It’s the most wonderful time of the year — especially if you’re in retail. This is make-or-break stuff, with the combination of Black Friday and Christmas trading coming together to deliver what will hopefully be a strong end to the year.
The last thing retailers need is a Bleak Friday.
To assess how this year went, we will have to wait for the usual statistics to be released, including the credit card reports on Black Friday spending trends.
I recently wrote on the usefulness of regular data releases such as the Stats SA retail trade statistics and how these move share prices, even though you won’t see any mention of them on Sens. The Black Friday reports are another great example of data points that you can use in your analysis to form updated views, especially when retailers aren’t giving you that information timeously.
These reports will need to consider that retailers have turned Black Friday into Black November — an attempt to avoid the chaos of a single day of shopping. After all, if retailers offer specials for a full month, aren’t they more likely to get those sales? And won’t they appear cheaper to customers over a longer period, which is good for their brands?
Anecdotally, it feels like Black Friday or even Black November specials just aren’t that special any more
More importantly, this approach avoids retailers having to use ridiculous markdowns to get any action at all on Black Friday, turning a potential blood-red ocean of competition into what seems like just another month of trading, to be honest. The shopping malls might be busier on Black Friday weekend than on the other weekends in November, but the days of people taking leave to go shopping are behind us.
There are good reasons for this, and the way in which this American shopping tradition has evolved in South Africa has been fascinating to watch. Retailers realised quite early in the Black Friday journey that, first, South Africans aren’t stupid enough to believe the hype of “big specials” on items that were marked up 50% before being “discounted”; and second, given the lack of consumer spending power after years of economic disappointment, much of the Black Friday shopping is just a pull-forward of Christmas shopping.
In other words, retailers were losing out in many cases by giving spectacular Black Friday deals ahead of the Christmas shopping period. Anecdotally, it feels like Black Friday or even Black November specials just aren’t that special any more.
Market share vs margin
This leads to a bigger talking point around retail strategies: chasing market share or protecting margin. You can’t do both, as price elasticity tells us. Price elasticity is the term used to describe the extent to which demand will change based on a change in pricing. If there is high price elasticity, then a change in price will drive a significant change in demand.
Speak to anyone in retail and they will tell you that South Africans are highly sensitive to price changes. This is a function of the general pressures that households are under.
In other words, if a retailer wants to maintain market share at this time of year, there will need to be aggressive promotions. This should result in a positive impact on sales and a negative impact on gross margin. A successful festive period is thus measured by gross profit, not gross margin — that is, the actual rand value of gross profit generated by the business.
Retailers with a grip on price elasticity and customer behaviour can tweak their offerings to ensure that a decrease in price has enough of a positive impact on demand that earnings increase overall.
You can see how this can go wrong. If prices are dropped but demand doesn’t react positively enough, then revenue comes through as a disappointment and gross margin is lower as well. There’s only one possible net outcome and it’s not pretty.
When updates from retailers start coming through, especially in the discretionary categories such as clothing, you’ll see various strategies on display. Some will have chosen the more conservative route of moderate sales growth and better margins, possibly disappointing customers in the process. Others will have taken the risk of trying to win market share.
Either way, the important thing to do is to read widely and consider whether the management narrative at each retailer ties up with other observations.
With retailers now trading at such high earnings multiples after months of GNU-phoria, the market is pricing in a successful festive season. That’s always dangerous.
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