2016 also saw a surge in bankruptcy filings of significant franchisees of McDonald’s, Burger King and Long John Silver’s, as well as the parent entities of Sweet Tomatoes and Logan’s Roadhouse. These, too, were blamed on a change in consumer discretionary spending.
Since most retailers and many casual dining establishments expected to “make their year” during the holiday season, failure to do so leaves them in a precarious financial position for the upcoming new year.
This past holiday season’s deep discounting that began shortly after Thanksgiving substantially eroded profit margins on sales. The deep discounting that proliferated online, television and print advertising for both retailers and casual dining establishments, created a situation that even maintaining volume of sales may not have created the profits needed in order to extricate many retailers and restaurateurs from what has been the disastrous financial year.
Have retailers simply taught shoppers to shop only when there are huge discounts? It’s even affected the world’s largest retailer.
“The traditional Walmart customer is shifting to dollar stores,” said Charles Tatelbaum, Director of Tripp Scott law firm and chair of the bankruptcy and creditors’ rights department.. “Dollar stores are the fastest growing part of the retail environment. Customers are being more thrifty and looking only for bargains.”
Even more troubling will be the loss of retail and food service jobs for those who are terminated as a result of store and restaurant closings, as these jobs cannot be replaced in the shrinking retail and food service sectors. These employees, who are usually at the bottom of the pay scale, are clearly the most vulnerable in today’s consumer economy. Furthermore, shopping mall owners, operators and other tenants will be substantially impacted by the closure of retail establishments as a result of bankruptcy liquidations.
This situation creates a domino effect that will extend far beyond the entities that need bankruptcy protection.