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How to tackle promotions this holiday season

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Forget Black Friday. This holiday season, if you’re planning your big sale to nab the post-Thanksgiving shopper, you’re weeks too late.

Discounts on clothes, shoes and accessories are at their highest level in at least three years, averaging 49%, according to analysis by Edited, a retail intelligence firm. Overall, 58% of styles are currently on sale, up from 35% last year and 51% in 2019.

Retailers are again choosing to significantly mark down their products after pulling promotions and raising prices in the face of surging demand last year. Some had hoped the industry had turned over a new leaf after a decade of year-round discounts.

This turned out not to be the case. Apparel companies such as Nike, Gap, PVH Inc., Urban Outfitters and Nordstrom all recently said they were sitting on too much inventory after overordering products in response to surging consumer demand, as well as to supply chain issues.

Nike’s inventory levels in North America were 65% higher year over year starting in September, for example. As a result, it has taken an “aggressive” approach to eliminating its excess products, the company said in its Sept. 30 earnings call. This will eat into the company’s margins, added chief financial officer Matthew Friend, but the cost will be “more than outweighed” by the benefit of making room for a more relevant offering. (Investors disagree — shares of the company plunged 13% that day, the biggest one-day drop since 2001, according to Bloomberg.)

It’s unclear whether even deep discounts will convince consumers to buy all that extra merchandise. Consumers are expected to spend less this holiday season amid continued inflation and anxiety over a possible recession. Last month, Adobe predicted that U.S. online apparel sales would fall 7% from a year ago, despite overall retail sales growth. In Europe, where energy prices have soared as winter approaches, the picture is even more pessimistic.

But there are still ways retailers can make the most of what’s shaping up to be a bleak holiday season. Brands can be selective about which categories are marked down — leftover sweatpants probably need some help moving around, but many shoppers will pay top dollar for a new dress to wear to the office Christmas party. Retailers may look to cut costs elsewhere in the business, including business expenses, to offset the impact of holiday sales on margins

Above all, retailers should do all they can to make this winter’s discount bonanza a one-time event, rather than a return to form.

“What we don’t want to see is go back to a pre-pandemic mindset, when there was way too much inventory,” Ramirez said. “Prices were the healthiest we’ve seen in a very long time…so I think the priority is getting rid of inventory.”

What’s on sale?

Despite the bleak forecasts, many consumers continue to spend. Young and high-income consumers, in particular, say they expect to do a lot of shopping for the holidays, according to a recent McKinsey survey of holiday spending. Forty percent of all respondents, regardless of age group, said they would “splurge for themselves or others,” while 55% said they were excited about shopping holiday season, up from 34% last year.

That means retailers need to be “surgical” about what they put on sale, said Kelsey Robinson, senior partner at McKinsey. Promotions can be a means to an end, like getting a first-time buyer to buy again, getting a customer to buy in another category, or simply building loyalty in the entire base.

In practice, this resembles private sales for loyalty program members and personalized promotions, where a consumer may gain access to one sale over another based on their purchase history.

This year’s fashion trends are also still in effect.

“Despite what’s going on with inflation or theories of a recession, there’s this customer that’s very much there,” Ramirez said. “So if there’s an event, some sort of homecoming, she’ll want to buy something bright and colorful.”

In contrast, more casual pieces in muted tones are not as in demand and therefore might stand out.

Especially for brands that gained pricing power last year, when demand outstripped supply, marking items may not be worth it just to eliminate inventory, as it may dilute their brand power. . An alternative to promotions is to pack up excess inventory and sell it at full price next year.

“There’s no doubt there will be promotions, but that doesn’t mean they have to happen,” said Simeon Siegel, managing director, equity research at BMO Capital Markets.

Prepare for success

Regardless of how sales perform this year, it’s crucial for retailers to avoid repeating last year’s mistakes. Much of what is unsellable right now was ordered months ago, when inflation was only rising and a recession seemed a distant possibility.

“These lead times have really lengthened during the pandemic because companies have made room for much longer supply chains,” said Sonia Lapinsky, general manager of the retail practice at AlixPartners. “They need to become more agile again.”

Retailers might cultivate relationships with factories that agree to reserve capacity without knowing what specific products will be produced. Versatile fabrics that can be colored at the last minute can help avoid delays if certain raw materials are suddenly out of stock. Using digital tools in the design process is another way to avoid back and forth between designer and supplier.

While many retailers may choose to mark down their assortment this year as a temporary fix, they don’t necessarily have to accept lower profits. Companies can protect margins by cutting costs elsewhere, such as renegotiating transportation rates, which have fallen in recent months, Lapinsky said.

“All the disruptions we saw during the pandemic are here to stay – supply chain disruptions, labor shortages,” she added. “So instead of being surprised by the next disruption, be ready for it. Embrace the mindset of understanding the consumer and their journey.