How to protect your margin on Black Friday and power profitability

How to protect your margin on Black Friday and power profitability

As one of the most crucial periods in the retail trading calendar looms, the pressure is on. A turbulent 2020 means that this Black Friday could be the most competitive yet, and those working in merchandising and planning will be hoping that they’ve made the right decisions in terms of stock buying, markdowns and pricing strategy in order to end a difficult year in the most positive fashion possible.

At a recent Masters of AI event, our Retail Director, Tom Summerfield, sat down (virtually) with industry expert Scott Robertson. Scott is the Founder of Sqwyz, a new consulting company that specializes in helping businesses define and deliver their strategic ambitions. He was previously Head of Merchandising at retail giant Superdry, where he introduced AI and machine learning to drive pricing and markdown optimization, as well as tackling a growing stock pool.

Scott chatted through the benefits of delivering ‘Connected Commerce’, shared some important advice for retailers to help protect your margin on Black Friday and drive profitability, and explained some of the biggest mistakes he’s seen merchandisers make during this crucial period…

 

Talk to me about Connected Commerce. What does this mean to you, and what opportunities does it offer retailers?

For me it has two meanings. The first is around the natural evolution of becoming customer-centric. Looking back to the early days of e-commerce, it was typically run as a separate channel to physical retail stores. We then had multi-channel, omni-channel, and now connected retail. I think that is about trying to make the customer experience as seamless as possible across all channels, and with a consistent brand experience across those channels as well. Channels are typically reactive, and the capability is developing so that we can become proactive and anticipate what customers are going to do, or what they want to do, and surprise and delight them by serving their needs even better across however or wherever they want to shop.

What we’ve seen as a result of the COVID-19 pandemic is a lot of companies being forced to accelerate along this journey as lockdown has impacted physical retail. I think it’s proven that if you focus on achieving a few key digital objectives, it’s very doable to make big changes quickly. The companies that continue to invest in this area, and with the same level of agility, will give themselves a massive competitive advantage over those who go back to slow, plodding change.

The second meaning of Connected Commerce, for me, is actually internal. Most retail business, and non-retail businesses, have evolved to have a silo mentality. Logistics focuses on making the warehouses as efficient as possible, sourcing focuses on getting the best price, merchandising focuses on sales, margin and stock, and many of these are actually at odds with each other. For example, trying to optimize how you pack boxes for retail stores might drive cost down in the warehouse, but it might equally drive cost up in retail stores.

So, most businesses now have the data to start to think about optimizing the end-to-end operation, and it’s about how you pull those functions together, connecting the right people together and using the data to join the dots, create insights and make the right changes in the right places. Once you have those pieces in place, you can then move on to using tools to help you augment that decision making process, or even automate some of the easy decisions and actions.

Moving on to Black Friday, when does the planning start for a business like Superdry? And how do you start those conversations?

For any business it really starts immediately after the previous Black Friday. It’s massively important to capture lessons learned on what works, what doesn’t work, the impact of decisions you made, and why you made those decisions. It’s really easy to move straight onto the next thing, with trading for Christmas next on the list, especially if you’ve had a great Black Friday, but you’ve got to capture those learnings immediately before you forget. Getting any lessons learned session booked in well in advance is critical; you’ve just got to have it as a standard part of the trading calendar for any event.

You’ve then got two other key periods. One is when you’re placing your buys for that period. If you’re a more traditional apparel retailer, that might be as much as six months in advance, whereas fast fashion companies can be much closer to the time. Therefore, you need to be clear on what your Black Friday strategy is: Are you planning on using it to drive footfall and sales? If so, you might need to buy a bit extra, and you might want to concentrate on promoting some high margin stock that you can afford to markdown more.

If it’s more of a stock clearance strategy, it’s working out which products you’re likely to want to clear at that point and adjusting your buys accordingly. The second period is then as you start to go through the autumn season, seeing how sales have progressed against your plan, what stock you have left to liquidate, testing the temperature of the rest of the market to try and anticipate what they will do, modelling multiple different scenarios, working out how long to run for, and when and how to react when you actually get into the trading period. There’s huge amounts of data involved, as well as a degree of intuition, so it’s very difficult to do it with any degree of certainty in Excel – which is almost always the merchandiser’s tool of choice!

One thing that has become more common over the last two to three years is that Black Friday is no longer a single day or even one weekend – it’s now a whole trading period in its own right, potentially lasting a couple of weeks. Retailers are starting early to try and secure a share of wallet, and because of poor buying practices, bad forecasting and a general decline in retail sales and more competition, they have more stock to clear. There is a side benefit to this in that you don’t see massive spikes on Black Friday, as spend is spread over a longer period – so this reduces some of the operational stresses on stores and e-commerce fulfillment.

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What would a typical Black Friday markdown strategy look like? And what are some of the biggest mistakes you’ve seen in this area?

Again, it depends on where you are in terms of sales and stock. But for most events it’ll be a multi-stage process. You work out, at a product level, what you’ve got left, how fast it’s been selling, where you want to exit the markdown window in terms of stock, and if your objective is stock clearance or margin optimization.

The products you’ve got the most stock of, you’ll tend to put in a first phase, if something is not moving, you might mark it down more heavily to drive the sell through rates in a second or third phase. You might also add more lines that have less stock to clear into the sale in a second or third phase, which helps with messaging and bringing consumers back to the store or website. What’s really tricky is being able to track and analyze every item at an individual level, especially as you’ll have potentially a thousand or more lines in the sale. For most retailers, you also have to take into consideration store processes where you don’t want to be constantly changing prices, so pureplay online is a little easier. Therefore, getting the right markdown price first time is key.

One of the biggest mistakes I’ve seen is just doing flat markdown, so taking 30% off everything as an example. It might be great for driving customers to your store and easier to implement, but all that typically happens is your best sellers sell even better and your worst sellers don’t sell. And if your best sellers are selling anyway, you’re basically throwing away margin and leaving yourself with a worse stock mix after the sale. In almost all circumstances, rather than 30% off everything (for example), you might say up to 40% off – and then vary your discount by product, based on your rate of sale and stock position.

It’s a more compelling message and gives you a better outcome in terms of stock and margin. The other big mistake, more from a long-term perspective, is the impact on a brand’s health by having to constantly markdown product to clear it. Buying the right amount up front and selling out of seasonal lines at full price should be celebrated. Overbuying and marking down to drive sales is great for your short terms numbers, but you just train your customer over time to wait for sale because the best products will get marked down.

How important is it to protect your margin on Black Friday? Or is it all just about customer acquisition?

Honestly, I don’t think long term acquisition should be a key objective for Black Friday. Most people are looking for a great deal on Black Friday, so loyalty is not high on a customer’s agenda. Equally, you could spend a fortune on blanket marketing, pay-per-click and so on, forcing your online acquisition costs through the roof but only driving low margin sales with a customer that isn’t going to come back. I think it’s more about securing a share of wallet that was normally spent slightly later in the run up to Christmas and normally at full price. As Black Friday has taken hold, that spend has moved earlier to grab a bargain, reducing the margin that businesses can make in what’s normally the golden period.

Therefore, margin protection is critical. Going back to the previous point, being intelligent about how you structure your markdown so you can achieve your objectives in terms of sales and stock, and seeking out every last penny of margin has never been more important.

What are your predictions for Black Friday 2020? What will be different this year?

Black Friday this year is going to be very interesting as COVID-19 has had a huge impact on sales and forecasting, stock levels, customer’s disposable income, consumer confidence levels – so many different factors that make 2020 unlike any other year in terms of volatility. There will be companies who have been able to scale back their buying or phase it more effectively and won’t have a stock issue. Some of those companies might not even take part as we’ve seen over the last few years with the likes of Fat Face opting out altogether, and others like North Face who have chosen to donate profits to good causes.

However, there will be those who have a big stock issue and almost certainly need to liquidate that stock just to survive. Therefore I think we’ll see even more polarisation of retailers giving really big discounts over an extended period of time (especially where they have major issues) but also other retailers opting out or taking a more principled approach to the Black Friday period to appeal to a different type of consumer.


 

🔢 We’ve compiled a handy list of the merchandising metrics that matter for your Black Friday markdown strategy

Want to get more expert insight on how to protect your margin on Black Friday? Watch our Masters of AI webinar, How to win the Black Friday battle, on demand here 👇

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