In the article, “How retailers transformed their customer-centric strategies due to the lessons they’ve learned," author Sasha Fedorenko of Internet Retailing focuses on key strategic initiatives mentioned in almost every retail earnings call over the past two quarters: customer-centric transformation and reduction of profit eroding promos and markdowns.
The entire article highlights findings from the DynamicAction Retail Index: 2017 Year-in-Review and 2018 Outlook, an analysis of over £5.1 billion in online consumer transactions.
For European retailers, orders using a promotion increased 2%, while orders using a markdown were down on an average by 27%. In 2017, margins were impacted more by promotions such as buy one, get one free (BOGOF), gift with purchase, and site-wide sale, and less by markdowns including product discount in comparison to the previous year.
But despite smarter promotional strategies, promotional activity still eroded profit margins with a 5% increase in margin-reduction as a result of promotions in 2017 vs 2016.
Further findings include:
- Retail marketing spend was up 57%
- New customers orders were down an average 2%
- Customers converting from 1st-to-2nd-time buyers were down 9%
In fact, marketing cost in EMEA grew by 57% in Q1 2017 in comparison to Q1 in 2016, with weeks as high as an 142% increase early in the year. European retailers ended last year at an average of 5% growth in marketing cost for the year, largely counteracting high early spending with a marked decrease at the end of the year; 15% down in December vs 2016.
Despite a reduced number of new customers, first-time buyers were the most profitable segment of buyers for European retailers last year. They were on average 10% more profitable for retailers than 11+ time buyers.
When it comes to returns and shipping strategies, last year saw European retailers rush to keep up with consumer expectations. Some of the costlier shifts in consumer expectation show a need for a better logistics and shifted retail economics.
Returns are affecting European retailers more than ever, with the value of returns raised by 33% in 2017. Consumer expectation to receive free shipping has continued to rise, with an average of 9% growth in orders shipped free last year.
To prepare for ever-demanding clientele, last year, European retailers braced themselves with more inventory than in 2016, with a 25% expansion of product inventory in 2017.
This year, European retailers have started 2018 with a significantly higher level of inventory than last year, with a 65% increase in inventory value thus far.
“As we analysed the results of 2017, it’s clear that in order to boost profits, maintain industry strength, and satisfy customers’ true expectations, retailers and brands must recognise shifting consumer behaviour and adapt accordingly. Shoppers have come to expect discounted merchandise as the new ‘full price standard.’ If it isn’t at least 30% off, they don’t consider it a good deal,” says Michael Patterson, managing director – EMEA at DynamicAction.
He adds: “In Europe, the average percent of online orders bought on promotion or markdown during the 2017 festive season was 26%, an increase over 2016, indicating that promotions are steadily climbing each year in Europe as retailers engage in traditionally American promotional efforts like Black Friday and Cyber Monday. However, North American retailers’ woes demonstrate that chasing them down the promotional path is not the way to protect margins. Moving forward in 2018, it’s essential that European retailers reconsider which customers are truly their ‘best customers’ through the lens of profitability, balance inventory levels to focus on those products customers are actually viewing and purchasing, and develop strategies for effective markdowns.”
Patterson concludes: “Increasing retail returns and consumers’ expectation for free shipping offerings result in costly logistics advancements and shifted retail economics. A core driver of retail success in 2018 will be leveraging connected customer data to understand who the most profitable customers are, what their true desires are and adjusting product offerings and promotions accordingly.”