Retailers Enter This Year’s Holiday Season With Important Open-Ended Marketing Questions

Retailers and big retail brands typically embark on Q4 with their plan firmly in place. Pricing and promotions, inventory deliveries and expected sales are all known factors.

Companies test, learn and implement during the first nine months of the year and by the holidays they should be riding on rails.

And tech providers oblige. The Trade Desk, for instance, specifically made sure to launch its new DSP interface in July  so as to give brands and retailers enough runway to test it before the holidays. And Google has a habit of pushing back tumultuous advertising policy updates if the changes throw a wrench in Q4 plans.

But this year is anything but typical. Many top retailers, including Macy’s, Allbirds and Target, recently reported their quarterly earnings, revealing an industry at a crossroads, with many open-ended questions about how to approach strategy this holiday season.

Are retail sellers more profitable with fewer discounts and Black Friday-style promotions? Is ecommerce a drag on profit margins (delivery, blech) or a surprise boon for brick-and-mortar?

If holiday shopping pushes forward to November, will there be the same December surge of store shopping and online ad sales?

Brands and retailers are still trying to figure it all out.

The pricing and promotions balance

Retail companies have always had to juggle sales discounts with profitability. But this year many traditional Black Friday discounters are swinging the pendulum back toward full pricing.

This is still an outlier year. Many companies aren’t lowering prices because supply chain issues mean they have fewer products to sell, and so can’t make a profit at a discount and are likelier to sell out anyway.

“We’re very focused on testing in our pricing science,” said Macy’s CEO Jeff Gennette. He said the company has been testing price points on certain products in Q3 with plans to make more targeted sales offers in Q4.

One potential avenue is personalized promotions, Gennette said. Instead of marked discounts per item, store associates – even at the cash register – might extend a promotional offer to upsell certain items or a discount based on what’s in a customer’s cart.

Macy’s also removed overlapping discounts between its namesake stores and Bloomingdale’s, which it also owns.

The upshot: No more willy-nilly Black Friday bonanzas savvy shoppers can take advantage of to double dip on big-ticket items that are usually offered one-per-person, like a heavily discounted winter coat.

Both Macy’s and Bloomingdale’s brands have “really changed the historical practice,” Gennette said.

And so has Kohl’s, which “built a lot of new muscles” this year on the pricing and promotions front, CEO Michelle Gass recently told investors.

For example, pricing can now be a lot more competitive, Gass said.

Since clothing chains like Macy’s are taking a stance on discounts, Kohl’s can maintain its own prices without losing its edge as the generally lower-priced option compared to other department stores.

Kohl’s isn’t alone. Mall-based clothing retailer Express reported a 27% increase in average unit retail, an industry metric that divides the total cost of goods sold by the number of items, thereby rewarding stores that sell at higher prices.

Express CEO Tim Baxter attributed the uptick to a “significant reduction in promotional activity.”

Brick-and-mortar benefits

On top of finding they have more pricing power than they thought, retailers are also rediscovering the value of physical stores.

For instance, this year Express opened its first five stores not in malls, but in well-trafficked city neighborhoods. Each store has a slightly different product assortment based on what sells in that area, Baxter said.

These Express stores are tiny by normal standards (under 4,500 square feet), and it’s early on in this retail experiment, but ecommerce sales jumped have in the zip codes where a store is located.

And just because the pandemic caused headwinds for retail isn’t a reason not to embrace the omnichannel shopping experience. Ecommerce shoe retailer Allbirds isn’t quitting on its brick-and-mortar expansion plans because in-store shopping  are more valuable customers, CEO Joey Zwillinger said on the company’s first earnings report after IPOing last month.

“These customers spend 1.5x when compared to digital-only repeat customers, giving us more reason to continue our store expansion,” he said.

Target’s store footprint is a also key ingredient for its ecommerce success, although for a different reason.

“Notably, digital fulfillment had an approximately neutral impact on gross margin rate in the quarter as the cost associated with higher digital volume were offset by the benefit of a shift in fulfillment mix towards our same-day options,” CFO Michael Fiddelke told investors.

To put that in plain English: Target’s ecommerce business was not a drag on overall profitability this quarter because more ecommerce customers are picking up purchases at a store, which preserves all the profit margin that would otherwise go toward deliveries (and the inevitable returns).

Curbside and in-store pickup will only intensify as the holidays get closer. In about a week, online shoppers will start seeing notices that ecommerce deliveries can’t be delivered in time for Christmas.

“That’s where the strength of our 1,200 stores comes into play,” Gass said about Kohl’s plans for December.

Supply-chain data

Another important change in the past year is that data has helped stitch together the retail supply chain across what used to be completely siloed pyramids of the overall business.

“I want to pause and emphasize the ongoing collaboration that’s been happening between our supply chain, merchandising and marketing teams,” said Target COO John Mulligan about the company’s readiness for a difficult holiday sales period.

Target’s properties team reshaped stores to streamline BOPIS orders (buy online pick-up in-store), and cold storage to accommodate online grocery shoppers. Merchandizing teams are empowered to customize promotions based on what’s working at their store. Ecommerce teams have visibility into in-store product availability to sell BOPIS offers when delivery warehouses are empty.

“These teams have worked together to develop promotional and marketing plans that are much more fluid and nimbler than in the past,” Mulligan said, “enabling the incorporation of real-time data on inventory availability and location within our holiday plans.”

Kroger is also bringing together siloed divisions, such as procurement, store teams and marketing, said CEO Rodney McMullen.

Marketing teams inform the procurement folks about which products sell best in big packs or larger quantities for ecommerce orders. (In-store shoppers have to actually heft a massive pack into their cart.)

Kroger is also doing in-store meal kits – an important junction of supply-chain data. Rather than discounting Kraft cheese, for instance, Kroger might partner with the brand to incorporate it into meal kits at a more favorable profit margin to both, and with both companies sharing the marketing expense.

“It’s something that we aggressively use our data to understand,” McMullen said. “And we aggressively try to make sure that the customer is able to stretch their budget as well.”

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