Avoid Being Consumed by the “Retail Vortex” – Crucial Strategies for the Holiday Shopping Season

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Avoid Being Consumed by the “Retail Vortex” – Crucial Strategies for the Holiday Shopping Season

By John Squire - 11/13/2019

Today’s retailers face unprecedented challenges, with even big industry names struggling to compete in the ever-evolving, fast-paced world of retail. Giants like Amazon, Walmart and Target are offering unmatchable prices and services that set the pace for customer expectations. With holiday shopping accounting for nearly 30% of retailers’ total profit for the year, the risk of navigating a perfect storm of shifting consumer behavior, intense competition and rising costs should send executives racing to get their teams prepared ahead of the season.

Yet, there is a strengthening yearly pattern that is often overlooked when planning holiday strategies – the post-holiday consumer phenomena that the DynamicAction Data Science team has identified as the “Retail Vortex”. This dramatic confluence of consumer behavior drastically impacted retailers between Christmas Day 2018 and mid-January 2019. Waning customer acquisition met with radically increased marketing spend, prevalent free shipping offers, declining units per order and a soaring number of returns, quickly eroded the recently won seasonal profits.

Today’s digitally-enabled consumers are transforming the mechanics and economics of retail, and it is critical for retailers to evolve their analytical approaches to align with the increasing fluidity of customer activity. So, with plans for peak Christmas shopping already rolling out, how can retailers navigate the potential profit depression of the Retail Vortex?

New metrics for the new year

Our analysis of the Retail Vortex uncovered a clear downdraft in new customer acquisition, dropping an average of 12% during last year’s holiday period across North America, while marketing spend increased by 35% after Christmas through the first weeks of January 2019.

As retailers look to strike a balance between the cost of drawing in new shoppers and the impact to the bottom line, it is vital to recognize that not all customers are equally valuable. This is especially important when determining how much to spend on acquisition and which existing customers to target for incentives. In an environment where discounts are table-stakes to attract shoppers and free shipping is running rampant, closely controlling the cost of marketing per order is essential to retaining a retailer’s hard-earned profits. 

As consumers move to transact across multiple channels, retailers are well served to expand from store-focused metrics, such as revenue, average order value and store like-for-likes. More specific measures like customer profitability by cohort, inventory not sold or SKU availabilty more accurately deciphers performance and promotional relevance at the customer level.  

Empower your insight to weather the storm

The final catalyst that accelerated retail’s swirling storm to a full blown vortex was the flood of returned product. Across North America and Europe the increase of returns started as early as December 25th in 2018, and then surged by 26% year-over-year during the same period through January 14th, 2019.  The effect of so many returns served to amplify the rising cost of digital marketing spend and increased free shipping offers. Not only does the influx of returns have a significant impact on profits, but also causes an allocation nightmare of products scattered haphazardly to the wrong stores and distributions centers at the start of a new season.

Retailers and brands have to consider starting earlier to analyze their customers behaviors by profitability to determine which holiday strategies will lead to a market-beating improvement to their bottom line, rather than simply looking at short-lived revenue peaks. By leveraging metrics that calculate long-term customer profit, retailers can gain the rich insights hidden within their existing data that exposes the quickly evolving habits and needs of the modern consumer and the specific value they could generate. The more agile retailer will be able to nimbly navigate costly returns, while minimizing spend on marketing offers directed at the least profitable customers and products.  Through utilizing leading, rather than lagging metrics, they are able to identify which shoppers to target that they must absolutely retain, and ultimatley how to best serve the customers that best serve the business.

Retail is only getting more intricate and complex, especially during the pivotal selling moments of the holidays. All too often the focus gravitates to topline revenue, leaving the cost of marketing, free shipping, post-holiday returns and customer incentives overlooked despite their powerful impact on the measure that truly reflects success – profit.  When a retailer can rapidly and systematically isolate the customer patterns that truly transform the business, they can confidently make decisions that drive profit throughout the holiday season to reduce being consumed by the daunting Retail Vortex.

-John Squire, CEO, DynamicAction