The Retail Vortex is a post-holiday phenomenon where fewer new customers, higher marketing costs, increased returns and a rise in inventory create a spiraling force that drive operational costs up and retailer profits down at the start of the new year. This strengthening yearly pattern that occurs between Christmas and mid-January was identified from more than $12.3 billion (£9.53 billion in online consumer transactions globally over the holiday period between December 25, 2018 and January 14, 2019, accounting for more than $5.7 billion (£4.4 billion) in North America and nearly $6.6 billion (£5.1 billion) in Europe.
The analysis revealed four forces that combined to create The Retail Vortex; increased returns, increased inventory value, high marketing spend, and fewer new customers. Holiday returns started as early as December 25, 2018, across North America, and were up by an average of 26% on the previous year through January 14, 2019. As well as significantly impacting profits, this increase in returns resulted in more products coming into store inventory, creating logistical issues such as stock misallocation. Retailers were stuck with 9% more unwanted inventory versus same time last year – much of which required deep discounts or worse, couldn’t be put back on shelves at all.
While marketing spend per online order also grew, acquisition of new customers fell. Marketing spend played a massive role in the post-holiday Retail Vortex. During the 2018 holiday shopping season (Nov 1, 2018 – Dec 30, 2018, a subset of the Retail Vortex time period) in North America and EMEA, marketing spend soared 94%*+ compared to the 2017 holiday shopping season. And despite the increased spend, retailers acquired 12%* fewer new customers. A rise in free shipping further heightened the effect of the Retail Vortex.
"To avoid being disrupted by the Vortex, retailers and brands must go deeper to analyze their customers by profitability and deliver corresponding discount strategies that lead to an improved bottom line."
- John Squire, CEO, DynamicAction
Retailers must review their holiday strategy through the lens of customer profitability. Think of it in terms of customer acquisition costs, lifetime value and retention economics. Pursue a customer-centric holiday strategy that emphasizes retaining high value customers and boosting the size (and value) of their purchases. Curate products and offerings that appeal to your most profitable shoppers to encourage full price sell-through and attract new consumers who are more likely to convert to repeat buyers.
Navigating the headwinds of the Retail Vortex requires more than looking at top level metrics like revenue, AOV, and Units per Transaction. Retailers must go deeper to analyze their customer by profitability and parallel discount strategies that lead to financial outcomes that will sustain the company into 2020.